Monday, January 6, 2014

The Apple e-books litigation post #1: why did it happen at all?

Although the Apple e-books judgment is a few months old, its consequences haven't yet begun to be fully understood. Tthis judgment starts to rebalance the playing field away from bottlenecks and distributors and toward individual content creators in several fundamental ways.

To understand the significance of the judgment, it's necessary to know what it does (and doesn't) say. And it's 160 pages, so bear with me because I'll have to break this into several parts...

One of the court's most significant findings is that both Apple and the publishers wanted there to be no price competition for e-books at the retail level. In English, that means (for example) that an e-book copy of Hunger Games sold through Apple's iTunes store would cost exactly the same as a copy sold through Amazon. But more importantly, it would mean that even if Amazon wanted to cut prices, it couldn't.

Why would Apple have wanted this? Because Apple was trying to start up its iBooks service. All things being equal, if a book is $12.99 at both Amazon and iTunes, customer inertia would lead people to buy books through Apple: the same familiar interface that they've been using to buy music, the same gift cards can be used for both sides, etc. But that only works if Amazon isn't able to be a cheaper alternative, and so Apple needed prices to be stable.

As for the publishers their motivation is more clear: if Amazon trained consumers to prefer e-books because of price then consumers would make all their purchases through Amazon for their Kindle, as opposed to paper books which can be sold through multiple channels. Amazon would get power over the publishers and could negotiate them down on price.

A word or two about book pricing might help set context. From a business perspective, it's very labor-intensive for publishers with millions of books in their catalogs to do individual negotiations on each title. Instead they would set the suggested retail price of the book and then offer the book to bookstores at a set percentage of that price. For example, if a book has a suggested retail price of $20 and the bookstore orders at a 50% discount, then the bookstore pays $10 per copy.

But under antitrust law the publisher isn't allowed to force the bookstore to charge a particular price to consumers; that's why the phrase is "suggested" retail price. So that's why the publishers couldn't force Amazon to keep prices at a certain level. Amazon felt that it would benefit consumers to have access to e-books at low prices and had decided to train consumers to expect e-books to cost $9.99. And, so long as Amazon was the only game in town for e-books, there was nothing the publishers could do about it.

Okay, you might think, fair enough, but couldn't publishers fight back by just not offering their books as e-books at all? That's actually not as easy as it might sound, for both legal and business reasons.
  • For business reasons a publisher couldn't pass on the e-book rights and just take the print versions. Otherwise authors would go find someone willing to pay them for the e-book rights and print publishers would find their products competing with e-books in ways they couldn't control, and many consumers would learn even faster that e-books are less expensive and equal substitutes for print. So they needed to license these rights.
  • For legal reasons a publisher couldn't license the e-book rights and park on them. If you own a copyright and don't keep it in the market it eventually loses its value. The law recognizes this by saying that if you license rights and don't use them then the owner can force you to give these rights back. So once the publisher has licensed those rights from the author, they have to look for deals. And if Amazon cornered that market, publishers would need to go to Amazon.
  • For legal reasons a publisher couldn't just say (for example) "If you want Harry Potter as an e-book, you have to take every e-book we offer and pay $15 per unit." Because of a part of the judgment in  a 1948 case called US v. Paramount (better-known for being the case that broke up the studio system in Hollywood), copyright owners can't use their rights over one copyrighted work to try to leverage potential distributors of that content to purchase other content. They could try charging $15 for the Harry Potter e-book, but pricing on the other books would have to be independently set.
  • There's also the business reality that Amazon has significant market power of its own in the print publishing world. If Amazon had insisted that it wouldn't distribute print books unless it got e-book distribution as well, publishers would have had to decide whether to forego that distribution channel for their printed products. And unlike the publishers whose hands are tied by the Paramount case, Amazon as a customer is free to say it won't take print without e-book rights; antitrust law exists to protect customer freedom of choice. According to Publishers Weekly, Amazon had a 29% market share for print books in the first quarter of 2012. That's a lot of money to turn down, but not enough to make Amazon a dominant player in the print business (oversimplifying a bit, if you have 35% share or more you're dominant for antitrust purposes). This is an important distinction: if Amazon was dominant it would be a lot more difficult for Amazon to put conditions on its purchases of print books.
And let's not forget that e-books were a new market for publishers in a very mature business. The publishing industry has always understood that there are people who won't pay for hardcover books, and after a time window has elapsed the publishers have made trade or mass-market paperback versions available for those customers. E-books represent a way for publishers to sell to those customers, as well as other types of customers who just might not have bought books if there weren't e-versions (e.g. people living in cramped spaces who don't have room for lots of paper, people on airplanes who don't want to take up space in their carry-on luggage, impulse purchasers, etc.).

Put all of this together and you can see why the publishers would have wanted Apple to come along and be a competitor to Amazon in the e-book market: to create an environment where they would be able to shop their e-book products to several retailers and choose the one that would pay them the most, rather than the one that would charge the least.

But more importantly, publishers also just wanted e-books to cost more for consumers. They just felt $9.99 wasn't a good price point for consumers to learn that books should cost. They had seen what had happened to the record labels when consumers learned that a digital download of an album should be $9.99 and $0.99 for a single (ironically enough a price point created by Apple) and they didn't want this to happen to books and publishers also. And so they wanted to raise prices. But they felt that if any one publisher acted independently, Amazon wouldn't move its pricing. But if they worked together to force a price hike...

As I mentioned above, antitrust law exists to protect consumers from things like this. And that's why the Department of Justice decided to investigate. In my next post, I'll discuss what they found and why it will have far-reaching consequences for the way distribution companies think about content.

US v. Apple
US v. Paramount
"Amazon picks up market share", Publishers Weekly

1 comment:

  1. your information is very helpful for us....your information is very impressive and attractive for all..thanks for sharing...


Thanks for commenting. Posts and comments aren't legal advice; requests for legal advice in the comment probably won't get answered. Sorry to have to do this but someone someday is going to make me glad I did...