Federal Court Ruling on ebook Pricing: Who Benefits?

This morning’s New York Times brought news of a decision in a landmark case that is sure to affect publishing in major and perhaps unpredictable ways. You may recall how, more some years ago, Apple approached six major book Jobs-and-Pubspublishers to try to reach an agreement on a set price for ebooks and came away with a deal with five of them--Hachette, Penguin, HarperCollins, Macmillan and Simon&Schuster. It was a move many thought was designed to respond to Amazon’s growing dominance in the e-book trade. The U.S. Justice Department pursued an antitrust case against Apple even though the publishers involved had already settled without admitting they had been involved in a conspiracy to set prices. On Wednesday, July 10, a federal district court Judge, Denise L. Cote, ruled that Apple had “played a central role in facilitating and executing” a deal with five major publishers imagesAmazon had set prices for e-books at $9.99. At the time, Amazon controlled 90% of the e-book trade. On the cusp of launching its iBookstore, Apple wanted to find a way to gain a larger share of the market without taking a loss. If it used a “wholesale model,” where publishers sell e-books at a price about half the price of the cover price for a print book, allowing retailers to set their own price, Apple reasoned it wouldn’t be able to compete with Amazon’s set price of $9.99 and make money. What strategy to pursue?

Publishers were already disgruntled with Amazon’s low pricing in digital publishing, which was already showing signs of threatening further the profitability of print publishing. Apple capitalized on the fact that publishers were looking for a way to derail Amazon’s policies by proposing using an “agency model,” where the publisher sets the price of the e-book and agrees to give the retailer a fixed 30% commission. This appealed to publishers. But what if the publishers raised the price too high? Why would a customer buy an e-book from Apple for a higher price than she could buy the same book on Amazon? Apple hatched a plan that would allow e-book prices to rise, while still protecting Apple’s profits.

Apple devised a two-pronged strategy: price tiers with caps and the requirement that the agency model be used for all e-tailers. Apple expected this proposal would appeal to the Publishers. After all, it would allow them “to ‘fix’ their ‘problem’ with Amazon’s pricing” by making the agency model for e-books industry-wide. (U.S. District Court Southern District of New York, 12 Civ. 2826 (DLC) Opinion and Order, p. 40)

Eddy Cue, Apple’s senior vice-president of Internet software and services brought this proposal to the Publishers and they met it with great enthusiasm. As complicated negotiations progressed, Cue insisted “an industry-wide adoption of the agency model was ‘the only way’ to ‘move the whole market off the 9.99.’ ” (ibid., p. 47) And it managed to achieve this compliance, despite Publishers’ initial resistance to it, through a clever strategy that appealed to publishers long-term interests in finding a way to undercut Amazon’s market share.“Understanding that no one publisher could risk acting alone in an attempt to take pricing power away from Amazon, Apple created a mechanism and environment that enabled them to act together in a matter of weeks to eliminate all retail price competition for their e-books,” the District court noted.

What will be the impact of this ruling that Apple’s actions amounted to a conspiracy to raise prices? Apart from the fact that Apple faces yet undetermined fines (although it plans to appeal the decision), who else loses and, more importantly perhaps, who benefits? The jury is still out, but comments from book industry suggest that Amazon will continue to be a key beneficiary, holding onto, and perhaps expanding, its huge share of the market. “A recent survey of the publishing industry revealed that in the United States, e-books account for 20 percent of publishers’ revenue, more than $3 billion, up from 15 percent the year before. Amazon.com dominates the e-book market.” (New York Times, July 11, 2013).

Publishers won’t face an immediate loss either, because, under the wholesale model for e-tailing, they currently receive a fixed wholesale price of approximately 50% of the hardcover retail. For instance, using an example cited in the judgment, if a hardcover retails for $26, the publisher receives, on average, $13 per book, even if Amazon, known as a “loss leader” in the industry, sells the e-book for $9.99. And e-book consumers stand to benefit from the continued downward pressure on prices. As the New York Times reported, “The main reason e-book prices will probably not move sharply in the near term is that the publishers who settled are operating under the settlement’s terms, which prohibit publishers from restricting a retailer’s ability to discount books.”

