Friday, March 4, 2011

More on raids in price-fixing probe. Publishers "explain" high ebook pricing.

The title should read, "...try to explain" the fixed higher-pricing of e-books.  See earlier article here on the raids.

The Guardian has a piece today on the raids, which includes quotes from some publishers trying to explain or defend the fixing of pricing so that prices are generally much higher and must be the same at all online bookstores needing Agreements with the Big 5, with no way for the online stores to offer sales or lower prices no matter what the case.  Random House has decided not to join Agency pricing in Europe during this time of probing questions.

Benedicte Page and Leigh Phillips report from Brussels, where they say that officials there have "refused to say how many or which publishers were targeted although a spokesman for Hachette, famed for its dictionaries, confirmed that it was among them.  The inquiry is understood to be focused on French companies."

Excerpts of particular interest, emphases and bracketed comments, mine:
' The EU competition spokeswoman, Amelia Torres, said: "We have suspicions of collusion to keep prices high.  But if our suspicions prove to be founded, this would have an impact across the EU because ebooks are sold across borders."  She added that the firms involved face fines if the commission finds "hard evidence".

The development comes on the heels of an investigation in January by the UK's Office of Fair Trading into whether arrangements between certain publishers and retailers over the sale of ebooks "may breach competition law".

Investigation teams have asked many of the biggest London publishing houses, including HarperCollins, Hachette and Penguin, for all records and documents relating to ebook sales.
. . .
Publishers see the agency model as crucial because it allows them to trade with Apple [which created the Agency plan and insists on it], which was already using it for iTunes, and also to control the price at which their ebooks are sold.
. . .
Ronald Blunden, Hachette's head of communications, denied that the company engaged in price fixing. "Emphatically no," he said. "We are dealing with distributors [such as Amazon] who have considerable clout.

"We found that in the US, electronic retailers began to apply large discounts on ebooks, driving the cost down.  Steadily the spread between the price of a printed book and an ebook became so substantial that we felt it was just unacceptable."

"It's important for the publisher to control the retail price," Blunden continued. "We don't want the items sold below cost, as the perceived value of books becomes damaged.  Once this happens, can we expect online retailers to absorb the cost of financing the editing and publishing of books?"

John Makinson, the Penguin group chief executive, argued that the "very important" agency model contributes to a competitive ebooks marketplace.  "To have vibrant competitive markets, it's important that Apple and the other digital vendors have a place in that market.  The agency model made it possible to have that choice," he said.

Makinson added that he saw "a certain irony" in an OFT [Office of Fair Traiding - UK] investigation designed to ensure competition and consumer choice.  "That in our view is what the agency agreement has provided," he said.
Their view of 'competition' is that the online booksellers must not be allowed to offer lower prices, which means online bookstore "Sales" are no longer possible and the customer cannot look for a lower price elsewhere as it would be fruitless.  Some consider this 'price fixing' while others consider it necessary publisher-control of book pricing, no matter how artificial or without reason.]
Novelist Nick Harkaway, author of The Gone-Away World, agreed. "If the agency model is really a problem under EU law, the law is the problem, not the industry," he said. "Otherwise you fall back into a situation where Amazon controls the market.  This is not to demonise Amazon, but they are a massive portion of the physical market and if their wholesale model also dominates the digital book market, it becomes much harder to negotiate with them." '

The Bookseller's deputy editor, Philip Jones, feels that if you let the market decide, then ebooks will become "too cheap" and they'll be unable to pay authors, editors or all the infrastructure that sustains the industry."

Yes, if an industry or individual companies (as we saw with digital music and with companies still limiting themselves to distributing physical copies of DVDs) cannot find a way to adjust to a vastly changing world, they won't be able to sustain the infrastructure as it stands.  The answer is not unceasing efforts to Stop the World from moving naturally (and insisting customers just pay up, and up) but to modify their infrastructure to reflect the real world and evolving technology, no matter how upsetting it may all be for them to have to change anything.

Read more at The Guardian story.

A Kindle World Blog history of articles on the e-book pricing wars

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  1. "We don't want the items sold below cost, as the perceived value of books becomes damaged."

    hahahahahaha. What is much more likely to "damage" the perceived value of [e]books is their insistence of passing off a scanned, unedited version of a manuscript as a finished product. (Never mind that the cost of an ebook is obviously less than the cost of a physical book, particularly when the ebooks aren't proofed as physical ones are, so even if cost were the issue, that wouldn't be justification for increasing prices so.)

