Sunday, May 17, 2015

Winning and Losing

A few months ago, the Big 5 Publishers won. At least they think they did.

After the Department of Justice found them guilty of collusion in setting prices, the agency pricing contracts they had in place were determined to be illegal and they were forced into other terms for a period of time.

For those who have no idea what I’m talking about, I’ll give a short explanation. There are two ways a manufacturer’s goods get into your favorite retail store. The model most of us are familiar with is that Joe’s Widget Factory sells a box of widgets to Big Box Retail Store for fifty cents a widget. Big Box Retail Store figures out how much profit it needs to make on each widget to cover not only the cost of the widget, but salaries, lighting in the store, etc. The retailer prices each widget at 99 cents and puts it on the shelf. Sometimes, in order to get more business, Big Box Retail Store runs a sale and prices the widgets at 89 cents. Humongous Retail Store down the block, seeing all their customers leaving to go buy at the cheaper price, lowers its price to 88 cents. That’s called competition.

This is the way print books have always been sold.

In agency pricing, Joe’s Widget Factory decides that the price of its widgets in the stores should be 99 cents. When a widget is sold, Big Box Retail Store keeps a percentage, say 30 percent, of the selling price and Joe’s Widget Factory gets 70 percent. Big Box Retail Store can’t run a sale on widgets unless the manufacturer decides there should be one.

This is the way ebooks were being sold.

Now, there’s nothing inherently illegal in agency pricing. It’s the model indie authors have in place with all the major book retailers. What was illegal was that the Big 5 Publishers sat down with Apple and decided that they would make all retailers sell widgets — er, ebooks — at the same price for the same percentage split. It appears that this tactic was specifically aimed at Amazon, which had been wildly successful in selling ebooks, which the publishers thought was cutting into sales of print books, and helping Apple, which was launching its nascent iBooks store. What was illegal was the collusion.

 The DOJ pretty much voided the agency agreements and forced the publishers to sell ebooks like print books for a period of time. That time period expired last year and the publishers entered into a negotiating period for new contracts with Amazon. You may have heard something about this when the stalled Hachette negotiations made the news.

To make a long story short, each of the publishers eventually negotiated back to agency pricing with Amazon. This wasn’t illegal because there was no collusion. They handled the negotiations individually. As far as which pricing model they’d operate under, they won.

Or did they?