U.S. Justice Department Confirms Investigation Into eBook Pricing

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Justice Department investigates eBook pricing

via The Wall Street Journal

Ever notice how eBooks are pretty much all priced at $9.99? And doesn't that seem a little weird, considering there's no production, distribution or storage costs?

There's a reason for that: Steve Jobs.

And you're not the only one who noticed, by the way. So did the U.S. Justice Department, which has officially confirmed it's investigating pricing in the eBook industry.

First, a little history:

When the iPad came out in 2010, Jobs decided that his biggest competitor was Amazon, with it's reputation for deep discounts. Simply put, the iPad would be less competitive if eBooks were less expensive in the Kindle store. So instead of waging a pricing war, Jobs went to five of the big six houses--HarperCollins, Hachette, Macmillan, Penguin, and Simon & Schuster--and convinced them to abandon the "wholesale model" of pricing in favor of the "agency model."

Under the wholesale model, the retailer determines the price of a product. Under the agency model, the publishing house determines the price. It was an easy sell, as this option meant higher profits after years of declining revenues (though the argument has been made that this was short-sighted and less eBooks are sold, resulting in lower profits).

Jobs even seemed proud of the scheme. According to The Wall Street Journal

"We told the publishers 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway,'" Mr. Jobs was quoted as saying by [his biographer] Walter Isaacson.

"But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.'"

As you can see, Amazon didn't have much of a choice. If they didn't sign on, the Kindle would be DOA. The problem, though, is that this practice is anti-consumer and anti-competitive. And there are laws against the latter. 

Flash-forward to today, and the news that the Justice Department is on the case. The pricing model has also attracted the attention of antitrust investigators in the European Union, as well as attorneys general in Connecticut and Texas. 

This past August, eBook pricing also hit the civil court system, when consumer rights firm Hagens Berman filed a class action suit in California against Apple and the five publishers, claiming they're "in violation of a variety of federal and state antitrust laws, the Sherman Act, the Cartwright Act, and the Unfair Competition Act."

Random House, the only major publishing house not named in the suit, signed onto the agency model this past March, which means they weren't party to the original agreement. 

From the suit:

Once approved, the lawsuit would represent any purchaser of an e-book published by a major publisher after the adoption of the agency model by that publisher.

The lawsuit seeks damages for the purchase of e-books, an injunction against pricing e-books with the agency model and forfeiture of the illegal profits received by the defendants as a result of their anti-competitive conduct, which could total tens of millions of dollars.

So what does all of this mean?

Right now, not much. This won't be resolved any time soon. In the long term, it could mean restitution for eBook consumers, though probably not much more than a pittance (think Ticketmaster).

Really, I see this playing out in one of three ways:

  • Option One: Apple and the publishers successfully argue they're not breaking anti-competition laws. Life goes on.
  • Option Two: A settlement is reached that keeps the agency model, but in a new, staggered format. Sort of like how all songs on iTunes used to be 99 cents, but now they're staggered at 69 cents, 99 cents and $1.29. It appears a little more fair, but it's really not. 
  • Option Three: Apple and the publishers lose. Amazon slashes their prices to bargain-basement levels as a "screw you" to Apple. And for once, in one very rare, beautiful moment, the consumer wins.

My money is on option two, because the consumer never wins. 

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Comments

Instag8r's picture
Instag8r from Residing in Parker, CO but originally from WV is reading Blood Meridian by Cormac McCarthy December 9, 2011 - 8:03am

Yeah, maybe the consumer wins but what about you as an author? What does it feel like to sell a novel that you've been working on for a year - maybe years - for $0.99?

Rob's picture
Class Director
Rob from New York City is reading at a fast enough pace it would be cumbersome to update this December 9, 2011 - 8:20am

Then self-publish and price the book however you want. 

Instag8r's picture
Instag8r from Residing in Parker, CO but originally from WV is reading Blood Meridian by Cormac McCarthy December 9, 2011 - 8:23am

Are you really telling me that you are okay with selling your work, your heart and soul, for pennies?

 

RonEarl's picture
RonEarl from Charleston, WV is reading Dove Season by Johnny Shaw December 9, 2011 - 8:30am

$9.99 was the set price for titles from the Big 6, the agency model allows them to set higher prices based on the book, author, whatnot. $9.99 is a great price point for books, but I can see why a book like Stephen King's 11/22/63 should be priced higher. A namebrand author, a 900+ page book, and at $16.95 significantly lower than the print. Consumers will pay for what they want. A King reader is either going to plop down $35 or $17 to read the book regardless.

Even though the Big 6 are still paper concentric, eventually digital will be their focus and as corporate machines with lots of overhead, other than production cost, I don't see them marketing books below $9.99. There are a lot of hands that need paid.

One thing the agency model does do is allow the publisher to choose when to discount, run promotional sales. It would be great if say a first day release is set at $12.95-15.95 and the price gets reduced overtime. You will always have those who can't wait and those who can wait for the discount.

I loved the $9.99 price point, but I don't believe there are any anti-trust issues at play allowing publishers to set prices, the cover prices in print vary greatly depending on the author, genre and size of the book. Nothing here is different.

@Instag8r - I'm from WV and I lived in Parker in the early 90s. Visit the Denver area once a year. Beautiful country out there.

Rob's picture
Class Director
Rob from New York City is reading at a fast enough pace it would be cumbersome to update this December 9, 2011 - 8:36am

Instag8r - I'm not telling you that at all. I don't actually understand what you're trying to argue. 

Authors who publish through traditional publishers don't get to set their own prices.

If you want to control your own pricing, then self-publish. Then charge 9 million dollars for your book, or six bucks, or twelve, or three pennies.

