The Future of the Book

The Apple Antitrust Case and the Widgetification of Books

By posted at 6:00 am on July 12, 2013 10

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For the past year, to the rising horror of publishing-industry insiders, the federal government has been on a campaign to stamp out price fixing in the e-book trade between the last remaining major publishing houses and Apple, which sells e-books for its iPads and other devices. On Wednesday, Denise Cote, a federal judge in Manhattan, ruled that Apple had indeed colluded with publishers to raise prices of e-books — in the process giving aid and comfort to Amazon, the single strongest monopolistic force in the book business.

The case is far from over. Apple is one of the world’s largest corporations, and it is in a knife fight with Amazon and others over the future of digital content, so you can count on it to carry on its appeals as long as it can. But Wednesday’s ruling follows an earlier decision by the major publishers to settle with the government rather than fight the case, so in some ways we are already living in the economic environment Justice Department lawyers believe is best for the book business. It isn’t pretty. Borders is gone, Barnes & Noble is on the ropes, and with the recently approved merger of Random House and Penguin Books, the already absurdly conglomerated Big Six publishers have become the Big Five.

As a matter of law, it is altogether possible that the government is right that Apple and publishers conspired to set prices higher than Amazon would charge, which would have forced consumers to pay more for e-books in the short term. But to see this case in this narrowly legalistic light is to completely misunderstand how the book business actually works, and, more dangerously, to undermine its ability to find and publish books people want to read.

The government’s case suggests that it views book publishing as essentially a commodity business. Publishers, this line of reasoning supposes, produce these things called books, consisting of several hundred pages of printed matter and a cover, each of which is more or less interchangeable with any other. A book then is like any other commodity, such as soap or motor oil, and the only legitimate concern for consumers is the unit price of the commodity. Any increase in the unit price beyond the absolute minimum the free market will bear is an injustice to the consumer.

But books are not bars of soap. When you go online to buy a book, you are not merely paying for a file full of random ones and zeros. You’re buying the original ideas and stories contained within that book, and frankly nobody has any idea how much those ideas are worth until people start reading them.

This is the crucial point the government missed in bringing this lawsuit: book publishing is in essence a vast, bumbling R&D operation — a sort of pharmaceutical company churning out stories rather than mood-stabilizing drugs. Like pharmaceutical companies, publishers are constantly testing out products of unknown efficacy to find the one in a thousand that works, and, like pharmaceutical companies, publishing houses have to charge above-market rates for their successful products to amortize all those failures. If you limit their ability to do this, books will indeed be cheaper, but they also will be lower in quality and variety because publishers will have less ability to finance experimentation.

This was what was at the heart of the publishers’ negotiations with Apple: publishers wanted to be able to set their own prices. Put simply, when it comes to e-books, Amazon sets the price — for a time, the standard unit price was $9.99 — and then pays the publisher a royalty per unit sold. Often, Amazon was actually losing money on its per-unit sales, but that was fine with Amazon, because what Amazon really wants to sell is not so much e-books as the delivery system of those e-books, called a Kindle.

coverApple was offering a wholly different deal, called “the agency model,” in which publishers would set the price for an e-book and then Apple would take a cut — usually 30 percent of the list price. In other words, Apple was offering to once again give the publishing industry the freedom to overcharge for all those e-versions of E.L. James’s Fifty Shades of Grey flying out the virtual doors to make up for the risks it is taking on thousands of other titles that may have literary merit, but won’t sell nearly as well.

It is easy to see the Apple antitrust suit as merely a clash between multi-billion-dollar corporations, but at heart the case asks a fundamental societal question: what, legally speaking, is art? Is it a thing, a commodity like a bar of soap or a can of motor oil to be bought and sold in an unfettered free market, or is it something else, deserving of special allowances? If you see a work of art, in this case a book, as a commodity, then there is no question that Judge Cote’s ruling is correct. As a society, we long ago decided that when people sell things, the consumer is best served when the government allows the free market to work its magic on cost control.

But the framers of our Constitution recognized that ideas aren’t things and should occupy a special place in our laws. In enumerating the powers of Congress in Article 1, Section 8 of the Constitution, the framers noted how important it is “to promote the Progress of Science and useful Arts” and thus created copyright protection for authors and inventors. I am not suggesting copyright law has any direct bearing on the Apple case. I am merely saying the framers were onto something. Books and other works of art aren’t widgets, and art does not now nor has it ever flourished in a truly efficient market.

