The "Most Favored Nation" landmine

Reuters is reporting that the U.S. Justice Department could file suit against Apple and one or more publishers for eBook price-fixing as early as Wednesday. I won't rehash the details of the case; you can read this or this for background. In this post, I want to discuss one of the sticking points in the case--the "Most Favored Nation" clause. Apple's "Most Favored Nation" clause requires publishers to price eBooks that they supply to Apple at least as low as the lowest price offered by any other reseller. If the publisher or one of its resellers lowers the price for a title below that of Apple, Apple has the right to drop its sale price to maintain the lowest price.

It's very important to understand that Apple isn't the only eBook retailer with a "Most Favored Nation" clause; both Amazon and Barnes & Noble have them as well. In fact, Amazon is far more aggressive at exercising its clause than the other two retailers. Amazon regularly scans the prices for eBooks at competitive websites and will automatically drop the price of any title that it finds lower at another site, without giving notice to the publisher (or, for a self-published eBook, the author.)

The effect of Amazon's "Most Favored Nation" clause is magnified by another clause the company demands: For non-agency titles (in other words, titles that Amazon purchases to sell under the wholesale model,) Amazon reserves the right to set and change the price as it sees fit, although it will still remit the same wholesale amount back to the publisher or author. If Amazon drops its price for a title below that of Apple or Barnes & Noble, even without the knowledge of the publisher or author, Apple and Barnes & Noble have the right to match Amazon's price.

You may already see where this is going. If, either by design or error, the price of an eBook drops at one retailer, the others have the right to drop their prices. Any pricing mistake can quickly cascade. Is it possible that the price could go to zero? Self-publishers have been giving away some of their eBooks to encourage customers to buy others, so finding a title priced at zero wouldn't necessarily be flagged as an error. In at least one case, Amazon mistakenly found a self-published eBook priced at zero at another retailer, and dropped its price on the title to zero.

Okay, so what happens when the price accidentally goes down to zero? All the publisher or author needs to do is make a phone call or send an email to the retailers in order to fix the problem, right? That assumes that they can figure out who to contact at the retailer, and that the retailer takes action quickly to correct the problem. So let's say that you're an author whose eBook is, through no fault of your own, now priced at zero. You contact Amazon, Apple and Barnes & Noble, and they all agree to correct their prices. Amazon goes first, and you're back at, say, $4.99. Then, before the other retailers have a chance to change their prices, Amazon's scanner checks Barnes & Noble's website, sees that their price is zero, and sets Amazon's price back to zero. Then, Barnes & Noble corrects the price, until the Barnes & Noble price scanner sees that Amazon is selling your eBook for zero, at which point Barnes & Noble also sets its price back to zero.

There are two big takeaways:

1. "Most Favored Nation" clauses suck for everyone except retailers, and
2. Just getting Apple to get rid of its "Most Favored Nation" clause without doing something about Amazon and Barnes & Noble isn't going to fix the problem.

Update. April 30, 2012: According to The New York Times, Apple selected "After Friday Night Lights" to be part of its "Pick of the Week" promotion that allows Starbucks customers to get a free copy of the eBook. Amazon saw the promotion as a giveaway and dropped its price for the eBook to zero. Then, Byliner, the publisher of "After Friday Night Lights," withdrew the eBook from Amazon until the conclusion of the Apple/Starbucks promotion on May 1st.