Thursday, April 26, 2012

The Business of Writing: The Pendulum is Still Swinging

Following up on my earlier post, the Department of Justice has filed suit against Apple and two publishers, Penguin and Macmillan. Three other publishers—Simon & Schuster, Hachette and HarperCollins—settled with the DoJ out of court.
Apple has chosen to fight the suit before a jury. Pundits who are far better experts at this than I say Apple has a snowball’s chance in Hell of winning this suit. My knee jerk, amateur opinion questions that assumption. We’ll stay tuned to see where that mess goes.
While everyone is wagging their fingers at Apple and the publishers for allegedly price fixing to raise ebook prices, there is another issue going on at the other side of the market: Amazon.com’s predatory discount pricing.
The idea behind predatory pricing is to sell products at a loss so smaller competitors cannot afford to match your prices. Eventually, the competitors are forced out of business because consumers will go for the cheaper prices. Once all the competitors are gone, then consumers have no other choice than to shop at your store. At that point, the you can then raise prices to whatever you want and reap in much greater profits than if you just used competitive pricing.
How on earth can a business survive long enough to pull this off? Simple, by declaring the losses as business losses, they can write those losses off their taxes. Through these write-offs, a business can actually make a profit by pocketing the tax deductions, even as they claim a loss for the year. It appears that big discount you got was actually subsidized by you paying more taxes because some multi-billion-dollar mega corporation doesn’t. Because all that tax money wasn’t available for road maintenance or public services, in the long run, you pay more for the book than its original price.
Worse, when there are no more competitors you can go to affordably, they raise the prices on you.
Science fiction author Charles Stross has an excellent post that explains Amazon.com’s predatory approach to the book market.
What does this all mean for the consumer?
In the short-term, it means that prices on ebooks will drop. Not by much, but they will go lower for a bit. That will be greatly advantageous to Amazon.com, because they have enough cash to continue their program of predatory pricing to squeeze out the competition.
The downside is in the long term. With no competition, Amazon.com could become the one-stop place to buy books. That means, the only place you can buy a book would be online via Amazon.com. At that point, prices on books can be raised significantly, because there would be no competition to set lower prices.
It also would mean for ebooks, the Kindle could be the only game in town. If you are an independent author, wanting to self-publish your story as an ebook, Amazon could force you to accept their dictated terms.
Amazon would have both a monopoly and a monopsony in the book market. (Don’t know what “monopsony” means? Go to the link I supplied above where Charles Stross explains it very well.) They would control both the supply and the distribution of stories. This would be very bad for you the consumer.
But this business model comes with a significant weakness. The weakness is, the Kindle cannot use the ePub file format.
The ePub format provides an opportunity for a small competitor to do to Amazon.com what Amazon.com is appears to be doing to the publishing industry. ePub files can be read by any device that supports it: iOS devices, Android devices, desktop computers, ebook readers other than the Kindle. The problem for Amazon.com is if they open the Kindle to the ePub format, then consumers would be able to buy ebooks from any distributor and not just Amazon.com. Amazon.com would lose the customer lock-in to the Kindle; an unacceptable condition for Amazon.com at this time.
What we are seeing here is the forced evolution of the publishing industry. While the traditional publishers have stumbled badly, they still have done a better job at adapting to the new paradigm brought about by advances in technology than the music industry. As Amazon.com’s 650-pound gorilla battles it out with the 350 pounds of chimps, monkeys and lemurs of its competitors, I find it interesting that they all seem to be ignoring the 14,000-pound elephant that has entered the room: R.K. Rowling’s Pottermore Shop.
Both Amazon.com and Barnes & Noble redirect purchasers for Rowling’s ebooks to Rowling’s own ebook store. The purchases are not made through the third parties. Consumers buy directly from her store. The distributors are kowtowing to Rowling because to do otherwise could result in them losing distribution of Harry Potter-related products. Rowling has essentially told and demonstrated to the world that she does not need distributors or publishers. As an author, she’s decided to go it entirely alone selling her ebooks.
This 14,000-pound elephant is what the publishing and book distribution industries should be fearing. The fact that authors can go directly to the consumer and forego both publishers and distributors.
That doesn’t mean that every established and aspiring writer is going to rush off and publish themselves. In all honesty, it takes some technical knowhow to create an ebook. It takes even more technical knowledge and skill to create an ebook that takes advantage of special features found in Apple’s iBook format or Kindle’s KF8 format. And then there is the issue of creating a web site and online store for people to purchase your ebooks. 
I’m lucky enough to actually have these skills. Many writers don’t.
It also takes time to set these things up. It means setting aside writing for a period of time to work out all these things. Not writing means not earning your wages because you aren’t creating product.
In my opinion, the DoJ suit against Apple, Penguin and Macmillan won’t force them away from the Agency Model where the publishers dictate the retail price and Apple takes a cut from that price. However, it will have the “no lower prices” clause removed from those agreements, which will free up Amazon.com to once again offer ebooks at a loss. In turn, the DoJ will probably turn its attention to Amazon.com and its current market practices of predatory pricing and the potential of creating a monopoly or monopsony.
I would like to see the removal of the pricing policy. Part of that clause dictates that I cannot sell a special edition of my ebook on my own web site at a different price. (Or at least, that was my take on the wording.) I want my ebook, Nobody, to sell for $4.99. I would like to create a special edition which would include detailed maps, histories and maybe even the raw notes I wrote in creating the story, and sell that version for $7.99. (Keep in mind, it will take me quite a while to set up the special edition, so don’t wait for it.)
The pendulum is still swinging. We’ll just have to see where the publishing market goes.