Instag8r's picture
Instag8r from Residing in Parker, CO but originally from WV is reading Blood Meridian by Cormac McCarthy December 9, 2011 - 9:09am

What I am trying to say is that the public (consumers) judge the value of things by the price. If something (a book) is priced at ninety-nine cents then they see at as not being monetarily valuable escpecially when they are already paying $4 for a cup of coffee. Which is a great example - the consumer doesn't flinch at paying $4 every morning for a coffee because that's what they perceive its value to be. But an e-book at $9.99 - Oh my fucking God! There needs to be regulations. We're getting raped.

If we don't put a monetary value on our own work how do we expect the public to? We all know that a book (electronic or otherwise) is worth more than $0.99.

 

Rob's picture
Class Director
Rob from New York City is reading at a fast enough pace it would be cumbersome to update this December 9, 2011 - 9:20am

OK, I think my confusion lies in the fact that this article has nothing to do with the percieved value of ebooks (which is a completely different subject) and you accused me of saying they should be priced at 99 cents--which I didn't. 

Got it. 

Chester Pane's picture
Chester Pane from Portland, Oregon is reading The Brief and Wondrous Life of Oscar Wao by Junot Diaz December 9, 2011 - 12:18pm

Great article Rob,

Like everyone else I have been watching this e-books thing unfold and it will be interesting to see when things level off and stabilize.

@Instag8r: I hear your concern. It seems ludicrous that consumers will spend four dollars with glee for a latte that is ephemeral and then be able to turn around and buy a book for .99 cents. That would be cause for authors to band together and begin compiling firearms and biological weapons. Book bombs.

Unfortunately one need only look to the music industry for a precursor of things to come. Musicians now make a fraction of what they previously made. Ninety-nine cent songs. 

The comparable solution would be chapters for ninety-nine cents. 

Kirk's picture
Admin
Kirk from Pingree Grove, IL is reading The Book Of The New Sun December 9, 2011 - 12:53pm

The precursor of things to come? If you mean greater accessibility to success, sure.

The music industry has actually adapted really well and more musicians are actually making money off their music these days than ever before. It used to be that the only way you made money as a recording artists was to get a major contract, then get airplay, then get onto the top of billboard, then sign a second contract because for the first one, the labels always fucked you. Then, if you were lucky, you started getting maybe $2.00 on a $18 album sale, if you were lucky.

The people who are having problems now, are the useless suits at the top of the labels - the people who contribute nothing to the music you love. Their jobs are now irrelevant.

Hell, look at the comments Radiohead made about the In Rainbows release. They didn't put out actual numbers but they did say they made more money, as a band, off that one release than they did off their 3 previous albums combined and that includes the people who opted to not pay at all.

Now music is a little different because the bulk of the money bands make is off touring, authors don't have a comparable revenue stream to that. So I doubt you'll see anyone suggest that the guys selling 500,000 books should start selling books at 99 cents.

But it does give you, as an unknown writer, the opportunity to get people to read your work without the fear of losing a lot of money. I'm much more likely to buy your 99 cent eBook with only a handful of reviews than I am if it is $9.99. And perhaps your book becomes a huge success, how bad is that? You now have an audience for your next book, the one that is $9.99.

It also gives you the chance to boost your sales a year after release, or longer. You simply drop the cost and in theory, see a nice sales spike you wouldn't have seen otherwise.

Limbless K9's picture
Limbless K9 from Oregon is reading Wraeththu December 9, 2011 - 2:56pm

Fucking Steve Jobs. What an asshole. 

Chester Pane's picture
Chester Pane from Portland, Oregon is reading The Brief and Wondrous Life of Oscar Wao by Junot Diaz December 9, 2011 - 3:47pm

@Kirk,

Yeah, I suppose it all depends on the artist. I know plenty of Artists making 'less' than they were before. I would venture to guess that there are going to be a lot of authors who are going to be making a lot less in the next few years.

And yes. A precursor. I think the exact same lull is coming for well-known authors. I think we are both talking about the same thing. But just to clarify, I was comparing the current digital conversion to what happened in the music industry. I never said things wouldn't possibly stabilize down the road.

And I'm all for accessibility. Again though, Amazon isn't some Archangel declaring 'greater accessibility and profits for all.' 

Otherwise we'd be discussing Amazon.org. Again, there are obvious benefits to what Amazon is doing. But I am not going to don an 'I heart Amazon' t-shirt.

Amazon is about their bottom line. They don't care about the consumer in any way other than their pocketbooks.

Dwayne's picture
Dwayne from Cincinnati, Ohio (suburbs) is reading books that rotate to often to keep this updated December 9, 2011 - 4:34pm

@Pane - You say that like it's a bad thing. I'd much rather have a company that has improved my life for selfish reasons then yet another group who has made it worse with good intentions. We used to be pretty much locked out of every getting published now it's reasonable to think you can at least self publish into a profitable hobby. Plus the price of books has went down. Yay.

Instag8r's picture
Instag8r from Residing in Parker, CO but originally from WV is reading Blood Meridian by Cormac McCarthy December 9, 2011 - 5:09pm

@Rob - My apologies. I went back and just reread the article for the third time. You are correct, sir, I misread it. I especially misread the last line. I will blame it on the huge dose of pain meds I took this morning but no excuses. I just read it with a clear head and I will be the first to admit that I am wrong. I misinterpreted what you said.

You would have been within your rights to take a hammer to my thick skull.

 

Rob's picture
Class Director
Rob from New York City is reading at a fast enough pace it would be cumbersome to update this December 10, 2011 - 1:47pm

Instag8r - No need for a hammer. Just glad that's cleared up.