    I think it's still a refusal to face reality on the part of the publishers. They can talk all they want about how someday ebooks will be Magic and will Do Great Things, but that isn't going to make us pay hardback prices for them even when those enhanced books are the standard rather than the exception, never mind now when what we get are by and large a small step up from simple PDFs.

  2. Keep in mind that ebook publishing is rather weird right now, so weird, it's difficult to compare it to print books. It's not like comparing apples to oranges. It's more like comparing apples to bowling balls.

    1. Print books have printing and warehouse/shipping costs, as well as the cost of returns. Those costs then suggest a legitimate retail price.

    2. Other than cellular air time for Amazon ebooks, ebook books have none of those costs. That makes it harder for readers and publishers to agree on a book's value. To many readers, ebooks are no different from documents they download for free. They can't see why ebooks shouldn't at least be cheaper.

    3. Publishers, on the other hand, know how much money they spend finding good books, paying editors to improve them, covering the advertising, and soaking the losses on books that bomb. They don't see the move to digital as making that much difference in those costs, hence they feel the price should stay in the same range as printed books.

    4. Complicating the issue are the 'sell nowhere cheaper than us' contracts that Apple and Amazon are imposing on publishers. Since the traditional model would let some ebook stores heavily discount a title, publishers have no choice but to dictate the price through an agency model. If you want to blame someone for agency pricing, look to Apple and Amazon's contract terms more than to collusion.

    5. Finally, the spread of a fixed 30/70 split between retailer and publisher means that a publisher has no other techniques to raise a title's profitability (i.e. printing a large first run for Harry Potter to reduce printing costs). Whatever a publisher does, their slice of the pie is fixed. There's no way to cut costs. That means that only way they can control their income is by setting the retail price. That in turn makes them much more aware of that price and to greatly fear that ebooks may enter a death spiral, where the cost of creating an ebook is more than what they're getting paid for it.

    I think you get the point. These big publishers aren't being 'stupid," nor do they not understand the changes are bringing. They're a lot more aware of what's changing than many of their critics.

    Of course, that doesn't mean publishers aren't making mistakes. It makes little sense, for instance for a publisher to sell ebooks (which never wear out) to public libraries when those libraries then turn around and rent (for free) those ebooks to the public. If your customers are renting your free-to-create-a-copy, never-wear-out product, then maybe it makes more sense for a publisher to make available their entire digital collection without charge and to make their money by billing libraries per-checkout fees.

  3. Michael,

    No, I doubt that I get the point likely made.

    1. Who created the Agency plan/model ??

    2. Who was/is the Agency plan instigator who created the stipulation that no one be allowed to under-sell Apple, before Amazon even began to knuckle under to the Agency plan?

    3. Do you actually expect Amazon or any other online bookstore to say, to the Publishers who are happily on Apple's Agency plan, "Oh, it's OK if apple gets to offer a lower price than we are allowed to."

    4. Publishers CHOSE the fixed 70/30. Any constraints you list are of their own making.

  4. It's hard to discuss this without sounding too simplistic, but after 50 years in the book business, as both writer and publisher (at various times), my conclusions are:

    1. Most publishers are nice people but commercially braindead.

    2. Current ebook prices, from the big companies, are ludicrously high, and to absolutely no one's advantage: public, publisher, author, all are losing out.

    3. Being investigated by Inspector Knacker (as we say here in the UK) will come as a very nasty shock to the genteel world of publishing; and, guilty or not, it will do them all a world of good.

  5. It seems to me like the question of any antitrust/competition laws being violated is primarily one of whether or not any collusion occurred. If some of these corporations conspired together to set the pricing for their books then that was price fixing. Clearly there was some suspicion of this having occurred or these raids would not have happened. However if a corporation wants to set the price of something that they sell then there doesn't seem to be anything wrong with that.

    It seems very similar to something else that companies sometimes do and that is when they sell something to retailers with a stipulation concerning the lowest price for which they can advertise it. You can not see the price of some products that Amazon sells until they are in your cart. They say this is done to avoid breaking that rule that corporations impose on them.

