Publishers Have Themselves to Blame for Amazon’s Triumph

by Jonathan Berr | September 10, 2012 9:21 am

Amazon (NASDAQ:AMZN[1]) CEO Jeff Bezos has won the e-book price wars and will leave his competitors in the dust. The publishers that are complaining now have no one but themselves to blame.

Last week, U.S. District Judge Denise Cote approved a settlement[2] between three U.S. publishers — Hachette Book Group, Simon & Schuster and HarperCollins —and the Department of Justice over allegations that they were in cahoots with Apple (NASDAQ:AAPL[3]) to fix the prices of e-books. Apple and two other publishers, Penguin Group USA and Macmillan, have refused to settle. Their case will go to trial next summer. Officials in the publishing industry, who urged Cote to throw the case against them out of court, were appalled by the ruling.

“To say the least, we are colossally disappointed that the judge failed to understand how consumers will be negatively impacted by a decision that does not take into account the realities of the book business in 2012,” said Oren Teicher, CEO of the American Booksellers Association, in a statement posted on the group’s website.

Indeed, the publishing industry argues that it — not Amazon — is the aggrieved party given the Seattle-based company’s dominant position in the e-book market by selling electronic books below cost. Though their fears were understandable, their solution to it was illegal. It’s not even a close call.

Both Apple and the publishers didn’t want to compete with Amazon’s $9.99 price point for e-books. In 2010, they agreed to switch to a new “agency” model whereby publishers would sell titles directly to the public as opposed to the “wholesale” model, in which electronic books were sold to retailers. Agreements between Apple and the publishers were in place ahead of the 2010 launch of the iPad.

These agreements included a “price-based ‘most-favored nation’ clause,” according to which the price of any e-book sold in Apple’s iBookstore would be no higher than the price of that e-book at any other retail store,”[4] according to Cote’s ruling. “If an e-book was sold for less at a competing store, the price at the iBookstore would drop automatically to match it.”

It doesn’t take a federal judge to know that’s price fixing. It’s been against the law since around 1890 — when the Sherman Antitrust Act was signed — for companies to act in concert to set prices. Apple and the publishers may argue otherwise, but they may have a tough time convincing a court. The case, though, will drag on for years, and Amazon’s power will grow even stronger, which scares some pundits.

“The DoJ lawsuit plays, it seems to me, right into the hands of Amazon,” writes Allison Flood in The Guardian[5]. “Yes, we’ll have cheaper books, but at what cost? Is it worth paying a little bit less for a title if it threatens the future existence of the publishers who are bringing us the books?”

The settlement may further disrupt the publishing industry, but that isn’t the government’s concern as much as consumer protection. Under terms of the recent settlement, Hachette Book Group, Simon & Schuster and HarperCollins are forbidden from agreeing to contracts with retailers that restrict the seller’s ability to set e-book prices. They aren’t allowed to include most-favored nation clauses with the publishers for five years.

Some evidence shows that the e-book price wars that media reports speculated would occur as the result of the ruling are indeed happening. Amazon is currently advertising 100 “Kindle Books” on its site for $3.99 or less[6]. More e-book deals will no doubt come soon in the wake of the company’s announcement this week of a new line of Kindle readers[7].

Jonathan Berr has no positions in the stocks mentioned here. Follow him on Twitter @jdberr.

Endnotes:
  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. U.S. District Judge Denise Cote approved a settlement: http://mediadecoder.blogs.nytimes.com/2012/09/06/judge-approves-e-book-pricing-settlement-between-government-and-publishers/
  3. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  4. higher than the price of that e-book at any other retail store,”: http://www.publishersweekly.com/pw/by-topic/digital/content-and-e-books/article/53852-federal-judge-denise-cote-approves-doj-e-book-settlement.html
  5. The Guardian: http://www.guardian.co.uk/books/2012/apr/13/apple-ebook-price-fixing-terrifying
  6. site for $3.99 or less: http://www.amazon.com/gp/feature.html/ref=amb_link_84185091_2?ie=UTF8&docId=1000706171&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-1&pf_rd_r=14PRF2N3SSYDCFY78118&pf_rd_t=101&pf_rd_p=1395862502&pf_rd_i=1286228011
  7. a new line of Kindle readers: http://investorplace.com/2012/09/amazon-unveils-updated-kindle-fire-and-kindle-fire-hd/

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