The Impact of the Dept. of Justice Investigation

The Indie Author in the world of Publishing

Last week, on March 24, 2012, we looked at a brief history of eBooks, Publishers and the Agency vs. Wholesale pricing model. You can review that post here.

Ironically,on Thursday March 29, 2012, the Huffington Post ran a story by Mark Coker the founder of Smashwords. Most of you are familiar with Smashwords as one of the first distributors to supply eBooks to retailers including, Apple iBookstore, Barnes & Noble, Sony, Kobo, the Diesel eBook Store, and Baker and Taylor.

You can view Coker’s article with the Huffington Post here. Even though he is not directly involved in the suit, his opinion certainly must be considered as he represents about 40,000 authors and publishers. If you want all the detail, take a moment to see his article, but to summarize, his stance is that the Department of Justice (DoJ) should not take action to weaken or dismantle agency pricing for ebooks.

He makes some great arguments and provides some never before seen statistics. Remember though, everyone has a reason behind their opinion. I’m not here to disagree with Coker’s opinion, although there is a major line that must be drawn. As he says himself, Smashwords has become one of the largest distributors of ebooks from SELF-PUBLISHED authors and small independent presses. That alone should bring caution to his comments and opinions.

The premise behind the DoJ case is that five large US Publishers and Apple, Inc, colluded. They are investigating whether Apple and the publishers acted together to raise prices across the industry, in essence, price fixing which is a violation of federal antitrust laws.

So here’s how all his affects the Indie author. Please understand, this is my interpretation of the case and by no means is it the opinion of the DoJ or the Publishing/Apple colluding group. Publishers need to inflate prices of eBooks to preserve their “A” list authors. In this economy, publishers will not put a dime into unknown or unproven authors. The shrinking amount of bookshelf space in retailers dictates that the publishers must put all their eggs into a few baskets.

With the “agency model,” publishers set the price of their books, paper or ebook. The retailer then sells it for them and earns 30% of the selling price. The big publishers don’t care that you’re selling your self-published ebook for $2.99, they want their “A” list author to be selling for $11 to $13.

As a reader, you should be outraged—forced into an artificially set pricing system arbitrarily set collusively by the publishers. Recently, Scott Turow the current president of the Authors Guild, published a statement attacking Amazon and the DoJ. You can read that here. He goes as far to say Amazon’s pricing system was intended to “destroy bookselling.”

Say what you want, but Amazon has almost single-handedly built the eBook business. The ironic side of this is that in the beginning, Amazon had a 90% market share, which has dwindled to about 60% today. I’m not sure how you can destroy bookselling by selling millions of books and giving consumers what they want—lower priced eBooks. Keep in mind, when Amazon first started the practice of lowering the price on eBooks, it was with mainstream and “A” list authors. The indie author scene hardly existed at the time.

Now, it may sound like I’m defending Amazon, but I’m not. They incorporate the agency model as well. As an indie author, I make 70% of the selling price. The real issue has to do with the publishers—and how they treat authors and readers.

For example, let’s say you’re an up and coming indie author, and a publisher offers you a three book deal. Your ego inflates, you can’t walk through the door (your head’s too big) and you jump at the chance to finally have your hardcover on the shelf at B&N. So, let’s look at what that means to you. As a traditionally published author, you now earn a royalty of 17.5% of the sale price of the ebook.

“I’ll negotiate a better deal!” the battle cry echo’s a mile away. Fat chance. Every publisher does the same deal. That means that on a $13 ebook, you would earn $2.27. Isn’t it coincidental that the royalty comes out to just about the same amount that you would earn if you did it yourself? Keeping in mind that the retailer is only taking 30%, that means the publisher is raking in $6.82 per book. Three times as much as the dude who wrote it.

So who wins here? The author, uh—no. The reader? Definitely not, do you want to pay $13 for an ebook? You got it—the publisher hits a home run. Here’s the worst part. The same type of book you published yourself sold for $2.99. The next day, the traditionally published new book sells for $13. What do you think your fans are going to do? They will, in Coker’s words, “ … purchase lower cost alternatives.”

It’s silly isn’t it? Now he’s arguing against his own stance. The fact is, Coker is protecting his 30% model, and he should be. Once again, I’m not saying he’s wrong. We need more Mark Coker’s in the world. He does wonderful things for indie authors. It’s just that you have to look between the lines sometimes and understand where the comments are coming from.

The bottom line is that while we embrace the indie author world, what would you do if you had a chance to work with a big publisher. Would you tell them to take a hike? If they waved a $100,000 advance in your face, do you walk away?

Wouldn’t you like a world where both options are advantageous? I don’t know about you, but if I could just write, and not worry so much about formatting, cover design, editing and having to supply my own books for book signings, it would be a nice situation. Most of all, it would be really cool to have The Card, sitting on a shelf in Barnes & Noble. Here’s the thing, with the way things stand now, I wouldn’t touch it for the world, no thank you, I’ll continue doing it myself.

The real problem boils down to the DoJ going after the wrong thing. Both sides are right. I believe that the big publishers did collude to elevate ebook prices. I believe that they have raised the prices to make a bigger profit AND protect their paper book industry. If the paper version is only a couple of bucks more, many will buy the paper version instead. On the other side, Amazon did play a game with the other model, selling books at a loss to build Kindle device sales. It’s not their fault that they had the device and it took others a year or more before they had their own devices.

