The High Price of Cheap E-Books

The High Price of Cheap E-Books



You got the e-mail from Amazon, Barnes & Nobles or Apple: if you bought e-books from us at some point in the past, you’re getting a refund, gift certificate or credit for your past purchases.

Is Santa Claus coming early this year? Did Amazon CEO Jeff Bezos wake up with a fit of benevolence? Did pigs fly? No, the refund is a rare result in the complex, tedious, slow-moving world of antitrust legislation: consumers will see money back and lower costs, but the cost to the publishing industry will likely be far-reaching.

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It began with a jump in e-book prices: consumers, used to spending at most $10 on Amazon e-book titles, saw a sudden jump in prices in 2010, with bestsellers rising to $13 or even $17.

The jump confused a lot of people — how can digital cost as much as paperback? After all, e-books are booming, and analysts applauded the publishing industry’s transition. The results are concrete: revenues and sales from e-books are surging, surpassing hardbacks — and soon paperbacks. The price jump just seems greedy.

Consumers weren’t the only ones who noticed. The Justice Department, one of the major antitrust watchdogs of the U.S. government, began investigating the shift to higher prices, uncovering alleged collusion between Apple and five major book publishers to raise e-book prices at the launch of the iPad and its e-bookstore. The DoJ claimed Apple came to an agreement with publishers to let them set their own price on e-books sold on iPads. In return, Apple would take a 30-percent cut, therefore squeezing out retailers, which use a wholesale pricing model, and overall, raising prices for consumers. In short, the agreement dramatically stunted a retailer’s abilities to set prices, generate sales and respond adroitly to market forces and customer demand.

Of course, it’s perfectly legal for publishers, or any product-maker, to set their own prices and give a commission to sellers. But the DoJ’s issue is that Apple entered into an agreement with publishers to switch to this pricing model, a major anti-competitive practice that forces an artificial shift in the market, rather than natural response to forces of supply-and-demand. Happenstance is okay, a plan is not.

The regulatory body said it “uncovered significant evidence that the seismic shift in e-book prices was not the result of market forces, but rather came about through the collusive efforts of Apple and five of the six largest publishers in the country,” according to a federal court filing in New York. With evidence on hand, the DoJ filed a lawsuit against Apple and five of the six major book publishers in the spring of this year.

A Major Turning Point

The significance of the lawsuit wasn’t lost within an industry grappling with the transition to digital. The book-selling and publishing industry had done well in managing the shift: it had foreseen the importance of e-readers and adapted considerable libraries of assets for the digital market. It planned ahead and instituted strict digital-rights management systems to prevent piracy, ensuring it wouldn’t walk down the same destabilizing path as the music industry.

And its strategies paid off: e-books are selling well, to the point of eclipsing traditional books like hardcovers. Most consumers will read e-books in the future.
But publishers have one major worry: Amazon has accrued immense power within the publishing industry, particularly in its low-cost pricing strategies. Amazon had instituted a $10 e-book price, even though it often lost money on each sale, to establish its store as the destination of choice for digital content. And it slashed prices and profits on e-book titles to stimulate sales. Meanwhile, publishers worry their digital products are devalued, and customers will come to expect $10 on all e-books in the future, capping its earnings potential.

Publishers complained, claiming Amazon’s held a monopoly in e-book distribution, dangerous in its own way, especially as brick-and-mortar powers like Barnes & Nobles and Borders struggled to compete. So they welcomed Apple as a counterbalance to Amazon, pitting major powers to level the playing field, and hopefully regain some control over the pricing of their e-books.

The DoJ lawsuit, however, creates an opportunity for yet another seismic shift in the e-book industry, centered on questions of value, price and the power to determine these. If the DoJ wins, consumers will see lower prices again. But Amazon will be left alone with ever-increasing powers over publishers. If Apple and its partners win, publishers will be able to set their own margins, which will undoubtedly lead to higher prices, leaving consumers to decide whether pony up for the latest e-bestsellers. Publishers will regain a modicum of control in a rapidly shifting industry that is still searching out ways to stay viable and profitable.

