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DOJ Anti-trust Lawsuit Against Price-Fix 6 Only Benefits Amazon

March 8th, 2012 by · 32 Comments · opinion

It looks like that ant-trust lawsuit against the Price-Fix 6 (which we last heard about back in December) is about to go to trial. The WSJ is reporting that the Dept of Justice is threatening Apple and 5 publishers with a suit alleging that they conspired to set prices.

The specific details are vague in the WSJ piece, but this story can pretty much be summed up by what we already knew. Back in early 2010, Apple colluded with publishers to raise ebook prices and enforce agency pricing. And now they’re hoist by their own petard. And yes, I am stating this as fact. The civil lawsuit against the Price-Fix 6 has already revealed damning info.

This is going to have a rather  interesting effect on the market, but do you know who is the one most likely to benefit? Amazon, that’s who.

One likely outcome from this lawsuit (even if it never goes to trial) is that it will shake up agency pricing. I doubt we’ll see the 70% cut going away (it’s written into too many contracts), but we could see price fixing going away. And that would be a terrible thing for everyone.

Right now Amazon is blocked from underselling their competition on agency priced ebooks.  Take that away and they will discount ebooks again, just like they were doing before.

But the big difference between now and then is that no one has the margin to offer good sale prices anymore. All (most) ebookstores  are existing on a tight 30% of retail. If Amazon drops prices as much as 40%, no one will be able to compete – not  even B&N or Apple (aside from niche ebookstores). What’s more, Amazon might actually be able to afford that discount.

So yes, I think the Price-Fix 6 handed Amazon a bigger club to beat the ebook market with.

Thanks, guys.

Update: The WSJ took 4 times as many words to make the same point as what I wrote above.

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32 Comments so far ↓

  • John Wilker

    I’d think the big winner is the consumer. The P6 brought this on themselves. They didn’t like Amazon offering huge discounts and forced arbitrarily high prices on everyone, now they’re paying the price.

    Yeah it gives Amazon a lot of power, but even they can’t live forever as a loss leader, but they’re at least likely to try and figure out a reasonable pricing strategy, where as I don’t trust the P6 to even (wait they haven’t yet) try to work out a reasonable pricing strategy

    An ebook that costs more than the hardcover… not likely to happen under Amazon…

  • George

    Well, yes, Amazon benefits. It benefits in the same way that Walmart & other big box stores benefit by offering products at lower prices than mom & pop stores. How many independent brick and mortar bookstores have problems competing because Walmart & Amazon & Target & Barnes & Noble are able to offer popular bestsellers at huge discount prices for hardbacks & paperbacks.

    Somehow, though, to many people it only becomes evil when eBooks are involved.

    For homework, I suggest everyone watch the South Park episodes “Gnomes” & “Something Wall-Mart This Way Comes.”

  • Paul Durrant

    The 30:70 split between retailer and publisher for ebooks is still unreasonably generous to the retailer, IMO. If the agency pricing gets struck down, then retailers will be able to discount by 12.5% and still get 20% of the sale price. (100 discounted to 87.5. Retailer’s 17.5 of 87.5 is 20%)

    What’s really iniquitous about ebook pricing is that it’s so high compared to paperbook pricing. For paper books, publishers get about 50% of the retail price, not 70%. This fact alone should make ebooks a lot cheaper for customers & still more profitable for publishers.

  • Mike Cane

    >>>And that would be a terrible thing for everyone.

    Are you out of your mind? All that matters here are *readers*. If the Big Six can’t get it together to compete, the hell with them. They deserve that day of reckoning. It happened to many of the writers they dumped who are now self-publishing and having to fend for themselves. Stop crying for multi-billion dollar corporations.

    • Nate Hoffelder

      Amazon has a history of abusing their suppliers. If they got control of the ebook market, they would likely do the same to the self-pub authors. Do you really want that to happen?

      • Mike Cane

        Up until recently, I used to worry about Amazon and its power. Not any longer. eBooks are just one more thing that Amazon sells. Should their share start to slip, should general-purpose tablets prove more popular and non-eBook digital goods more profitable to them, that power will be diminished. I’d really like to know what the population is of eInk Kindles vs installed Kindle *apps* — and which has the greatest market share.

