Periscope Depth

stronger than yesterday

Greetings, Carnival of the Indies visitors! I think Joel meant to send you to my post on cover design instead of this one. Check out that post for a detailed walkthrough of my experience in commissioning a cover design. You can also check out my book on Amazon if you want to see the finished product. And don’t forget the rest of this month’s Carnival as well!

Continued outrage at Amazon for its recent tactics (the price-check app, Kindle Direct Publishing Select) has brought out accusations of “monopoly tactics” and “predatory pricing” from Internet commenters. And while I normally don’t say this about the comment threads of any website, I think the accusations have some merit. The ongoing war over digital pricing has definitely uncovered evidence of predatory pricing in the ebook marketplace.

Just not by Amazon.

Look up your favorite big name author’s latest ebook on Amazon – say, Michael Connelly’s The Fifth Witness – and you’ll see a disclaimer under the price tag: This price was set by the publisher. This is Amazon’s way of notifying you that this book is subject to agency pricing, a new model wherein the retailer isn’t actually the retailer. See, the retailer is just an “agent,” facilitating the sale of a digital product, for which the agent gets to keep 30% of the proceeds. The big six publishing houses adopted agency pricing for ebooks early this year after a stand-off with Amazon.

When I first heard of this model, it sounded oddly familiar. Not because Apple had put it into practice already (for ebooks on iTunes). It sounded like minimum advertised pricing (MAP), a stunt that had cost music publishers hundreds of millions of dollars.

In May 2000, the attorneys general of 43 states filed a class action lawsuit against the world’s five largest record distributors (Bertelsmann, EMI, Warner-Elektra-Atlantic Corp., Sony Music Entertainment and Universal Music Group) and three of the largest music retail outlets (TransWorld, Tower Records and Musicland). The suit asserted that distributors and retailers in the industry conspired to fix a minimum price on compact discs, in an anticompetitive measure that threatened the existence of smaller retailers. The industry elected to settle out of court in October 2002 to the tune of $143 million, which, after attorney fees and compliance costs, netted out to a check for $13.86 for anyone who wanted one.

Telling retailers that you’d like them to advertise your products at a minimum price is not illegal in itself. However, the 43 states (and the FTC, in a parallel lawsuit) alleged that MAP was a tactic used to fix a de facto price floor.

There’s no hard and fast rule for when a bunch of firms constitute a cartel, but antitrust law uses several guidelines in a case like this:

  • Do the firms in question constitute a significant portion of the market?

  • Are the actions of other firms easy to monitor?

  • Is there extensive vertical integration?

  • Do the timing of actions by these firms indicate cooperative rather than competitive behavior?

  • Are there methods of enforcement available between firms, or between producers and retailers?

The AGs never had to prove their case in open court. However, based on the evidence that they had available (the FTC’s findings in the parallel lawsuit, remarks at National Association of Recording Manufacturer conventions, harsh penalties to retailers who deviated from MAP), it seems clear that they could have*.

When I heard about “agency pricing,” it seemed like a clear heir to the music industry’s attempts at MAP in the 90s. Would a similar lawsuit against the big six publishing houses – either a class action or an FTC case – yield similar results?

Let’s run down the criteria:

Do the firms in question constitute a significant portion of the market?: Robert Pitofsky, then-chairman of the FTC, found that the named music industry defendants in 2000 (BMG, EMI, Warner-Alektra-Atlantic, Sony and Universal) constituted 85% of the market. While I can’t find exact numbers, I would be shocked if the largest publishers in 2011 constituted any less. The Big 6 (my thanks to Scott Marlowe for the extensive list) are Hachette, HarperCollins, Macmillan, Penguin, Random House (itself owned by Bertelsmann, also of BMG), and Simon & Schuster. Unless you’re big into self-published titles, almost every book on your shelf is printed by one of those houses or an imprint of one of them.

Are the actions of other firms easy to monitor? In the case of the publishing industry, I’d say yes – especially with regards to Amazon pricing. If one of the Big 6 relaxed their “agency pricing” arrangement with Amazon, word would spread remarkably fast.

Is there extensive vertical integration? I was tempted to say, “No” to this one at first. Traditionally, publishers would sell books to retailers (local bookstores, Borders, Wal-Mart, etc), who would then sell them to consumers. The publishers may have had cozy relations with book buyers, but they didn’t literally own the storefronts. However, by adopting an agency pricing model, the Big 6 may have brought more trouble on their own heads. Technically, Amazon is not retailing an ebook anymore: they’re an “agent” acting on behalf of the publisher. This isn’t quite vertical integration, but it’s much closer than the traditional model.

Do the timing of actions by these firms indicate cooperative rather than competitive behavior? Let’s see. In January 2010, Amazon caves to pressure from Macmillan and lets Macmillan use agency pricing to sell its ebooks. Shortly thereafter, the other five major publishing houses tiptoe onto the agency pricing model as well. Funny how none of them wanted to take a chance on the increase in volume (and possibly revenue) that would come of letting Amazon set its own price for ebooks.

Are there methods of enforcement available? This is the tricky one. While the Big 6 publishing houses function as a monopoly (sole seller) on books as an intellectual property, Amazon functions as a near monopsony (sole buyer) of the wholesale product. So the Big 6′s threat, implied or explicit, to pull product from Amazon is just as serious as Amazon’s threat to remove the ‘Buy’ buttons from all Big 6 books.

What we’re faced with is the latest round in a cold war between the world’s largest online retailer and the world’s biggest publishing houses. Amazon’s size and market power make it hard to pose as a victim of corporate manipulation. Amazon’s recent tactics certainly paint it as an aggressor, not a knight of virtue pure. But I suspect the reason we haven’t seen a class action lawsuit against Amazon yet is because the lawyers for the Big 6 know that they could be tarred with a lot of the same brushes.

There’s fresh and extensive precedent for what happens when attorneys general, or the FTC, allege price fixing against a publisher cartel. Legacy publishers are already hemorrhaging money. They don’t need a multi-million dollar settlement on top of that.

(P.S. The E.U. Competition Committee agrees with me)

(P.P.S. I should clarify: I’m not hoping that the FTC sues the Big 6. I’m just laying out the precedent as I, a non-lawyer with a B.A. in economics, understand it. Asking which side the FTC would consider a monopoly/cartel, Amazon or the Big 6, is like asking who would win a nuclear war in 1970, the U.S. or Russia. Nobody wins in that scenario, which is why we don’t see anyone shooting first.)

* I wrote a paper on the case in 2003, though I was coming at it as an economist, not a lawyer. We can chat in the comments if you want to discuss the 2000 case further.

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