Where will the dice fall? Wherever it lands will influence and shape publishing for years to come, and affect how consumers buy and read e-books and how publishers sell them.

Consumer Checkmate

In the end, the resolution came unexpectedly quickly: almost immediately after the DoJ filed suit, some of the publishers named as defenders in the suit began negotiating settlements, rather than enter into an expensive and protracted legal battle. In September, U.S. District Judge Denise Cote approved a proposed settlement offered by the DoJ to these publishers, resolving allegations of collusion and price-fixing.

The settlement required the publishers in question — HarperCollins, Hachette and Simon & Schuster — to terminate their agency contracts with Apple as well as agreements with other retailers, like Amazon, “as soon as each contract permits,” i.e., when the contract expires, with an option for retailers to terminate the contracts themselves earlier. Then settling publishers and retailers can enter into new contracts, adhering to the DoJ stipulations.

Consumers are already seeing the benefits of these new contracts. Amazon has lowered prices on many titles by HarperCollins, for example, and with the holidays approaching, customers can expect the lowering of even more titles so retailers and publishers can take advantage of the shopping season.

And then there’s compensation for past e-books. The three settling publishers have agreed to pay $69 million into a settlement fund, which will be disbursed to consumers through retailers. Stores like Amazon have begun notifying eligible customers by e-mail about refunds, which is expected to range from $0.30 to $1.32 per e-book either in account credit or as a check if requested. They won’t arrive until February next year, subject to court approval. But consumers can find out more at EBookAGSettlements.com.

In the future, consumers will see lower e-book costs, even from non-participating publishers, who will need to discount to stay competitive. Retailers will be free of most restrictions on pricing, so Amazon is expected to drop prices on many best-selling titles, and competitors like Barnes & Noble and Kobo are predicted to follow suit.

Since the lawsuit drops most major restrictions retailers have had put on them, consumers may see some dramatic changes in the selling of e-books. Bestsellers used to retail for about $10 per e-book, but Amazon can now theoretically sell books for much lower. Look for the e-tailer to experiment with book bundling, flash sales drops or even titles giveaways altogether — in short, its e-books strategy may begin to mimic its music-selling strategy, in an attempt to consolidate power in the e-books business.

Prices for books bought on iPads, however, remain a wild card. Apple has rarely entered the world of competitive pricing, and has little experience with sales and competitive discounts. Unless Apple prices its e-books to compete, its e-bookstore will remain a sideshow, and not a powerhouse of revenue and profits, like its iTunes store has become through powerful alliances and hardnosed negotiations with record labels.

In short, consumers should rejoice as a result of the settlement: in this case, the system worked to prevent artificially high prices from taking hold in the market. Lower prices means more e-books sold, speeding the industry ever faster towards the inevitable digital medium.

Predictable Turmoil

Of course, publishing overall is in an uproar with the settlement, with many insiders worrying about Amazon’s continuing consolidation of power. Some continue to stand firm against the DoJ. Apple, Penguin and MacMillan, for example, refused to settle and soldier on in a separate lawsuit. But many, fearing the writing is on the wall, are responding. The Authors Guild, for example, issued a statement condemning the ruling, saying it turns the clock back to 2010, when Amazon sold 90 percent of all e-books.

The judge’s approval of the settlement “essentially handed Amazon a controlling share of the market,” said literary agent Gary Morris of the David Black Agency to the Los Angeles Times. “I wish the beneficiary was not a rapacious monopolist.”

Others believe that publishing will become more conservative in taste in response to a market where it’s more difficult to eke out profits. Still, more say the ultimate destabilization of publishing will benefit Amazon’s own heavily-invested and thriving publishing arm.

“Amazon might want to crash the industry so they can dominate from the rubble,” said John Evans, owner of Diesel, an independent bookstore.

Even the DoJ acknowledged that the ruling will likely have an adverse effect on the publishing ecosystem, ranging from authors to publishers to booksellers. It said much of the criticism it received on its proposed settlement “expressed a generalM frustration… from the evolving nature of the publishing industry — in which the growing popularity of e-books is placing pressure on the prevailing model that is built on physical supply chains and brick-and-mortar stores,” according to Judge Cote.

