The Kindle Swindle: Eric Holder Sues Apple, E-Book PublishersEconomicsNorthern VirginiaTechnologyVirginia

Careful, booklovers. You may have paid too much, according to the Department of Justice.

E-books are comparatively new to the realm of bibliophiles, and the jury is still out on whether or not they will survive or surpass the wonderfully connective experience and tactility of holding a traditional ink-on-paper volume–being able to write notes in margins, seeing and feeling the physical progress of your reading by estimating the pages read versus the pages remaining, following excitedly with your finger along the muted lines of simple arnement, the joyous cacophony of a page whishtly turning to the next (so maybe I’m biased…).

Regardless, though, perhaps it has officially arrived. The decision of the Department of Justice to sue Apple, Simon & Schuster, HarperCollins, and other publishers for conspiring to set prices on reading material can be seen as an indication of its permanence. It is, after all, an adage of governments that there shall be in the marketplace no representation without regulation.

Allegedly, these publishers (and Apple, the e-book seller) colluded to fix a price on their products. If this is true, then perhaps they did break existing law; but anyone who has read me before knows that my points do not necessarily rest on existing premises of politics.

Eric Holder, our illustrious general attorney, noted, “as a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles.”

More than … ?

Paper books?

Seriously. “More” than what? More than what is fair?

If people bought these books, it sounds like a fair price to me. (This statement assumes no one was being forced upon penalty of pain or death to buy an e-book.)

Sharon Pozin of the Department of Justice’s antitrust division claimed that these publishing companies were also trying to get Kindle readers to pay more as well, in some cases raising the price beyond $9.99, which, according to the AP, “was substantially below [the publisher's] hardcover prices.” Sounds like e-readers were still getting a good deal (even if they’d have nothing to show for their purchase in the event of a global EMP…) compared to traditional books. So what’s the problem?

While HarperCollins and Simon & Schuster have settled with the United States, Macmillan and Penguin refuse to (as does Apple)… So far .

Macmillan has shown courage by telling its authors and retailers, “it is hard to settle a lawsuit when you know you have done no wrong.” They deny any collusion.

And that might be the case, exactly. Amazon has long been suspected of undercharging its customers for e-books, compared to the actual cost of production, which has angered many publishing companies. Apple, on the other hand, may simply be offering a product at a price that is compatible with publishing costs and desired profit. (Regardless, it is still the customer that makes the final purchase decision.)

Amazon is a leader in the e-book retail industry–and they know it. Good for them. But in becoming such a leader, they have been able to demand discounts from publishers, that they (the publishers) would otherwise be unwilling to offer. In some cases, Amazon refused to continue selling e-books of companies who would not agree to Amazon’s terms. Apple, I have to assume, offered an attractive alternative. And the market rolled on.

Until the Department of Justice, perhaps based largely on Amazon’s low-price offerings, decided that customers were paying too much.

In other words, the United States has accused Apple and these publishers of fixing prices, while telling them they must fix their prices.

One really has to wonder what Amazon’s role is in all this. Since 2008, they have increased their lobbying expenditures by 60%. Their PAC has donated nearly 30% more to Democrats over the last four years (but has recently begun betting on more Republicans). They have more competition in the e-book market than ever before. Will Apple’s loss be Amazon’s gain?

It appears so. This “scheme” supposedly began at the beginning of 2010, right around the time the iPad was launched. Since then, as the AP eruditely notes, “publishers believes [sic] the new price model has reduced Amazon’s market share from around 90 percent to around 60 percent.” Apple’s gain has in these two years been Amazon’s loss, and Macmillan thinks this suit would reverse that market force.

“The terms the DOJ demanded were too onerous,” said John Sargent, CEO of Macmillan. “After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model. We also felt the settlement the DOJ wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents.”

Don’t get me wrong, I don’t begrudge Amazon for their success in this market, but perhaps the Department of Justice has in regulating the fairness of some companies made Amazon just a little more fair.

But take heart, consumers. Eric Holder has ordered the settling publishers to return $52 million in overcharges to the consumers, who likely didn’t even REALIZE they were being Swindled. I don’t know about you, but I am holding my breath waiting for the check…

The AP contributed, as it were, to this story.

