A few days ago, Apple filed their response (read here) to the Department of Justice’s lawsuit accusing Apple and a number of publishers for price fixing. The PDF is not written in legalese and is easy to read. The introduction puts forward Apple’s position on the case and makes some interesting arguments. After that, the document follows Apple’s responses to the points brought forward by the DoJ and goes on for over twenty pages. Definitely read the document for the introduction. If you have the time and would like to see the minutiae of the issues being addressed, read through the “Response to Individual Paragraphs.”
So now what?
The DoJ is saying Apple colluded with the publishers to form a price fixing scheme. Apple counters that all they offered was an agency model, where Apple takes 30% for the distribution system and the publishers set their prices to whatever they choose. Amazon.com used the wholesale model, where Amazon.com paid the publishers for the ebooks at a set unit price and then set the sale price to the consumer wherever the hell they wanted.
From the above paragraph, I can go in a whole bunch of different directions! From the Amazon.com monopoly on ebook sales to arguing whether or not there was real conspiracy to wrest control of the ebook market from Amazon. But I want to focus on something else. It is a clause that all the distributors have in their agreements.
This clause states, that the publisher will not allow the ebook to be sold at a lower price via another distributor.
What this means, if Distributor-C wants to offer my ebook as the “eBook of the Week” for free, then I have to have to reduce my price to $0 at Distributor-A and Distributor-B. I would assume that Distributor-C is going to pay me the going rate for each of my books that they give away for free. But A & B won’t have to because they aren’t offering the special on my book, but I am still obligated to give it away for free on their sites because it is free on C’s site.
Now, you’d think a free promotion would be a good way to raise awareness of my book. Let’s say Distributor-C gave away 260 of my books. That would net me enough money to keep the lights on, so long as I skimped on food for the month. But because Distributor-C gave it away for free, I had to drop the price on A & B to $0. Because A & B are both much bigger than C, 8,000 people saw my book for free and decided that it was worth looking at for that price.
In earlier blog entries, I’ve commented that I need to sell about 10,000 copies of my ebook in order to be able to make a living. So, if 8,000 people downloaded my book for free, that meant I just lost out on 80% of my annual income. To put that in perspective, that would be the equivalent of you working for your employer the entire year and the first paycheck you get is at the end of September and it is only for the previous week of work.
That would suck.
So what’s the harm? What if I simply forgot to change the prices? How would they ever find out?
The same way you get results when you do a search for the best price of a product online. They look at the list of titles they have, then use a program to go out and scan the other distributors to check the prices. If my title shows up at a lower price, then I am in breach of contract.
The penalty for being in breach of contract is my account is closed and I forfeit all unpaid monies. Because it takes two months from a sale before the money is paid out to me, that means I lose all the money that sales from my book generated held up in that two month waiting period.
This, too, would suck.
This practice is, in essence, a form of price control. It removes the possibility of another distributor gaining a competitive edge by offering a given ebook at a lower price, even if only for a temporary sale. And more, it puts the responsibility on the publisher to police the prices, not the storefront (the distributor). The penalty then falls on the publisher because the distributor claims all proceeds should the publisher be in breach of the contract.
The best way to attract shoppers to your store is to offer goods at a lower price than your competitors. This is why stores put various items on sale each week. Get people through your doors once, and they are likely to come back. But, if every time you have a sale, your competitors change their prices to match yours, then potential customers don’t have any incentive to come and visit your store.
It kills off competition because there is no competition. Rather, there can’t be competition in terms of the pricing of a given product. The distributors have to compete for the costumer’s attention through other means. That’s their business. My business is writing and selling my book.
I don’t like this clause. It takes away all the risk and incentive for promotion from the distributors and puts all the penalties on the publisher/author.
The solution to that clause is to simply go with the wholesale model. I state the wholesale price I want for each copy of my ebook sold, and the distributor can sell it at whatever price it wants. If a distributor wants to have a sale that week and reduce the price, that’s fine. As long as I get paid my due, I’m happy with that.
The downside to wholesale pricing is, if there are very few distributors or possibly only one available distributor, then that distributor can say to me, “You say you want us to pay you $X.XX for your ebook, but we want you to sell it to us for XX¢ instead. Take or leave it!” In this case, the wholesale model works against me. This is essentially what Amazon.com has been doing already to the big publishers. Their response to that was to agree with Apple on the agency pricing model. Amazon.com was forced into accepting the agency pricing model because when Apple entered the ebook market, it was the first time Amazon.com faced any real competition in the ebook market. At the time of this writing, the Apple iPad is decimating the sales of the Kindle Fire. This competition is very serious for Amazon.com, which had a veritable monopoly in ebook sales until Barnes & Noble and Apple entered the fray.
The most obvious response to all this is, “If you don’t like the details, why not just sell it yourself?”
And a good point that is. I am setting up just that capability on my website. (Right now, if you click on the Buy button, it comes back and says it is out of stock, before automatically pushing you to the “Whoops” page. That is going to change very shortly.) Very shortly, I will be opening up that purchase page to allow pre-ordering my ebook.
The answer is to that question about selling it myself is that it makes it a harder sell. Someone going into Amazon.com, Apple iBookstore, or Barnes & Noble is going to a known commercial entity, with a very polished store interface. It is a front that customers trust. Selling through a distributor like this adds a certain legitimacy to a product.
Selling through a personal website, people think, “Wait a minute! Is this legitimate?” Also, it opens to a PayPal page instead of a shopping cart page still within my domain. Not exactly polished like a nice store front of the other distributors. It is a legitimate payment system, and it is also very affordable for me. Yes, there are shopping cart systems for web pages, but I can’t afford that right now. Maybe in the near future—I hope—but not right now.
It will be interesting to see if this price-matching clause is removed after the DoJ has reached a settlement with Apple and the others.