The Impact of the Dept. of Justice Investigation

Last week, on March 24, 2012, we looked at a brief history of eBooks, Publishers and the Agency vs. Wholesale pricing model. You can review that post here.

Ironically,on Thursday March 29, 2012, the Huffington Post ran a story by Mark Coker the founder of Smashwords. Most of you are familiar with Smashwords as one of the first distributors to supply eBooks to retailers including, Apple iBookstore, Barnes & Noble, Sony, Kobo, the Diesel eBook Store, and Baker and Taylor.

You can view Coker’s article with the Huffington Post here. Even though he is not directly involved in the suit, his opinion certainly must be considered as he represents about 40,000 authors and publishers. If you want all the detail, take a moment to see his article, but to summarize, his stance is that the Department of Justice (DoJ) should not take action to weaken or dismantle agency pricing for ebooks.

He makes some great arguments and provides some never before seen statistics. Remember though, everyone has a reason behind their opinion. I’m not here to disagree with Coker’s opinion, although there is a major line that must be drawn. As he says himself, Smashwords has become one of the largest distributors of ebooks from SELF-PUBLISHED authors and small independent presses. That alone should bring caution to his comments and opinions.

The premise behind the DoJ case is that five large US Publishers and Apple, Inc, colluded. They are investigating whether Apple and the publishers acted together to raise prices across the industry, in essence, price fixing which is a violation of federal antitrust laws.

So here’s how all his affects the Indie author. Please understand, this is my interpretation of the case and by no means is it the opinion of the DoJ or the Publishing/Apple colluding group. Publishers need to inflate prices of eBooks to preserve their “A” list authors. In this economy, publishers will not put a dime into unknown or unproven authors. The shrinking amount of bookshelf space in retailers dictates that the publishers must put all their eggs into a few baskets.

With the “agency model,” publishers set the price of their books, paper or ebook. The retailer then sells it for them and earns 30% of the selling price. The big publishers don’t care that you’re selling your self-published ebook for $2.99, they want their “A” list author to be selling for $11 to $13.

As a reader, you should be outraged—forced into an artificially set pricing system arbitrarily set collusively by the publishers. Recently, Scott Turow the current president of the Authors Guild, published a statement attacking Amazon and the DoJ. You can read that here. He goes as far to say Amazon’s pricing system was intended to “destroy bookselling.”

Say what you want, but Amazon has almost single-handedly built the eBook business. The ironic side of this is that in the beginning, Amazon had a 90% market share, which has dwindled to about 60% today. I’m not sure how you can destroy bookselling by selling millions of books and giving consumers what they want—lower priced eBooks. Keep in mind, when Amazon first started the practice of lowering the price on eBooks, it was with mainstream and “A” list authors. The indie author scene hardly existed at the time.

Now, it may sound like I’m defending Amazon, but I’m not. They incorporate the agency model as well. As an indie author, I make 70% of the selling price. The real issue has to do with the publishers—and how they treat authors and readers.

For example, let’s say you’re an up and coming indie author, and a publisher offers you a three book deal. Your ego inflates, you can’t walk through the door (your head’s too big) and you jump at the chance to finally have your hardcover on the shelf at B&N. So, let’s look at what that means to you. As a traditionally published author, you now earn a royalty of 17.5% of the sale price of the ebook.

“I’ll negotiate a better deal!” the battle cry echo’s a mile away. Fat chance. Every publisher does the same deal. That means that on a $13 ebook, you would earn $2.27. Isn’t it coincidental that the royalty comes out to just about the same amount that you would earn if you did it yourself? Keeping in mind that the retailer is only taking 30%, that means the publisher is raking in $6.82 per book. Three times as much as the dude who wrote it.

So who wins here? The author, uh—no. The reader? Definitely not, do you want to pay $13 for an ebook? You got it—the publisher hits a home run. Here’s the worst part. The same type of book you published yourself sold for $2.99. The next day, the traditionally published new book sells for $13. What do you think your fans are going to do? They will, in Coker’s words, “ … purchase lower cost alternatives.”

It’s silly isn’t it? Now he’s arguing against his own stance. The fact is, Coker is protecting his 30% model, and he should be. Once again, I’m not saying he’s wrong. We need more Mark Coker’s in the world. He does wonderful things for indie authors. It’s just that you have to look between the lines sometimes and understand where the comments are coming from.

The bottom line is that while we embrace the indie author world, what would you do if you had a chance to work with a big publisher. Would you tell them to take a hike? If they waved a $100,000 advance in your face, do you walk away?

Wouldn’t you like a world where both options are advantageous? I don’t know about you, but if I could just write, and not worry so much about formatting, cover design, editing and having to supply my own books for book signings, it would be a nice situation. Most of all, it would be really cool to have The Card, sitting on a shelf in Barnes & Noble. Here’s the thing, with the way things stand now, I wouldn’t touch it for the world, no thank you, I’ll continue doing it myself.

The real problem boils down to the DoJ going after the wrong thing. Both sides are right. I believe that the big publishers did collude to elevate ebook prices. I believe that they have raised the prices to make a bigger profit AND protect their paper book industry. If the paper version is only a couple of bucks more, many will buy the paper version instead. On the other side, Amazon did play a game with the other model, selling books at a loss to build Kindle device sales. It’s not their fault that they had the device and it took others a year or more before they had their own devices.

The reader, our customer, is the one who loses. If the “agent” model prevails, there will continue to be a big discrepancy in eBook pricing. The “traditionally” published author will not have any say in the pricing (or royalty) of their work. Amazon and Smashwords will continue to offer direct publishing by independent authors and their work can be priced at will. If your dream is one day see your book in print with “Random House” slapped on the cover, good luck.

For our Indies Unlimited friends across the pond, the European Union is dealing with this issue as well. It looks like publishing companies could offer concessions to avert a fine of up to 10 percent of their global sales. Regulators would then drop their investigation without the companies admitting to any wrongdoing, according to a March 12, 2012 article by Reuters.

If the DoJ wins, there will be a gradual decrease in the pricing of eBooks from the publishers. Where that stops, nobody knows. Most likely market forces will take over and settle at a reasonable level.

As an Indie author, here’s the negative. A quick look at the bestseller rankings and you can immediately identify the traditionally published author from the big publishing companies. The prices tell the difference. Down the road, you won’t be able to tell. The Indie author may get lost in the masses. So in essence, the big publishers are doing us a favor in the current make-up of the industry.

As you can see, there is no real answer. What is amazing is that the man who single-handedly destroyed the “record” store with 99 cent iTunes is trying to prop up a bunch of old-school, good-old-boys-club publishers. My guess is that some type of settlement will be reached that doesn’t change the industry model, but makes the publishers pay for colluding in raising prices across the industry. That would be a win-win for everyone, allowing indie authors to continue to pursue a career in a market where they can get noticed, and paid in a way they can make a living.

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Jim Devitt is a Contributing Author for Indies Unlimited and the author of the #1 Kindle Bestselling novel, THE CARD. For more information, please see the IU bio page or his blog:  http://jimdevitt.blogspot.com/[subscribe2]