The reader, our customer, is the one who loses. If the “agent” model prevails, there will continue to be a big discrepancy in eBook pricing. The “traditionally” published author will not have any say in the pricing (or royalty) of their work. Amazon and Smashwords will continue to offer direct publishing by independent authors and their work can be priced at will. If your dream is one day see your book in print with “Random House” slapped on the cover, good luck.

For our Indies Unlimited friends across the pond, the European Union is dealing with this issue as well. It looks like publishing companies could offer concessions to avert a fine of up to 10 percent of their global sales. Regulators would then drop their investigation without the companies admitting to any wrongdoing, according to a March 12, 2012 article by Reuters.

If the DoJ wins, there will be a gradual decrease in the pricing of eBooks from the publishers. Where that stops, nobody knows. Most likely market forces will take over and settle at a reasonable level.

As an Indie author, here’s the negative. A quick look at the bestseller rankings and you can immediately identify the traditionally published author from the big publishing companies. The prices tell the difference. Down the road, you won’t be able to tell. The Indie author may get lost in the masses. So in essence, the big publishers are doing us a favor in the current make-up of the industry.

As you can see, there is no real answer. What is amazing is that the man who single-handedly destroyed the “record” store with 99 cent iTunes is trying to prop up a bunch of old-school, good-old-boys-club publishers. My guess is that some type of settlement will be reached that doesn’t change the industry model, but makes the publishers pay for colluding in raising prices across the industry. That would be a win-win for everyone, allowing indie authors to continue to pursue a career in a market where they can get noticed, and paid in a way they can make a living.

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Jim Devitt is a Contributing Author for Indies Unlimited and the author of the #1 Kindle Bestselling novel, THE CARD. For more information, please see the IU bio page or his blog:  http://jimdevitt.blogspot.com/[subscribe2]

16 thoughts on “The Impact of the Dept. of Justice Investigation

  1. I've been following this story and have fully understood perhaps a third of it. I don't have a head for economics or business. After reading this post, Jim, I can say I'm starting to get a sense that I understand more than half, which is definite progress. Good post.

  2. The Supreme Court ruled in 1993 that “the purpose of the [Sherman antitrust act] is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”

    Competition in publishing is alive and well: consumers have the opportunity to buy books from 99 cents or less to $19.99, Apple and Amazon both have significant portions of the market, and multiple publishers are in play. We are the middle of an upheaval in publishing, which is necessarily creating an upheaval in pricing models and distribution models, and everyone is feeling their way right now, but most importantly — the market is driving it. This is how it is supposed to work. So I think the government getting involved right now would just stifle creative change and progress, for publishers and authors alike.

    And where will it stop? The DOJ could just as easily go after independent authors who give away their books because they have a day job to subsidize their hobby, and this uses “means which make it impossible for other persons to engage in fair competition.”

    Thanks for the thought-provoking articles, Jim!

  3. "The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.” Wow, this sentence is an indictment of unfettered capitalism, really. Good for the Supreme Court. I suppose the problem is: who decides at what point the conduct becomes unfair?

  4. "who decides at what point the conduct becomes unfair?"

    The first guy to say so is called the plaintiff. Then a bunch of lawyers get well paid fighting about it, then the case settles with a confidentiality agreement and no one knows how it turned out.

  5. It seems to me that publishers are whining about the supposed "downfall of the paper book". I'm sure trees everywhere are quietly celebrating! It makes me wonder why the publishing industries don't just quietly back the ebook business? If that's where the business is headed, why not just change the business model to keep in competition with Amazon?

  6. Propping up the paper book industry is only a small part. The big part is that they are making tons of money off of the eBooks from their "A" list authors. If the market will bear those numbers, they have every right to do that. Meanwhile, I'll keep going with my novel at $3.99 and make more money off each copy than Stephen King, now if I could only sell as many copies as Stephen King.

  7. I've given this a lot of thought; and I'm not so sure this will have as much impact on indies as some folks think.

    Yes, if Amazon suddenly discounts all books from major publishers, it'll cut sharply into the price difference between indie and big publisher books, and that could hurt. But WILL they?

    I think the most likely outcome from the settlement will be that publishers will retain a 70% deal; and agency will be abolished, allowing retailers to set whatever price they want.

    If that happens, then Amazon will still have a functional lower price on work. If publishers list a book for $13.99, then any price below $9.79 will cost Amazon money. It's unlikely Amazon would discount most such works to an unprofitable level.

    Yes, they might make the latest Big Name Author book 99 cents as a loss leader – but those books are already selling well, even in an indie-dominated ebook world like we have right now. Those writers are the only legacy published ones who *are* still doing OK in ebooks.

    So, net effect? Really big books will get discounted to loss levels (effect on indies zero). Other books might get discounted some, but not enough to bring them down to acceptable levels for most readers (effect on indies very low). Unless *publishers* actively embrace lower prices on ebooks, and start pricing their books low enough for retailers to discount them down to indie levels and still make a small profit, I don't think the indie pricing range ($1-6) is in as much danger as some folks think it is.

  8. I agree Kevin,

    I think that was kind of where I ended up with this. I do think that the agency model will prevail though, but the publishers will be penalized somehow.

    If you look at the proposed settlement in the EU, it's similar to that concept.

    Love your comments Kevin, and I always enjoy your feedback.

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