Saturday, January 30, 2010

Who sets the price?

The Amazon/Macmillan dustup brings to mind an important question: Should retailers have sole control over the prices of the products that they sell, or should manufacturers be able to determine prices (or at least price ranges)? Decades ago, many states in the U.S. passed Fair Trade laws that gave manufacturers control over the prices that retailers could sell their products for. (This shouldn't be confused with the Fair Trade movement that seeks to encourage producers in third-world countries to farm and manufacture sustainably.) These laws allowed manufacturers and their distributors to refuse to sell to retailers who would discount the prices of their products.

The Fair Trade rules were fair for manufacturers, less fair for retailers, and not fair at all for consumers, so they were eventually repealed or struck down. However, manufacturers still have the right to set Minimum Advertised Prices (MAP) for their products. Retailers can sell the products at any price they want, but they can't advertise the prices if they're lower than the MAPs set by the manufacturers. That's why you sometimes see "Prices too low to advertise", or on a website, you have to put a product into your shopping cart to see its price. MAP policies are very common with consumer electronics, cameras, watches and other high-ticket items.

In the Amazon/Macmillan situation, Amazon almost certainly has a clause in its contract with Macmillan that allows it to sell books for any price it chooses. Thus, Amazon would be immune from any MAPs set by Macmillan. However, there may be nothing in the contract dictating how long Macmillan has to deliver eBook versions of its print titles to Amazon; if so, Macmillan would be within its rights to delay availability of its eBooks to Amazon in order to encourage sales of full-price print copies. It's an interesting spin on the old Fair Trade argument: "We're not saying that we won't sell you eBooks, we just won't sell them to you until the print versions have been out for 30 or 60 days." It's similar to the release window strategy used by movie studios for decades. The legal problem could come if Macmillan discriminated against members of the same class of retailers.

Let's say that Apple sells an eBook title for $14.95, while Amazon sells it for $9.99.  Apple gets the eBook file and puts it on sale the same day as the print version, but Amazon doesn't get it until 60 days later. Unless there's some legitimate technical reason why Macmillan can't deliver the eBook file to Amazon at the same time as to Apple, its behavior could be seen as discriminatory. (Please remember that I'm not a lawyer, and your results may vary.) Macmillan would be required to provide the files to both Amazon and Apple at the same time, so as not to give Apple an unfair advantage.

Macmillan might still have an "out", again taken from the business practices of the movie industry. Most of us have been to neighborhood "second-run" movie theaters that get movies weeks after they're first released. These theaters sell tickets for a few dollars each, rather than the $10 and up that movie tickets commonly go for. The films that the second-run theaters are showing are exactly the same as the ones that were in the first-run theaters (well, not exactly the same--the prints are usually pretty beaten up), but the movie distributors can discriminate on the basis of price. It's not a fair analogy, because the publishers might actually get paid more by Amazon than Apple, while the film studios almost always end up making less from the second-run theaters than they did from the first-run ones. However, it demonstrates that Macmillan might have some "wiggle room" as to when it releases eBooks to different retailers.

In any event, the battle is now on, and it's likely to end up in the courts.
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