        I will not cry for the Big Six, period. And tablet apps loosen Amazon’s grip now because if they won’t offer it in Kindle format, it’s no big deal for someone to buy it and read it in ePub — or even PDF — on a tablet. That lock-in is really going to diminish in the years ahead.

        At some point, the most popular posts around will be how to DRM-strip and convert Kindle format to ePub — which is really superior to doing it the other way, ePub to Kindle.

        • fjtorres

          Right on both counts.

          Besides, it’s not as if the trustbusters aren’t aware of Amazon.
          (Or Amazon isn’t aware of the feds.)
          Early industry leaders aren’t guaranteed eternal domination in the tech world.
          (C.F., CP/M, Apple, Atari, Commodore in PCs; Palm in PDAs, smartphones.)
          It’s early in the ebook era.

          Let’s not overventilate just yet.

  • Len Feldman

    The fact that existing contracts with the Big 6 are written with 30% commissions will be meaningless if the publishers either settle with the Justice Department, or if the Justice Department prevails in court. The 30% agency commission would be illegal, and all of the contracts would have to be renegotiated.

    If the Justice Department prevails, consumers would most certainly benefit. Prices for eBooks from the Big 6 would go down almost immediately. In addition, resellers could put titles from the Big 6 on sale without having to ask permission from the publishers. I’d also hope that, in the settlement, the Justice Department requires the four of the Big 6 that refuse to sell their eBooks to libraries to do so under reasonable terms.

    • Nate Hoffelder

      But I don’t foresee publishers giving up any money. They have the 70 percent now and I expect them to hold firm.

      Now, it would be in their best interest to give everyone but Amazon a deeper discount, but I’m not sure anyone can see that from the inside.

      • MikeB

        If the agency model goes away, so does the 70%. Publishers would get 100% of the wholesale cost they sold the ebooks to retailers for and the retailers could sell the ebooks for whatever they wanted.

        If publishers maintained the current price ratio of hardcover to ebook revenue they would get $15 for a hardcover and $10.50 for an ebook. Amazon would then be free to sell the hardcover for $16 and the ebook for $11.50, make the same profit per book, and let the customers decide what format they preferred.

        The publishers won’t be giving up any money at the wholesale level, you just won’t have that mandatory 43% profit margin at the retail level.

  • Peter

    Actually, I think Amazon would be the big loser if the Agency model went away.

    That’s because the winning business model in a post-agency world is Apple’s- they benefit from price competition between the various ereader apps, while making THEIR money off hardware.

    But the apps only exist in the first place because Amazon and Barnes and Noble thought the agency model was going to be permanent.

    Very clever, Apple.

    I also don’t think consumers will see a return to $9.99 Kindle books, agency or not. Even if they could afford to subsidize ebooks at that rate (and I don’t think they can anymore) Amazon simply has no incentive to when they
    1) no longer make money off hardware sales and
    2) know that readers can simply purchase the Kindle books through apps without locking themselves into Amazon for the long term.

    We MIGHT see $9.99 ebooks from Google, though. The Google software/ Barnes and Noble/ Kobo hardware tag team enabled by the epub standard remains the wildcard.

    • Mike Cane

      Probably $9.99 eBooks from Apple and Kobo. Sony’s store used to have *very* popular sales pre-Agency, when they would sell bundles of books. It might have been very low-margin (I doubt Sony would do a loss-leader), but it attracted customers to their store. I expect that practice to be revived. “The latest book from X! Now buy all past books for the special bundle price of $Y!” Writers ultimately win — as they should!

    • fjtorres

      What epub standard?
      The consumer product is DRM’ed epub and you just listed three different DRM platforms to fight with Apple (if the feds don’t force them out of the business) over whatever ebooks don’t go to Kindle.
      Proclaiming standards and getting people to buy them are two very different things.

      • Peter

        “you just listed three different DRM platforms”

        No, I listed one ebook distributor- Google and two hardware distributors- nook and kobo- that can read the Adobe ADE ebooks Google distributes.

        It’s game theory.

        Apple starts selling ebooks and other digital content dirt cheap and maintains high hardware margins.

        Amazon cannot use cheap digital content to compete with Apple, because all Apple products can play all Amazon digital content. Therefore, Amazon chooses to subsidize the hardware and is forced to leave margins relatively high on digital content.

        Google HAS no established hardware to sell, and therefore chooses to competes on the price of digital content. The margins suck, but they have to at least match Apple because they are not subsidizing hardware.

