The United States VS. Publishers

By: Jeff Herman

Book publishing is actually in the headlines, which is uncommon. It's an important yet reticent business that doesn't crave attention, and doesn't want the current attention. In fact, the normally liberal minded industry might now prefer to see the federal government's powers greatly reduced.

What's it all about? It's complicated and unclear. Which means that a handful of lawyers are going to make seven to eight figure windfalls, and sometimes that's the hidden catalyst, at least according to cynics like yours truly.

For more than 100 years the Justice Department has had the mandate to unravel deliberate monopolies and penalize corporate collusion that undermines fair competition. John Rockefeller's oil monopoly was one of the earliest targets and AT&T was one of the more visible latter day conquests. This time, the case alleges that the large publishing houses acted in deliberate unison to increase the prices of digital products. Some of the houses have already cried uncle and have agreed to reimburse the public $tens-of-millions via a complicated formula that might never actually trickle down to any consumers. More importantly is that going forwarded the defeated publishers will be compelled to charge significantly less for their digital products. Several of the large houses have chosen to stand their ground which means the dispute will ebb and flow for a long time before it ever gets litigated.

In the name of economic parity and justice, the government might actually be acting to hinder the organic wisdom a free market can provide. If the case prevails, it's uncertain that consumers will benefit in the long run. It's more certain that Amazon's stakeholders are thinking that they have died and gone to heaven. However, it's not out of the question that the case will be summarily dismissed somewhere along the line, and that the taxpayers may end up owing significant damages to the defendants.

The underlying tension is publisher's profits vs. Amazon's market-share. In this fight, writers are in the same boat as the publishers, since their royalties are tied to the prices that publishers can charge. However, author loyalties will shift if future royalty formulas reward unit sales volumes over price points.

Publishers and a small fraction of their front-list authors, and traditional book retailers, make a large part of their profits from hardcover sales, which average around $30 a copy and don't cost much more than paperbacks to print and ship. Usually only the top-sellers are introduced in hardcover, for the purpose of skimming the cream of the market that will pay more for immediate possession. After about a year, the paperback version will follow for about 60% of the hardcover price to capture the mass-market customers who won't pay premium prices. Paperback sales volumes tend to dwarf the hardcover volumes, but the per-unit profit margin is much less.

The above dynamic had been routine for more than 20 years. But then came efficient digital distribution followed by a shift of power away from publishers to Amazon. Somehow, publishers allowed themselves to lose control over sequencing when a book could be sold in digital formats and at what price points. The publishers were incredibly outmaneuvered; not the first time nor the last, and a saga onto itself. Whereas the less expensive paperback formats were delayed for at least a year, the cheap digital formats were released at the same time as the expensive hardcover editions, and the overnight popularity of ebooks significantly reduced publisher and physical retail profits and author royalties.Furthermore, Amazon was happy to charge as little as possible for the digital formats in order to convert customers en-mass and dominate the market.

Naturally, publishers pushed back by trying to control when the digital editions could be released and at what prices. But Amazon pushed back at their push back by refusing to sell any books from publishers who had the audacity to fight for a bigger piece of the pie. Some compromises were made by both sides, but everyone knew that Amazon was the only one dealing all the cards.

Did the large publishers act in deliberate unison to increase digital list prices? If they did, it's probably illegal. But more importantly, any such efforts essentially failed. The publishers are relatively powerless against Amazon, and now the federal government is beating them up for unsuccessfully behaving like they had power.

Should Amazon be the target? Technically, no. Amazon has marginal competition and isn't acting in concert with them. The government should sit this one out, at least for the time being.

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