    However the whole issue is complicated by the fact that e-books (at least in the US, I don't know about elsewhere) are not sold but rather licensed to retailers like Amazon. What Amazon is selling us is not an actual book but rather a license to access a particular book. Also, Copyright holders already have a de facto monopoly in the sale of licenses and so can't be condemned for having a monopoly.

    A major issue, I think, in the whole thing is the fact that e-books really are less valuable than physical books. I doubt that anyone except the publishers knows exactly how much less expensive it is to publish an e-book than a paper book but it isn't hard to figure out that it is less expensive if only in the material and workmanship that goes into the actual product. There you have a very good reason why publishers should be allowed to have some considerable amount of say in how much an e-book should be sold for. However it seems to me that the only fair way to price something sold in different formats like this is according to a percentage of the value put into it. It seems unethical for publishers to sell e-books for the same price as paper books when the publishers put less value into them in the form of material. Customers at least deserve that "materials" discount. Other than that who are we to say what something like this is worth. In the free market system sellers are free to sell for whatever amount they want and it is the responsibility of the consumer to decide whether or not that product is worth that amount to them.

    Many publishers sell both hardback and paperback versions of their books. The paperbacks are sold much cheaper than their hardback equivalents because of the difference in materials, workmanship, and target (that is the fact that paperbacks are intended for mass sale at lower profit per sale). Publishers are in that instance already giving this "materials" discount to consumers who buy paperbacks over hardbacks. You don't hear publishers complaining that the prices of mass-market paperbacks are devaluing those of the more expensive, higher quality hardbacks. I think that this is really because both paperbacks and hardbacks generally require a publisher. However, e-books don't require a publisher and we have seen many examples recently of authors who have self-published successfully using Amazon's platform. Publishers are feeling their very existence threatened by e-books and are willing to do whatever it takes to ensure that people will always require a publisher. The cost of e-books is a major advantage over physical books. You remember how much Amazon has advertized the $9.99 price of it's NYT best sellers among other books. Publishers are doing this whole thing with the agency pricing not for profit or control but for continued survival. They are willing to do anything to take away at least some of the advantage that the digital format has over the physical. In a sense it is not that the digital books, with their lower prices, are devaluing physical books but rather that the digital books, with their lower pricing among other benefits, are devaluing publishers.

  6. @lpt101095 - interesting US perspective. In the UK (and I presume the EU as a whole, but perhaps not), as I understand it the situation is rather different from what you describe in your first two paragraphs.

    Collusion is clearly illegal, but so is what the layman might describe as price fixing.

    The UK's Competition Act says

    "2(1)...agreements between undertakings ... which—

    (a)may affect trade within the United Kingdom, and

    (b)have as their object or effect the prevention, restriction or distortion of competition within the United Kingdom,

    are prohibited unless they are exempt in accordance with the provisions of this Part.

    (2)Subsection (1) applies, in particular, to agreements, decisions or practices which—

    (a)directly or indirectly fix purchase or selling prices or any other trading conditions;"

    Manufacturers cannot set a price, whether minimum or otherwise - Dyson has been trying various tactics for years with his vaccuum cleaners, largely unsuccessfully - so retailers are free to sell at whatever price they wish. The "price-less" Amazon items don't exist in the UK as that option isn't available to suppliers to Amazon. That's why, for many, it is all the more difficult over here to understand how the dictated-price model for ebooks adopted by several of the publishers is consistent with the law. It may be that the subtlety lies in the licensing issue you mention; one has to presume that the major companies concerned think they know what they're doing.

    Interesting times...

  7. Just to clarify: if competition law hands control of ebook pricing to a single company, then competition law isn't really doing what it's supposed to do, irrespective of whether the Agency Model is a good thing or not...

  8. @Stephen
    Interesting. I suppose the EU's competition law is much broader and further away from US anti-trust law than I had thought. When I said that there is nothing wrong with the publisher setting the pricing I meant if they were doing it in a non-anti-competitive way. Although I didn't understand at the time the fact that in the EU price fixing can be vertical as well as horizontal. Well it will be interesting how this turns out especially since we have heard that some US agencies are looking at the legality of the agency model. From what I read though it sounds like it won't be easy for the EU agencies mentioned to prove that something illegal was done unless there was an agreement made on the subject.


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