However, the regulatory body remains unapologetic, ruling that its job is to eliminate “anticompetitive, collusive practices” in the market, and that antitrust laws can’t be circumvented to protect existing business models. “Even if Amazon was engaged in predatory pricing, this is no excuse for price-fixing,” wrote Judge Cote in her order.

Unpredictable Roads Ahead

With its back to the wall, there’s no telling how publishing will ultimately react to the ruling’s consequences as they play out, particularly in relation to Amazon’s growing might.

Not everyone believes consumers see lower prices. Some like Michael Cader at Publishers Lunch believe publishers can raise the price of their products, as a method to protect the innate value of their e-books. Publishers still have the ability to set list prices for their books, and nothing in the settlement prevents publishers from raising them from $10 to $19, for example. Amazon can still choose to sell titles at a loss to beat the competition, but it forces the Internet giant to be more selective over what prices to slash.

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“Higher list prices could ‘use up’ a retailer’s annual discount pool more quickly,” Cader said. “It could provide some protection against devaluation in the marketplace of a publisher’s biggest properties.”

However, publishers, authors and other parties in the industry may pursue more interesting pricing strategies, since previous contracts with retailers froze out models like subscription-based pricing. They could, for example, pioneer models where subscribers pay a monthly fee to access an entire library of back catalogs and future works, or join a Netflix-like service for current bestsellers. There is tremendous room for creativity and growth in the chaos created by the DoJ suit, for those who choose to take risks.

In the end, the uproar in the wake of the settlement reflects the anguish and confusion of an industry still struggling to make the transition to digital. It underscores a fundamental problem in the market: how to convince consumers that the value of its digital product is higher than its current perception.

Like music, consumers are used to low prices for digital products, so they balk at higher ones. The technology of e-books will need to raise the bar to justify those higher prices, perhaps taking full advantage of the multimedia nature of the e-book. With digital, value can now be created in terms of access — creating a subscription to an evolving book tailored to finely attuned tastes, for example. Either way, publishers must change the way they create value for consumers — and let go of the hopes of a traditional business by the book, so to speak, as it has done for centuries.

The settlement is just one major seismic shift in this process. “By putting the legal approval on this settlement, the district court has pushed us over a certain kind of cliff,” said Jonathan Kirsch, a Los Angeles-based author and publishing attorney, to the Los Angeles Times. “In terms of the real-life experiences of publishers, authors and readers, this will represent a fundamental change in how books are published and sold.” It is the type of pivotal moment where either businesses reinvent themselves for a new age, or consign themselves to the proverbial rubble of history.

The Rough and Tumble World of E-Books

E-book sales surpassed hardcover sales, but obstacles are hindering the digital format’s road to supremacy. According to the Association of American Publishers, stores sold $280 million of adult e-books in the first quarter, an increase of about 30 percent from a year ago. Young adult and children’s e-book sales, meanwhile, doubled to $64 million, while adult hardcover books grew modestly at three percent to $230 million.

Robust sales of e-books over hardcovers signal the rapid transformation of publishing. Early on, the industry embraced the digital format, but as it grew dominant, publishers, authors and consumers started jockeying for control over the distribution and pricing, especially as the number of e-readers proliferated. E-books are at a critical point in the industry, and two major events and forces are shaping the growth for years to come.

HarperCollins, Simon & Schuster and Hachette agreed to tear up contracts and renegotiate pricing with outlets like Amazon and Barnes & Noble, according to a Justice Department settlement with publishers, but the long-term outlook of digital publishing remains uncertain.

Regulators say Apple and five major publishers conspired used an agency model, which allows publishers to set prices of e-books, to fight Amazon, which used a wholesale method to let it guarantee the lowest e-book prices and undercut competition.

U.S. District Judge Denise Cote sided with consumers against Apple and the publishers. She believed Apple blocked e-books from competing in the open market by “helping the suppliers to collude, rather than compete independently.” The ban will help Amazon secure a stranglehold the market by crippling its two biggest competitors, Apple and Barnes & Noble.

