Digital Digest: How Much Should an E-Book Cost?

by Adrian Versteegh

News and Trends

Posted 1.1.13

January/February 2013

Poetry isn’t often quoted in judicial rulings, but when Judge Denise Cote of the U.S. District Court for the Southern District of New York approved the settlement of a federal antitrust suit against three publishing houses this past September, she channeled Emily Dickinson: “There is no Frigate like a Book / To take us Lands away.” The deal marked partial closure for a price-fixing investigation launched last spring by the Justice Department, which alleged that five major publishers, along with Apple, had been secretly working to erode Amazon’s market dominance by colluding to set higher prices on e-books. Judge Cote no doubt intended her poetic metaphor as a comment on the social value of books, but the case has intensified arguments over value in its more literal sense, and in particular over who ought to decide one of the thorniest questions in the digital marketplace: How much should an e-book cost?

Under the terms of the settlement, Hachette, HarperCollins, and Simon & Schuster have agreed to discontinue the so-called agency sales model—according to which publishers set e-book prices and retailers pocket a commission (typically 30 percent)—for two years. The publishers will also pay out a collective $69 million in compensation, the result of a damages claim filed by forty-nine states on the heels of the suit (only Minnesota did not join). Customers entitled to a portion of the proceeds—usually not much more than a dollar per eligible e-book—began receiving e-mail announcements from Amazon in October. “We think these settlements are a big win for customers and look forward to lowering prices on more Kindle books in the future,” the retailer stated in one announcement. As of this writing, the case is still pending against Apple and the two remaining publishers, Penguin and Macmillan.

The suit parallels a similar antitrust investigation opened half a year earlier in the European Union, where regulators claimed that the same five publishers, “possibly with the help of Apple,” had violated laws prohibiting “cartels and restrictive business practices.” That case, too, spawned a settlement, approved in November, in which Apple and four of the five publishers pledged to end agency pricing and to forgo “most favored nation” clauses—deals guaranteeing that Apple’s prices can’t be undercut—for five years. Penguin was the only publisher to decline the settlement offer. And, as in the United States, the settling parties declined to concede any wrongdoing.

Both cases have become flash points for debates over the economics of e-books. Although Judge Cote stressed that the Justice Department investigation wasn’t aimed at the agency model itself (which is perfectly legal) but rather at allegations of price fixing (which, of course, is not), an observer could be forgiven for thinking that the publishing industry had just been deprived of its best weapon against Amazon’s relentless discounting. And proponents of the agency model as a means of ensuring publishing revenue can point to some suggestive correlations in its favor: While the model was in effect, Amazon’s share of the e-book market dropped from an estimated 90 percent in 2009 to about 60 percent by last year, publishing consultancy Idea Logical told the Wall Street Journal.

In her ruling, Cote noted that of the 868 outside comments filed on the suit, a solid 90 percent were hostile to the judgment. Opponents of the settlement included, predictably, direct competitors to Amazon such as Barnes & Noble (which has been feeling its way into Europe after an infusion of cash from Microsoft last year), but also most major bookseller and author organizations. Kate Pool, deputy general secretary of the U.K. Society of Authors, told the Guardian that the agency model was “almost the only thing which stands in the way of Amazon…devaluing the product to the extent that in the long term everyone (including Amazon) loses out.” The Authors Guild, meanwhile, argued in its court filing that the case had put the entire “literary ecosystem” at risk.

If that ecosystem seems divided against Amazon, it’s also being split along other lines. With e-books creeping up to nearly a third of U.S. market share (according to the global financial firm UBS)—thanks largely to the mass popularity of e-readers, tablet computers, and smartphones—the literary field is being divided into those that have a device to peddle and those that don’t. Shortly after the settlement was approved, the two thousand independent members of the American Booksellers Association (which had been among those protesting the judgment) announced the launch of an integrated virtual storefront through e-reader manufacturer Kobo. The United Kingdom’s Booksellers Association, representing about a thousand indie retailers, did likewise.

But the biggest player on the scene emerged from the union in late October of Random House and Penguin—a merger that created the world’s largest publishing entity. With digital ventures cited as an explicit reason for its creation, the new conglomerate controls about a quarter of the books on the market today (and accounts, according to Bloomberg, for 29 percent of American sales). Add to that the fact that Penguin—in its incarnations on either side of the Atlantic—seems determined to ride both antitrust suits to trial (slated for June in the United States), and the pricing wars look far from over.

Adrian Versteegh is a MacCracken fellow at New York University. His nonacademic writing has appeared in Dissent and the Brooklyn Rail.