What about authors? Currently, most publishing contracts give authors a larger percent royalty on e-books, sometimes an amount twice the standard royalty percent offered to them for print books. But the cost of e-book production is, basically, the cost of rendering text and imagery in readable digital form. So publishers aren’t really losing even when they sell the rights to a retailer at a much lower price point than the print version. Their worry has been how to get a larger share of the digital market.

Authors with traditional publishers get a larger percent of a lower price, but that usually translates into the same dollar amount per book. The difficulty for authors is the pressure Amazon’s continued dominance in the digital market, coupled with the ambiguous long-term impact of the announcement by Barnes and Noble that it was discontinuing production of its Nook reader and the resignation of its CEO, will have on anyone's ability to publish and get books sold at all. And with the Big Six publishing houses reduced to a Big Five following the completion of the merger between Random House and Penguin, it’s possible the range of books published will grow narrower still. Although these two venerable houses have long been associated with both mainstream and literary works, to maintain and increase their share of the market, it’s not likely they are going to take many risks on novice, mid-list or experimental writers. So, like me, many more writers are going to consider independent authorship, or self-publishing, as the most reasonable path forward. Yet this doesn’t take independent authors out of Amazon’s orbit. If you want to reach the widest audience, you’d be foolish not to have a digital version available for the Kindle (especially given the uncertain future of the Nook).

As I said in a previous post, taking the independent authorship road wasn’t a decision I made without weighing its full impact. Because when you self-publish, you essentially have to occupy several roles at once: the writer, who creates or “produces” the content, and the seller, who tries simultaneously to “market” the work. But I’m learning the ins and outs and plan to share more ideas, and invite feedback, as I continue along the way. Here are a few pointers.


You Are The Publisher

Effectively, with all the major platforms that exist for print-on-demand (POD) book production, you are the publisher. You need a publishing “imprint” or else your book will carry the imprint of the POD source you choose. You will need ISBNs, or use the ones you get free on some POD sites when you sign up for their services. Read carefully what the implications of taking this latter route are; it could limit who can distribute your book.

Distribution: Do-It-Yourself or Outsource?

The one “middle person” left is the company that actually produces the book-as-object and either distributes it for you (both Amazon and Lightning Source, an Ingram Company do this, as well as others, such as Lulu) or sends the books to you to distribute (not something I plan to do, thank you very much).

Formatting for Print.

Working with any print-on-demand distributer means having your manuscript ready to upload in printable form according to industry standards. (Unless you don’t care what your book looks like!) If you are going to have a digital version available, you also need to format the manuscript as a digitally readable text and work with whatever distribution channels you choose—Amazon, Barnes and Noble, Apple, etc. —to sell books on various sites. Smashwords, among others, helps get your e-book onto different channels. (You can, or course, create your own author web site and take all the distribution on yourself, but that is usually more than most of us writers can or want to shoulder at once).

Both print-ready and digitally accessible files require specific formatting to work with different production and distribution systems. Amazon’s Create Space site provides resources for first-time “publishers” to learn about the requirements. Many other self-publishing sites have resources as well, or offer free style guides for manuscript preparation. But there are also independent contractors emerging in the industry who can help you with book design and the preparation of print-ready and digital files. I’ve mentioned The Book Designer before, but I intend to add other suggestions following further research. A relatively new resource, Self-Publishing Review, has suggestions of where to look for ebook design services.

So, yes, publishing is in a tumult and the dust hasn’t settled yet on what the latest legal ruling against Apple means for the future of books. As I am near to launching my own new book, I’ll be following trends and sharing tips I discover along the way.

As always, I look forward to your comments and responses!!