  • reality

    sigh. is it Nov. who won?

  • ToR

    “If people bought these ______, it sounds like a fair price to me.”

    Andrew, fill in the blank with any product. Now, according to your logic, price fixing has never taken place, in any market, for any product…

    • http://bearingdrift.com/author/andrew Andrew Schwartz

      Huh? I’m not sure you’re making sense, ToR. Are you talking about government price-fixing, or corporate price-fixing? Because the former has a punishment attached, the latter–unless there is a monopoly–has only to worry about consumer response. (Incidentally, I hope you caught the part about this suit actually perpetuating a near-monopoly…)

      If people bought these __cars__, it sounds like a fair price to me. If people bought these __Houses__, it sounds like a fair price to me. If people bought these __Ramen_Noodles__, it sounds like a fair price to me.

      Am I missing something here, or are you?

  • ToR

    I would think AG Holder was saying “more [than consumers would have paid had the publishers and Apple not coordinated to set prices for e-books]“, which is why he is suing.

    But my comment seems pretty self explanatory. I was, after all, quoting you. If people paid for _____, how could there be price fixing…isn’t that your logic?

    If auto manufactures/home builders/ramen noodle distributors coordinated to set a standard price across a market it’s not fair, it’s price fixing. You said if people pay for it, its a fair price. I’m saying if there isn’t competition, it’s not a fair price.

    • http://bearingdrift.com/author/andrew Andrew Schwartz

      So, you’re talking about corporate price-fixing. Are these corporations forcing consumers to buy their product? Or is the consumer too stupid to realize he can either do without purchasing the product or find an alternative? If these e-book publishers–even if they colluded–decided to charge $14.99 for a title rather than $9.99, is it not true that those who purchased it at $14.99 believed the title to have a value of $14.99? Or is someone forcing them to engage in this e-book contract? Who is the Attorney General to decide how much a given product is worth to a given individual?

  • http://www.bearingdrift.com Brian Schoeneman

    All I know is that before the iPad came out, when Kindle was the main e-reader, most of the books on there were between 5 and 9 bucks. Afterwards, the prices all shot up. Coincidence? I doubt it.

    • http://bearingdrift.com/author/andrew Andrew Schwartz

      Yet books at used book stores and Friends of the Library sales can be as low as $0.25. A lot of people believe Amazon was deliberately taking a loss on their e-books in order to prevent competition or attract buyers of other products. It could easily be that the higher price is more indicative of market value/production cost.

  • http://www.bearingdrift.com Brian Schoeneman

    It costs considerably less to publish an e-book than to print and ship copies. There’s no reason for most of these e-books to cost as much as a hardcopy. There’s no paper. No ink. No binding. No shipment costs. No handling.

    That’s why most books in the public domain are free on Kindle.

    All I know is that prices have steadily risen and you’d think the more folks in the market and the competing formats would result in lower prices. It hasn’t here.

    • http://bearingdrift.com/author/andrew Andrew Schwartz

      Well, perhaps you should propose fixing the price of e-books at the labor costs of getting the e-book on line, and no more!

      Yes, there is a reason for these e-books to cost as much as a hardcopy: intrinsic value of the medium. Being able to carry multiple books on a single machine has intrinsic value to the reader that they are willing to pay for–rather than carry a backpack full of books everywhere (I prefer hardcopies, but I understand the argument). Of course there are reasons for e-books to cost as much as a hardcopy. The main one is that the customer will buy it at that price.

  • Loudoun Republican

    First, I find it ironic that the person who wrote this post is touting the superiority of printed books while publishing his story in an eletronic media format.

    Second, his argument against Amazon “undercharging” consumers for a product because the publisher isn’t making as much money as they want sounds like the same people who complain about Wal-Mart making it harder for “Mom and Pop” stores because Wal-Mart can sell products at a lower price.

    Third, this case is a textbook example of price fixing:

    1. Publishers want to make more money and are mad at Amazon for offering a product with almost zero production costs at a cheaper price.

    2. Apple comes along and says we will sell your books at a higher price as long as you all make sure Amazon is not allowed to sell books for less.