        Barnes and Noble and Kobo simply don’t have the cash flow to subsidize digital content. Therefore they do the only thing they can- open up their app stores and continue competing just on the price of the hardware. The margins suck, but they have to at least match Amazon because they are not subsidizing the content.

        So now, the consumer sees a combination of dirt cheap ebooks (and apps and music) from Google, and dirt cheap hardware from either Kobo or Nook. That’s the solution they gravitate towards. Even though it doesn’t really benefit anyone in the industry.

        If either Apple or Amazon has a legitimate and substantial overall cost structure advantage then they can come out ahead. But I simply don’t think either one does. Unless Amazon can maintain their sales tax advantage.

        • Mike Cane

          >>>Barnes and Noble and Kobo simply don’t have the cash flow to subsidize digital content.

          It’s way too early to consider what Rakuten, which now owns Kobo, will do. We’ll have some sort of hint when new Kobo hardware is announced. I wonder if they will intro a new Kobo Touch this year based on Android?

  • Brian

    First Amazon would take the hit and drop prices to next to nothing to get rid of their competitors…then they could charge whatever they wanted because there would not be anyplace else to go…

    Once this happens and the big box stores like B&N go, so will the publishers and the rest of the industry as we know it…

    • George

      Because that’s totally what happened before Agency pricing came into existence!

      Oh wait, no, it wasn’t. So, maybe we should just back away from apocalyptic scenarios for now.

  • George

    It’s probably too early to tell who’s going to be the big winner & the big loser in all of this. All I know is that under Agency pricing the customers were usually losing. Ebook customers that is.

    The Agency 6 should have price fixed across all types of books & not just on eBooks. I think that’s what ticked me off the most. Among other things.

    Anyway, watching all this shake down between Amazon & the Agency 6 is somewhat analogous to watching Pro Football owners & players argue over who’s going to get to use the Jacuzzi on Tuesday while the fans are left wondering if there’s going to even be a season this year or if there is, how much the ticket prices will be jacked up.

    • Mike Cane

      >>>The Agency 6 should have price fixed across all types of books

      That used to be how books were sold. Until the government ruled it illegal in the 1970s. And you should thank god that they did. Because that ruling paved the way for the video rental market that sprung up a few years later.

      • George

        Well, I really wasn’t hoping they would price fix all across the board. Hyperbole & all, you know. :)

  • Mike Cane

    Pay attention, class: The population of *non*-eInk eBook-reading capable devices is an order of magnitude *larger* than the population of *eInk* devices. Stop thinking eInk-device lock-in. You are living in the past. Update your perspectives.

    • fjtorres

      Yup.
      On the other hand, just because a device can be used to read ebooks doesn’t mean it *will* be used for that. ;)
      The way it breaks down *now* is that heavy readers can easily justify getting dedicated reader gadgets, irrespective of screen tech, while casual readers can more easily justify a multifunction device. There are a lot more of the latter than the former but the former are a more reliable revenue stream to build a business on.
      Which is what Amazon has done: sell dedicated reader devices for the heavy readers and rely on apps and muti-function for casual readers.
      The problem for reader gadget fans is the matter of complex color-based books.
      Again: it is early.
      Nobody knows how things are going to settle down and, somewhat to my surprise, the Feds seem to get it: worry about the harm to consumers today, worry about theoretical *future* harm to competition later.
      *If* it ever comes to pass.

      • Mike Cane

        And how many kids are growing up interacting with a screen — the iPad — than the page of a printed book? Unlike those of us who find LCD reading wearying, they might develop into people who see paper as “dead” and unreadable and prefer to read off a tablet LCD (especially retina-resolution and beyond ones)

        • fjtorres

          Quite possible.
          There are plenty of tech-induced generation gaps around; thumboards vs touch typists, CLI vs mouse vs touchscreen…
          “Daaaaddd! Paper is so… dull and static…” ;)

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  • Jaxslady

    @mike cane Just a note to let you know that the Kobo Vox that came out in 2011 runs on the android platform. So it’s great to have a dedicated ereader that’s generous enough or brave enough to permit it’s owners to run other readers thru apps! So my Vox is my Kindle & when I go back to the States, it will be my Nook also. I also read the older formats through the browser. Since it behaves better internationally, it was a better overall choice. I can buy from all over the world.

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