An Amazon Monopoly

But several publishers counter that Amazon’s wholesale model, while cheap, devalues their digital books. They fear consumers will get used to the $10 e-book, and they’ll be unable to sell them at higher prices later on, draining their future profit and revenue. Currently, Amazon sells books at those low prices based on sheer quantity.

For now, it pays publishers the full royalty fee, and takes the loss itself for market share. But publishers fear Amazon’s size lets it undercut the competition, which drives rivals out of business, Once it’s the only seller left, it won’t have to slash prices, and it will have the power to pay whatever royalties it deems proper. That scenario would ultimately hurt consumers, publishers and the market itself.

Regardless, as part of the settlement, retailers are free to discount. In addition, the terms are good for two years, and afterwards, publishers can negotiate agreements to switch to another model and restrict discounting. Amazon, meanwhile, plans to drop its prices on many popular titles to less than $10 from around $15.

For its part, Apple is staying the course. “The Justice Department’s accusation of collusion against Apple is simply not true,” said Tom Neumayr, an Apple spokesperson. “The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry.”

A Raw Deal for Authors

The rise of Amazon is bad for authors, too. Scott Turow, president of the Authors’ Guild, lambasted Amazon’s uncontested dominance, saying Amazon gives authors less for their work than Apple or Barnes & Noble, and far less than authors make if they distribute the e-books themselves.

Since Amazon is the dominant e-book seller, the pricing may get worse, depending on what the Justice Department does. Amazon marks up the digital delivery fees that small authors must pay, for example. Some, like J.K. Rowling, who released the digital version of the Harry Potter series through her own website, Pottermore, sidestepped the exorbitant fees. But lesser-known authors will have to pony up, or turn to publishing tools like Habitat and try to distribute books through other venues — but that avenue alienates a bit chunk of digital buyers.

Writer and president of the Authors Guild, Scott Turow, expressed concern about what a shift may mean for Amazon, which he coined, “the Darth Vader of the literary world,” in an op-ed piece from Bloomberg last month. Turow joins others who contend Amazon’s wholesale pricing creates a monopoly, resulting in less diverse titles coming to market, which hurts bookstores, publishers and readers.

Still, e-books aren’t going anywhere, but if Amazon manages to box out its competitors, it’ll drastically change the face of the digital publishing industry — and not in a good way. Authors and publishers are caught in a difficult position, faced with the choice of reaching Amazon’s larger market or go it alone in the quest for a higher cut of revenues, and fragmenting the market.

An Opportunity for Challengers

As Amazon and Apple fight it out, underdogs Microsoft and Barnes & Noble are teaming up to gain a foothold in the shifting digital publishing market.

Microsoft will invest $300 million for around an 18 percent stake in the “Newco,” the temporary name for the joint venture. Barnes & Noble, meanwhile, will own the remaining 82 percent share as it spins off its Nook Digital and College businesses.

Microsoft’s involvement comes at a surprise, since they fought over the Nook’s alleged patent infringement. But rather than battling each other in courtrooms, the two companies teamed up — with Barnes & Noble agreeing to royalty-bearing licenses on Microsoft’s patents. In return, Microsoft will help push the Nook by installing its app on Windows 8 systems.

Barnes & Noble’s broke through and captured a niche in the e-reader market. But it’s been unable to parlay that into a successful brand, a feat Amazon achieved with the Kindle. Amazon developed its Kindle Fire, and then aggressively discounted it while offering a subscription service — giving customers a direct link to content — which increased its popularity and sales.

Microsoft’s investment, as well as the push from Windows, will help fuel growth as well as innovation. Barnes & Noble’s GlowLight e-reader, for example has yet to be matched by Amazon, and give the bookseller a little boost as it tries to gain ground.

The deal also opens the door for Microsoft to have a greater presence in the tablet market, at a time when the industry is ripe for educational expansion. Windows barely make a mark. IPads, meanwhile, dominate.

But the timing is significant as well. The Justice Department lawsuit against Apple and publishers has destabilized the e-book market, giving an opportunity for another competitor to enter.