As a matter of law, the Department of Justice might be right that Apple conspired with publishers to raise e-book prices, but as a matter of governance, the DOJ did not have to bring this suit, which everyone understood from the start would hurt publishers and help Amazon. The full effects of Wednesday’s ruling remain to be seen, but this much seems clear: if the government prevails, it may bring down prices of e-books, at least in the short term, but in doing so it will have created a far less genuinely competitive and vibrant book business.

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10 Responses to “The Apple Antitrust Case and the Widgetification of Books”

  1. Alphonse Boranzo
    at 7:01 am on July 12, 2013

    I’m calling BS on final argument in this essay. The DOJ didn’t just help Amazon–it aided consumers. I will NOT pay the same price or a dollar or two less for an ebook –which is what publishers want; they wanted to maximize a profit model in the same way that Apple and Amazon do. They have far less cost when it comes to creating digital books than they do paper ones, yet they pay authors the same or less. Defending publishers in this case is absurd, and your argument is simply to say that Amazon is the bad guy. Price fixing is bad for everyone who claims to believe in capitalism. This IS about multibillion corporations fighting for control–and publishers are multibillion dollar corporations who are trying to protect a bottom line and maximize a profit at the peril of the consumer.

  2. Sharon Jackson
    at 7:29 am on July 12, 2013

    I believe Mr. Bourne is correct, and that the decision in this case will actually hurt consumers in the ling run. Amazon is selling e-books at a loss for the singular reason that they want to dominate ( monopolize) the e-book market in the future. If you want healthy competition, let someone else in the game. Do you really think that Amazon will continue to sell E-books below cost forever? Once they have gained control of this market, those prices will be adjusted to make a profit for Amazon. Meanwhile, traditional writing and publishing, which I do believe is an art, will have been dumbed down to a much lower standard. I think that the DOJ case against Apple was a mistake that will have the effect of giving Amazon an unfair advantage in e-book sales. I can’t believe that I am saying this, since I am a retired librarian and a life long reader who is and always has been in search of the lowest price to satisfy my craving for literature. But I truly believe that Apple’s intent in suggesting the agency model was simply to level the playing field, allowing people to choose their e-readers based on the merit of the device rather than the cost of the content.

  3. Brendan
    at 8:31 am on July 12, 2013

    I don’t see how aiding a predatory corporation in its quest to drive not only its competitors out of business but also to destroy the longstanding means of production can be see as good for consumers. You know what, Alphonse? You should pay just a dollar or two less for an e-book than for a printed copy. It’s not just writers who need to be paid; it’s editors, designers, marketers, publicists, and so on. It’s a small fraction of the cost of a book that goes toward the paper. If you want to see what a world without publishers would be like, start reading nothing but self-published Kindle Originals. That’s the world Amazon wants.

    There was something in the Times article yesterday on this story — a quote about the growth in e-book sales tapering off after Borders disappeared, because not as many people could have a look at the real books before ordering them on Amazon (which is an abhorrent practice, but still). So maybe Amazon is hurting itself a little, too.

    As for the imminent demise of Barnes and Noble, one potential silver lining I can see is that it could open up the suburbs to independent booksellers again, which would actually be kind of nice.

  4. heather
    at 1:52 pm on July 12, 2013

    i agree with brendan in this ever complicated issue. support your local independent. mine is a different drummer book in burlington, ontario. end this madness and buy books. nothing beats browsing the aisles and chatting with great staff who love BOOKS. regards, heather

  5. Jefferson
    at 4:32 pm on July 12, 2013

    I think it’s the publishers who try to turn books into a commodity business. They are the ones who decide to sell most, if not all, books within a very narrow range of prices. They just want to set that price instead of Amazon. Book publishers don’t set the price of novels by first-time authors at half the price of established authors. They don’t set prices based on the value of the ideas or the artistry of the book. They set prices based on what the market will bear for a book in a certain category with x number of pages. If that’s not commoditization, I don’t know what is.

    Publishers enabled Amazon by insisting that ebooks be controlled by highly restrictive DRM code, and by following the music industry down its self-destructive path, trying to sustain paper book sales through artificial prices for ebooks. They’re stuck with an environment they created.

    Brendan, you’re mistaken. A good chunk of the cost of paper books is transportation, warehousing, returns and the cost of maintaining brick and mortar stores. Ebooks provide a savings far greater than a dollar or two. Editors, designers, marketers, publicists, etc., are all still necessary, but a good part of the physical apparatus of the book delivery system is unnecessary and an anachronism.