    3. The CEO’s of the four publishing houses in question meet regularly to work out the deal they will make with Apple, and soon they all four sign nearly identical contracts with Apple stating that the publisher, not the retailer, gets to set the retail price of the book.

    4. Publishers user their deal with Apple to force Amazon to change their pricing model for e-books or else they won’t let Amazon sell their books.

    This is clear cut collusion and price-fixing. It removes any possibility for competition and the free market to work. Any true conservative capitalist would not be making excuses for Apple and the publishers.

    • http://bearingdrift.com/author/andrew Andrew Schwartz

      You are absolutely wrong about this deal not letting the free market work. You assume that these publishers are static and permanent, and that no competition would ever be able to offer an alternative. Please tell me what is “free market” about the government ordering corporations not to engage in contracts with each other. There is no monopoly here. The only way there could even be a near-monopoly in this industry is if the government stepped in and started telling publishers and retailers how much they must charge for their product–based on the industry’s leading producer’s price model–and then regulated the industry so much to where successful start-up competition is nearly impossible. (Sound familiar?)

      You are also absolutely wrong about my argument “against” Amazon undercharging. If you read the article, you would read “I don’t begrudge Amazon for their success in this market.” I think it’s great they have been able to offer a product at a low price. I could care less if publishers get mad at Amazon. That’s between the publishers and Amazon. But to continue your Wal-Mart analogy (no, I don’t begrudge them either), would you expect the DoJ to step in and sue Target if they worked out a deal with Macmillan, Simon & Schuster, Penguin to sell their hardcopy books at $2 more than what Wal-Mart charges? If that $2 is too much for the consumer, they won’t buy it–or they’d buy it used. We do not have a RIGHT to purchase a commodity based on historic or competing prices. That is absurd.

      Third, there is not “zero” production cost in an e-book. Not anywhere near it. Who writes the book? Who does the research for the book? Who markets the book? Who designs the cover and illustrations for the book? Who edits the book? Who indexes the book? Who formats the book? You make it sound like the book should be free! The price per unit for a hardcopy (hardcover) book (assuming about 300 pages) can be anywhere between $10.00 – $17.00 (depending on quality of paper, ink, illustrations, color, dustjacket, etc.) Yet we routinely pay $25 – $40 for a new hardcover. If you subtract those physical costs of the hard units, you would still be paying $15 – $23 just in publishing/author costs. This is about where Apple and their companies had their prices (actually lower). Believe me, authors, editors, illustrators, indexers, formatters, and designers want to get paid too! Now they’re gonna have to take a cut because the DoJ has told them “the consumer paid “too much” for a product they wanted.”

      Please think about your argument.

  • http://bearingdrift.com/author/andrew Andrew Schwartz

    (Also, if you would like me to send a hardcopy of this article to you to alleviate the irony, please send me your address and a check for $2.50 to cover production costs. I know my preference for hardcopy books are purely based on sentiment, but you won’t ever see me trying to tell companies not to publish electronically.)

  • Loudoun Republican

    “would you expect the DoJ to step in and sue Target if they worked out a deal with Macmillan, Simon & Schuster, Penguin to sell their hardcopy books at $2 more than what Wal-Mart charges? If that $2 is too much for the consumer, they won’t buy it–or they’d buy it used.”

    You might have had a legitimate argument had this issue stopped there. If Apple wants to enter into a contract with these publishers to sell e-books for more than Amazan charges, then that is their right.

    But when the four biggest publishers (who are supposed to be COMPETITORS by the way) agree to sell books at a certain price, and then refuse to allow Amazon to continue to sell their books unless they agree to sell at the new, higher, price, then that is collusion and price fixing. The free market no longer is allowed to work.

    In a free market, Amazon would have the right to purchase books from the publishers and then sell them for whatever price they want, and Apple could do the same. In this situation, however, Amazon is NOT free to set their own price, and it is because so-called competitors have agreed to rig the market. BTW, the fact two of the four publishers have already agreed to settle should give you a clue as to what was going on.

    “We do not have a RIGHT to purchase a commodity based on historic or competing prices.”

    We have a right to be allowed to purchase goods and services in a free market where companies COMPETE for my business. When competitors stop being competitors, then the market is no longer free. You have created a de-facto monopoly.