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E-book prices will drop in the short-term, but the bigger picture is harder to discern. Publishers and writers will continue to fight to protect their interests, Amazon and Apple eye an emerging market and their own bottom line, the Justice Department is expected to press on with its antitrust suit and consumers want choice, flexibility and affordable prices.

Are E-Books Fairly Priced?

Struggles over the sale and distribution of digital books are wreaking havoc on the publishing industry, and amid all the confusion, one question continually surfaces: Are e-books fairly priced?

The current price of most digital books ranges between $11 and $15, but discount book retailers offer print copies at similar prices, sparking intense debate among publishers, authors, retailers, and consumers. The price parity creates questions in consumers’ minds: why is a digital copy as much as a paperback, or even hardcover, copy of a book?

Additionally, retailers like Amazon are increasingly at odds with publishers as the e-publishing industry heats up, and pricing has emerged as one of the key fronts of control. But who’s really winning in the battle over e-books? And why is an e-book $15, anyway?

How It Got This Way

E-book prices were initially set by retailers. Amazon pioneered e-book sales with its first Kindle e-readers in 2007, setting the price for most titles at $10 per book and taking a profit loss to sell more Kindles.

Amazon’s low price, when compared to hardcover and paperback prices ranging between $15 and $30, frightened publishers, and many publicly commented that Amazon was devaluing literature.

“If it’s allowed to take hold in the consumer’s mind that a book is worth ten bucks,” said David Young, chairman and CEO of Hachette Book Group, to The New Yorker in 2009, “to my mind it’s game over for this business.”

The print publishing industry, deeply entrenched in traditional methods of distribution, showed strong reluctance to change. But from 2002 through 2008, annual sales for printed books grew just 1.6 per cent, and profit margins were shrinking on traditional book sales.

Meanwhile, e-book sales were soaring, increasing by 170 percent in 2009 alone thanks in large part to the Kindle, leaving publishers searching for a way to make digital books profitable.

Sensing a Shift, Publishers Strike Back

Frustrated publishers saw a chance to take back control of pricing when Apple, gearing up for the first iPad tablet release, approached them later that year to discuss content agreements for the new device.

To compete with Amazon, Apple offered publishers a deal, dubbed the “agency pricing model.” The new model included a higher $15 price for consumers in the iBooks store, and a 30 percent cut paid to Apple on all e-books. Publishers would actually make less money per title, but the overall value of digital books would remain relatively close to print books, and the move took pricing power away from Amazon.

Publishers jumped at the chance to regain control of digital sales with the new pricing system, and with the iPad set for launch, major publishers like Macmillan and Penguin threatened to pull their digital titles from Amazon if the retailer didn’t switch to the new model.

Amazon, unhappy about the new proposal, said on its website it felt forced “to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books.”

Since then, $15 has become the new industry benchmark, but publishers still complain that’s barely enough to cover digital distribution costs. Authors report making less money, and consumers feel they’re paying more.

Pricing is especially confusing to readers, since they assume the cost of selling a digital download is lower than a print version, yet book publishers often price the digital versions only a few dollars below the hard-cover price.

But e-reader sales are soaring, and while consumers keep complaining about the price of e-books, they continue making purchases. Does that give publishers and retailers the right to keep raising prices?

It’s true some costs like paper, printing, binding and distribution are lower on a digital title, but their allocated overhead only amounts to about $4 per book. Publishers must still pay author royalties — typically around 15 percent of the sale price, marketing costs, and the salaries of their editors and a sales staff, marking only a slight difference in expenditure.

Still, Apple and five U.S. publishers now face federal investigations and a class action lawsuit over alleged price-fixing as a result of the agency model forced upon Amazon, in part due to statements Apple co-founder and CEO Steve Jobs made to his biographer, Walter Isaacson.

“We told the publishers ‘We’ll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.’ 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,’” Jobs said.

The agency pricing model changed the digital publishing game for good, perhaps to consumers’ detriment. Amazon wasn’t ready to wave the white flag yet, and set its sights on regaining some control over the e-book marketplace.