    On the other hand, I agree with your point about the possible demise of Barnes & Noble. Much as I love their stores, I loved independent bookstores more, and I can’t imagine more proof that the book industry had a fair bit of commoditization before Amazon came along.

  6. Julie
    at 10:40 pm on July 12, 2013

    “but a good part of the physical apparatus of the book delivery system is unnecessary and an anachronism.”

    That’s only your opinion. There are still countless people out there buying physical books, and they don’t have to stop just because you think they should. I hate ebooks–reading them is a soulless experience for me. I’ll continue buying physical books as long as I can no matter how much the internet tells me I shouldn’t. I tend to think people spend too much time staring at screens anyway.

    If saving a few bucks is so important, by all means, buy from Amazon. I happen to think Amazon is destroying towns even more than the dreaded Walmart. Walmart decimated downtowns and replaced them with Walmarts. Amazon decimates downtowns and replaces them with nothing. No one wants this, but every Amazon shopper seems to think they’re not culpable in it.

  7. Jennifer
    at 11:09 pm on July 12, 2013

    One problem – Publishers are no longer taking risks. Once upon a time an author just had to have a good book. Now they have to have a platform or a brand they’ve already built. There’s no risk there. Capitalism isn’t supposed to be fair, that’s why so much innovation comes out of it. Either publishers will stubbornly hold on to the past or the will embrace change and lead their companies into the future. It isn’t Amazon causing books to be so cheap, it’s the fact that indie publishers and authors can publish their work for a lot less. They can get professional contractors to work on their books for a lot less and still make a nice profit. No overhead. True some of these books stink but they are getting better. Some of the books tradition publishers put out by tried and true names stink too. That’s where the art comes in. Worth is in the eye of the beholder.

  8. Critical Linking: July 13, 2013
    at 6:00 am on July 13, 2013

    […] And this is why the pay-what-you-want model should be the industry standard. […]

  9. David Biddle
    at 5:24 pm on July 16, 2013

    The economics in this situation are actually a bit different than depicted here…and far more complex. The “Wholesale Model” which was the standard one publishers agree to for paperbound books had them selling at a wholesale price off their list price to Amazon. A $30 hardback best-seller would go for roughly 50%. That means the publisher was paid $15 by Amazon. In the agency model, the publishers were looking to set the price for an e-book at, say, $14.99. They would then get 70% of this — far less than they would using the wholesale model.

    It was all connected to the problem of perception with respect to the first-run hardbacks (old school thinking). The publishers wanted to protect that profit center. If Amazon was going to do their loss-leader thing and lose say $5.00 (or whatever) a sale to sell a first-run e-book at $9.99 when they paid $15.00 for it, consumer perception had the potential of a lemming rush to the ebook platform. Not only would that kill the print business (remember, they’ve been doing this for over a century) but it would kill most of the retail options at bookstores, Walmarts, etc.

    I don’t think the problem so much is that the Courts and DOJ are taking a widgety approach to art as the basic problem we all face as artists…our work is both intellectual magic we’re offering the world AND a commodity that we need to sell in order to make a living. As long as artists cede control of their work to others — whether Apple and Amazon or the neighborhood bookstore, this problem will be front and center.

    However, as soon as we stop looking at the Big Publishers and the Big Techno Companies, things change. That’s why Indie Writers have a shot at being in the driver’s seat in this industry. But we have to refuse to play the game the way the big kids think we’re supposed to. I’ll sell my books through Amazon and Apple and B&N, for sure…Kobo, Smashwords, you name it. I’ll also sell my stuff directly through my website using systems like Gumroad, Tomely, etc. And the whole European e-book world is so much more innovative, intelligent and artist friendly.

    Right now, it seems to me, since Apple (through iTunes) and Amazon have accounts that readers already have set up they get the lion’s share of business. But what happens every time I convince someone to open an account with Tomely.com or Gumroad or Smashwords?

    There’s much more to this equation than meets the eye. Creative types need to be creaitve, not dependent.

    Great piece! People need to open their minds.

  10. Arturo Ulises
    at 2:29 am on July 18, 2013

    As soon as more indie bookstores start selling contemporary literature in Spanish, I will drop Amazon. For now, though, they’re my best –and only!– option.

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