    “The price per unit for a hardcopy (hardcover) book (assuming about 300 pages) can be anywhere between $10.00 – $17.00 (depending on quality of paper, ink, illustrations, color, dustjacket, etc.) Yet we routinely pay $25 – $40 for a new hardcover.”

    YOU may pay $25 – $40 for a new hardcover. Only suckers buy the hardcover. People who pay $40 for a new hardcover are like the people that stand in line to get the brand new IPad while the price is still jacked up for the idiots who “have to have it now” and will pay any inflated price tag you stick on it.

    The true “production costs” for a book can be seen in the paperback costs, which are at $8 to $9 retail for a large book (around 1000 pages), and those costs include the printing, shipping, and the retail markup.

    An e-book has no printing costs, no shipping costs, no retail markup to pay for the brick and mortar building to sell it out of or the staff to stock it and sell it. Yet now I have to pay more money for an e-book than I do for a paperback.

    I didn’t use to have to pay more for an e-book than a paperback….until this price fixing scheme with Apple came along.

    Maybe you should read the Wall Street Journal story on this so you can learn what really happened.

    • http://bearingdrift.com/author/andrew Andrew Schwartz

      I didn’t realize a “free market” was only free when the government first determines who are competitors, and then steps in and tells companies–competitors or not–who they can and can’t talk to…

      You have accepted that corporate “price fixing” is wrong. That’s your premise, but I don’t buy it. I also don’t buy that collusion between corporations is a bad thing (between corporations and the government is a different thing altogether). As I said in the article, they may have broke the law, but if they did I argue the justice of the law–not the defendant. Just because it’s illegal doesn’t make it wrong.

      “In a free market, Amazon would have the right to purchase books from the publishers and then sell them for whatever price they want.”

      No they wouldn’t. Not even close. They have a right to PURSUE the purchase of books from publishers at a mutually agreeable price. If you are saying that publishers MUST sell to Amazon, then it is you who is advocating an eventual monopoly. They likewise don’t have a right to SELL them for whatever price they want. They have a right to PRICE them however they want, but they have no right to SELL them. There is a huge difference.

      “We have a right to be allowed to purchase goods and services in a free market where companies COMPETE for my business.” I agree. “When competitors stop being competitors, then the market is no longer free. You have created a de-facto monopoly.” I disagree. When competitors don’t compete, they open up a door for someone else to compete. This is not a de facto monopoly–unless the government steps in and makes it impossible for start-up competition to succeed (or refuses to protect the lives, liberties, and properties of potential new competitors).

      “I didn’t use to have to pay more for an e-book than a paperback…until this price fixing scheme with Apple came along.” You still don’t HAVE to. No one is forcing you (that I know of) to buy an e-book. Nothing is stopping you from going back to a paperback. But if you are willing to pay a little more for the convenience that an e-book offers, that is still your choice.

      There is a long history of anti-monopolism in this country, and I agree with it. But it is founded on a mercantilist idea of monopolies in which they were propped up and sponsored by the state, often compelling citizens to purchase that product–they were not individuals or groups of individuals who became a (larger) group to pursue profit at no danger or compulsion to the consumer.

      (And, true, I must be a sucker, because I always get the hardcover if I can. My books will last beyond me.)

  • ToR

    So why are Kindle books more expensive that their paperback counterparts?

    • http://bearingdrift.com/author/andrew Andrew Schwartz

      Because consumers are buying them. There is an intrinsic value in the medium.

  • Loudoun Republican

    “You have accepted that corporate “price fixing” is wrong. That’s your premise, but I don’t buy it. I also don’t buy that collusion between corporations is a bad thing”

    So your premise is that it is a good thing for companies to work together to fix the price of their goods above the market value so they can make more money? Because that is what is going on here. Let’s face it, the ONLY reason for companies to collude on price fixing is to increase the price of their goods above what a FREE market would set the value at. Any you think this is a good thing?

    ““In a free market, Amazon would have the right to purchase books from the publishers and then sell them for whatever price they want.”

    No they wouldn’t. Not even close. They have a right to PURSUE the purchase of books from publishers at a mutually agreeable price.”

