Blog / Memo to Charles Schumer: Publishers are not books

In an opinion piece to the Wall Street Journal, New York Senator Charles Schumer argues that the suit against Apple and book publishers is misguided and will restore an monopoly in e-books. This isn’t a great lawsuit, but Mr. Schumer’s argument is worse.

Recently the Department of Justice filed suit against Apple and major publishers, alleging that they colluded to raise prices in the digital books market. While the claim sounds plausible on its face, the suit could wipe out the publishing industry as we know it, making it much harder for young authors to get published.

(Emphasis mine) I don’t think Mr. Schumer knows what the word “published” means in 2012, and how much easier things are when you ditch the traditional publishers. Here’s how e-book publishing works today:

  1. I type 40,000 words into a free text editing program
  2. I run that text file through a free program to generate a special e-book file
  3. I send that file to Amazon’s free Kindle self publishing program or I put that file on a web server that costs me just $10/month
  4. If people buy my e-book and like it, I’m rich and famous
  5. End of story

Please compare that to running the gauntlet of a publishing company and tell me how much harder it is for young authors today.

The suit will restore Amazon to the dominant position atop the e-books market it occupied for years before competition arrived in the form of Apple. If that happens, consumers will be forced to accept whatever prices Amazon sets.

Or consumers can buy e-books elsewhere and send them to their e-readers. Mr. Schumer has never used a Kindle, has he? If you have a .mobi file, you e-mail it to your Kindle address and it appears on your device within minutes. There is another way, you know. But it’s the music industry DRM argument again. Publishers and authors have to follow in Steve Jobs’ footsteps and be brave enough to let consumers own what they purchase. No one’s holding their breath.

All of us will lose the vibrant resources a diverse publishing universe provides. As Scott Turow, president of the Author’s Guild, has explained, the Justice Department’s suit is “grim news for everyone who cherishes a rich literary culture.” These losses will be particularly felt in New York, which is home not only to many publishers, but also to a burgeoning digital innovation industry.

What are these vibrant resources our current publishing universe provides? Are they books? Are Mr. Schumer and Scott Turow seriously suggesting that people will stop writing books if HarperCollins and their buddies go out of business? (Better question: are you done laughing now?)

The last sentence is obvious self-interest: books will still be written and read, but New York publishing firms will go under. I’m not saying this wouldn’t be bad for New York’s economy, but Mr. Schumer’s really concerned about preserving the current economic model, not anything about our rich literary culture.

The e-books marketplace provides a perfect example of the challenges traditional industries face in adapting to the Internet economy. Amazon took an early lead in e-book sales, capturing 90% of the retail market. Because of its large product catalog, Amazon could afford to sell e-books below cost.

“Challenges” is putting it mildly. Traditional publishers have no place in the e-book marketplace. All that matters is the author, the e-book delivery system (Amazon Kindle or Apple’s iBookstore) and the reader. Sometimes not even the delivery system. Mr. Schumer’s arguing for a middleman.

Not that a publisher’s professional editing and marketing services are useless, but there isn’t enough money in the Internet e-book economy to support a skyscraper in New York. This goes back to Mr. Schumer’s claim that this suit could wipe out the publishing industry “as we know it” - he’s right, there would still be a publishing industry, but it wouldn’t include any of the old guard.

Still, he does point to a real issue: Amazon’s selling e-books below cost. This is a dangerous practice, but I believe Amazon’s heart is in the right place. Publisher-set e-book prices are simply too high. They’re a bulwark against the digital revolution, an attempt to keep e-books from cannibalizing physical sales. What if publishers set the price to be $4.99 or $9.99 for popular titles? Maybe then Amazon wouldn’t artificially lower the price. I know the whole predatory pricing scheme, but I’m not convinced Amazon’s doing this out of malice towards the industry. I suspect they had thousands of customers (e.g. me) bugging them about the ridiculous cost for something that could fit on a floppy disk.

This model may have served Amazon well, but it put publishers and authors at a distinct disadvantage as they continued to try to market paper books and pave a way forward for a digital future. Without viable retail competitors, publishers were forced to make a Hobson’s choice. They could allow their books to be sold at the prices Amazon set, thus undercutting their own current hardcopy sales and the future pricing expectations for digital books-or stay out of the e-books market entirely. In an increasingly digital age, the latter was simply not an option.