As the Battle Heats Up, Amazon Changes Course

Amazon had no choice but to convert to the agency pricing model by Apple and publishers in 2009, forcing them to agree to higher e-book prices up to $15. Publishers were happy to see higher prices and more revenue, but Amazon chafed under the agency agreement.

However, the e-retailer has been pushing back. Last week, the company dumped nearly 5,000 independent digital titles from its library because their publisher, IPG, wouldn’t negotiate for higher pricing terms.

Amazon once promoted itself as the “good guy,” advocating for fair prices for consumers, selling books, and even the Kindle Fire tablet, at a profit loss to gain customers, a move rivals say was anti-competitive in its own right.

Now that Kindle Fire sales topped the 5 million mark, Amazon regained some lost clout, and could feel entitled to push for bigger profit margins from publishers.

Attempts to reassert itself in the pricing debate arrive as Amazon enters the digital publishing world in its own right. The company seems destined to outgrow its status as a middleman, opening publishing offices on both coasts, signing exclusive deals with best-selling authors like Timothy Ferriss and e-book publisher RosettaBooks, and acquiring 450 new children’s titles, evidence the retailer could be headed in a new direction.

Further, Amazon’s Kindle Direct Publishing Program allows authors to self-publish their work and sell direct to customers via the retailer’s web site, removing the need for a publisher altogether and giving Amazon a cut of sales instead.

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Initiatives like these increasingly remove the need for a third-party: in this case, a traditional publishing house, underscoring the growing rivalry between Amazon and the print publishing industry.

But Who Is Losing Out in the End?

Writers are feeling the negative effects of digital publishing, insulted by the public’s increasing resistance to e-book prices. Stuart Neville, bestselling author of “The Twelve,” told the Irish Times “I’m amazed that people are that cheap. Do they think a year of my life is worth less than $9.99? Do they really believe that 10 to 12 hours of entertainment isn’t worth the equivalent cost of two or three coffees, or less than two beers?”

Authors may feel the overall value of their work is decreasing with digital publishing, but for the most part, author royalties remain the same, so they’ll still be able to afford a cup of tea to catch their tears, at least for now. Digital distribution channels could also increase circulation, reaching millions of potential new readers on the Web and through mobile devices.

But with profits on shaky ground, publishers could become even more selective about which authors they publish and promote, placing their bets on established bestselling writers and not new talent. The result will likely mean decreased diversity in titles that hit the marketplace, and fewer opportunities for new writers to get published.

The digital publishing revolution also breeds concern over piracy, which plagues the music and movie industries as well. When consumers don’t agree with set prices on media, they sometimes resort to unscrupulous means of obtaining it.

Apple helped reduce piracy in the music industry by offering easy access to millions of songs for low prices via iTunes, aggravating record companies and forcing them to go digital and cut prices, or face high rates of consumer piracy. But the company seems either unwilling or unable to go the same route with digital books, and if readers feel $15 is too much for an e-book, they may seek other options.

Where Will Publishers Meet Authors and Consumers?

On the flip side, people will not buy books they don’t wish to read just because they are cheap. Digital publishers and retailers would do well to remember those vast, towering stacks of discounted books that for two decades greeted consumers upon entering big-chain bookstores with fluorescent “3 for the price of 2″ signs.

Profit margins on those titles were slim to none, and much of that stock returned to the publisher unsold, meaning printing costs spent were never returned. But periodic sales on certain titles, once common in brick-and-mortar retail, could go a long way toward satisfying customers who just want to feel they’re paying a fair price.

Publishers, authors and readers are all struggling to negotiate the changing technology landscape, and with more than 20 million American e-book owners, e-books are here to stay. Everyone wants their fair share, but sooner or later, one side or the other might have to relent.

Perhaps what’s required is a total overhaul in the public mind: to separate print books from e-books in the minds of consumers. Eoin Purcell, commissioning editor with European publisher New Island, advises “it is better to think of e-books as a completely different kind of product from print books. When you think of them this way, you begin to see that e-books will develop their own price points, which are largely unrelated to print prices.”


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