    Now you are just arguing semantics. In a free market, one or more publishers could decide not to sell their books through Amazon which would leave other publishers free to take advantage of the market Amazon provides. But when all publishers agree to forgo that market, there is no risk of losing profit and market share to another publisher for selling their books through Amazon.

    The collusion has now reduced risk for sellers at the expense of a major retailer and consumers. And you think this is a good thing?

    “I didn’t use to have to pay more for an e-book than a paperback…until this price fixing scheme with Apple came along.” You still don’t HAVE to. No one is forcing you (that I know of) to buy an e-book.

    That’s true. I also don’t HAVE to buy gas for my car. I could leave the house at 5:00 AM and walk or ride my bike to work. Should gas companies collude to increase the price of gas?

    I don’t HAVE to buy food from the grocery store. I could go hunting for meat and grow my own vegetables and grains. Should grocery stores collude to increase the price of food?

    So let me see if I have this right. You believe that companies that sell competing products should be free to work together to set the price of their products above market value and refuse to sell their products to whoever they don’t want to sell them to, and this should obviously apply to all goods and services.

    Oh. wait. I forgot. You said that just opens up the field for someone else to come along and open up a competing business…except that the door is closed to any other new startups because the existing companies already own a lock on their product (which is why they call it a monopoly).

    And you see this as a good thing?

    You don’t seem to acknowledge the idea that the anti-competitive forces at work here could eventually destroy an entire market before its full potential is realized. For example, just like you said, when I have to pay more for an e-book than a paperback, why would I buy an e-book?

    After all, not only can I get the paperback for less, but there are all sorts of websites out there where I can download literally thousands of e-books for free. Do you remember Napster?

    The only way the Napster problem was dealth with was when the music industry realized they needed to work with these folks to provide their music not only at a lower price, but also give the people more choices.

    Now I don’t have to buy an $18 album just to get my favorite song. I can buy that one song for $1. Imagine what would have happened to the music industry had they not seen the writing on the wall? Imagine if the music industry had decided to collude to fix the price of a single song to $5 instead of $1 which is what the market will bear?

    This is the same thing that the movie industry is going through now, only they haven’t quite figured it out yet. Now it is also happening to the e-book industry, and if these publishers aren’t careful, and their collusion is allowed to stand, it will just mean the death of the e-book industry and will ultimately hurt the entire publishing industry as well.

    But in reality, for someone who prefers hardcover books, you would be just fine with the death of the e-book industry wouldn’t you? After all, we all know what happened to the music CD industry after Napster and I-Tunes, don’t we? It is almost non-existent.

    If the e-book industry explodes, how much longer do you think publishers are going to continue to pay the exorbitant costs to print and ship hardcover books?

  • http://bearingdrift.com/author/andrew Andrew Schwartz

    I still find it amusing that you think a “free market” involves the government determining who people or corporations can talk to and contract with.

    See, your assertion is that corporations colluding to fix the price “above the market value” rests on the premise that someone besides the consumer determines the market value. I would be interested to hear who you think determines market value.

    If consumers will consistently pay $14.99 for an e-book, then that is the market value.

    Similarly, when consumers stopped (and are stopping again) demanding gasoline at $4.00, the price of oil dropped.

  • http://bearingdrift.com/author/andrew Andrew Schwartz

    And since when did “All Publishers” agree to stop selling to Amazon? Let’s say the government never got involved. All those companies who didn’t agree not to sell to Amazon could still take advantage of Amazon’s service to get widespread marketing and convenient access and reject Apple’s. Perhaps if they pursued this course wisely, their budget would grow, more authors would be attracted to their publishing company, and then we would see a new “major publisher” surpassing the publishers mentioned in the article. Now that won’t happen because the government has stepped in and essentially said that Amazon–and by a converse extension, the publishing companies–are too big to fail and that the government knows best what prices to set for the consumer.

  • http://bearingdrift.com/author/andrew Andrew Schwartz

    One more thing: Why does any company “own a lock” on their product? It is either because the government has stepped in and protected that lock–either through endorsement or excessive regulation–or it is because the government refuses to protect the lives, liberties, and properties of potential competitors.

    Also a non-existent industry: The Bookwheel – http://boingboing.net/2011/12/10/bookwheel-the-multiple-tabbed.html