Mr. Schumer allows a little bit of the truth to leak out here. Publishers don’t want e-books to be affordable. They want “future price expectations” for e-books to be high, because the point of publishing a book for them is making a huge profit, not allowing an artist’s work to be read by the public. They also don’t want e-books disrupting their current system of physical sales, so why not strangle the digital books with inflated prices? Publishers want a smooth transition to a new profit center. Good luck finding a smooth path in a revolution.

Then the market changed. Apple entered and negotiated an agency model with publishers, in which the publisher could establish a retail price and Apple would take a percentage cut. The result was increased competition. Amazon’s market share quickly eroded to 60%, and consumers had multiple platforms through which to purchase digital books. Amazon was forced to expand its catalog, invest in innovation, and reduce the prices of its Kindle reading devices.

Most importantly, the average price for e-books fell to $7 from $9, according to a filing in the case.

He tries to disguise it, but the real issue here is price fixing by the publishers. Nowhere in his letter do I see the phrase “most favored nation,” the part of Apple’s agreement with the publishers that means all e-book sellers everywhere must sell the same book for the same price. Mr. Schumer is a fan of competition, so why shouldn’t retailers be able to compete on price?

He also doesn’t explain why Apple’s adoption of the agency model resulted in the loss of Amazon’s dominant market share. I thought people bought books on the iPad because it’s a great device and they love using it, not because normal consumers think publishers should set retail prices while Apple takes a percentage cut.

The Justice Department has ignored this overall trend and instead focused on the fact that the prices for some new releases have gone up. This misses the forest for the trees. While consumers may have a short-term interest in today’s new release e-book prices, they have a more pressing long-term interest in the survival of the publishing industry.

(Emphasis mine) No they don’t. They never have. Consumers care about having new and interesting books to read, which will continue to happen even if Simon & Schuster goes bankrupt tomorrow. People working at publishing companies care, but that’s not the argument Charles Schumer is making. It would be a more honest one. “Throw out this suit so New York publishers don’t go out of business and wreck our state economy.”

If publishers, authors and consumers are at the mercy of a single retailer that controls 90% of the market and can set rock-bottom prices, we will all suffer. Choice is critical in any market, but that is particularly true in cultural markets like books. The prospect that a single firm would control access to books should give any reader pause.

Correct. So why don’t the publishers make their own e-book reader and sell their books on that device? Or, why haven’t any other devices made headway into the market? The physical readers are about the same, so why is Amazon ascendant?

Could it be… the prices? Could it be that $14.99 for an e-book is ridiculous, and that lower prices would spur sales of e-book readers, e-books, and bring this cultural market to young people used to the digital world?

Naaah, that’s silly. If the companies lower prices, margins go down, and then how can the CEOs keep their multi-million dollar salaries? We have to keep prices high! To ensure open access to yachts! I mean, books!

The Justice Department lawsuit is also unsettling from a broader perspective. As our economy transitions to digital platforms, we should be celebrating and supporting industries that find ways to adapt and grow. By developing a pricing model that made e-book sales work for them, publishers did just that.

Funny, I thought the publishers were the ones trying to slow the transition to digital platforms. They haven’t released any of their own e-reading devices. They haven’t made any technical advances in e-books themselves. They haven’t created a system to allow millions of new authors to get their work read.

Instead, they dictate a new pricing model. That’s what Charles Schumer calls adapting and growing.

Uh huh.

I am concerned that the mere filing of this lawsuit has empowered monopolists and hurt innovators. I believe it will have a deterrent effect not only on publishers but on other industries that are coming up with creative ways to grow and adapt to the Internet.

I think innovators in other industries are more concerned about patent lawsuits than price fixing schemes, but I agree with him that this isn’t a great lawsuit. I’m not sure I buy the conspiracy angle. It just looks like a bunch of publishers are unhappy with Amazon’s low prices, and Apple didn’t see any harm in letting them use the same pricing scheme that governs apps in the App Store.

The only thing that sticks is the “most favored nation” clause, which is like Apple requiring Google to sell Angry Birds for the same price on Android as on iOS.

The administration needs to reassess its prosecution priorities. Justice Department officials currently have comprehensive guidelines in place to determine when they should challenge mergers, but they have no such guidelines for non-merger investigations. It’s time to come up with some. These new guidelines should take a broad, pragmatic view of the market as a whole. As the e-books case shows, this kind of perspective is sorely missing today.

Something tells me that broad, pragmatic view of the market includes a glance at New York’s tax revenue.