If eBook sales are slowing, is it good news or bad?

Not long ago, it was common for eBook sales to increase by 100% or more year over year. Those days are behind us--last year, the rate of eBook sales growth fell into the 20%-25% range. Barnes & Noble released its holiday 2013 sales figures today, and eBook sales increased 13.1% year-over-year.

Some industry observers are saying that eBook sales growth has reached an inflection point, which means that sales growth has hit zero or gone negative. In reality, eBook sales growth is slowing but still positive, and will most likely remain positive for a while. In addition, both consultants and reporters have been overly quick to minimize the effect of the Justice Department's settlement with Hachette, HarperCollins, Simon & Schuster, and most recently, Penguin. (Random House will join the settlement if and when its merger with Penguin is completed.) The settlements are still being phased in, and unless price has little or no effect on demand, we should see the rate of eBook sales increase in 2013.

However, let's say that even with the price-fixing settlements in the U.S. and Europe, eBook sales increases level off or turn negative. Is that good news for the publishing business, or bad?

• Some observers believe that it's good news, because they think that those customers will buy print books instead of eBooks. However, there's no evidence that a slowdown in eBook sales will mean an increase in print sales. In fact, print sales continue to decline, even as eBook sales growth slows down. (Update, January 4, 2014: According to Nielsen BookScan, U.S. print book sales (in units) fell 9.3% for all of 2012. Print book sales fell just under 16% between 2010 and 2012. In the U.K., print book sales (in units) fell 3.4% in 2012.)
• eBooks are the only source of growth for the book publishing business. If eBooks stop growing, we'll see even more consolidation and shutdown of publishers, since cost control will be the primary way to improve publishers' bottom lines.

I don't believe that eBooks' sales growth is going to go to zero, but 20%-30% annual growth may well be the ceiling for the next couple of years. Let's be clear--eBooks (and, to a lesser extent, audiobooks) are the only parts of the book publishing and retailing business that are growing. Everything else is stagnant or declining. If eBooks become stagnant, that's bad news for everyone.

Obama's victory spells bad news for Apple, Macmillan and Pearson

Historically, Republican administrations have been far less aggressive in prosecuting antitrust cases than Democratic ones. Had Mitt Romney won last night, it's likely that the eBook price-fixing case against Apple, Macmillan and Pearson would have been settled on terms far more favorable to the companies, or would have been dropped altogether. That may have been one reason why the three companies refused to settle with the U.S. Justice Department--they thought that they could get far better terms by waiting a few months for a Romney administration. However, with President Obama's reelection, the Justice Department will continue to pursue its case, and will almost certainly make settlement on the same or similar terms as Hachette, HarperCollins and Simon & Schuster a condition for approval of the Penguin-Random House merger. All of this makes a settlement by Macmillan much more likely. At that point, Apple won't matter, because all of the Big 6 will be prohibited from accepting Apple's terms.

Digital Book World's new eBook bestseller list is being compiled by a Big 6 employee

Yesterday, the Digital Book World website owned by F+W Media announced a new bestseller list for eBooks, and claimed that its methodology would make the list more accurate than those published by other sources. In its release of the first edition of the list, Jeremy Greenfield, the site's Editorial Director, wrote that the new list is "a new weekly venture from Digital Book World in partnership with Iobyte Solutions." There's nothing more in the article that describes Iobyte Solutions. A press release announcing the new list has extensive quotes from Greenfield, F+W Media Chairman and CEO David Nussbaum, Iobyte Solutions "managing partner" Dan Lubart, and several others. Other than the quote from Lubart, nothing in the release describes Iobyte Solutions. Finally, Lubart himself wrote a post on Digital Book World, describing the methodology used for compiling the list. Here's how Lubart describes himself in the post:

About Dan Lubart

Dan Lubart is a technology strategist and data junkie who founded Iobyte Solutions in 2000 following a previous decade of solo consulting. Still fairly new to the publishing industry, Dan has been involved with digital disruption in the past, spending a year at Universal Music Group right around the time Napster was rearing its head and now focuses mainly on the familiar challenges and opportunities of the eBook marketplace. With Iobyte, Dan also developed a very cool consumer learning site for Scholastic, and has consulted with major clients in banking, pharmaceuticals, retail and media. Amidst his other current professional endeavors, Dan devotes great chunks of time to enhancing and marketing Iobyte’s eBook MarketView service (retail data and analytics on both physical and eBooks for publishers). Follow him at hiswebsite and on Twitter.

There's just one problem with all of this: Dan Lubart is also the Senior Vice President of Sales Analytics at HarperCollins. That's right--a senior sales executive with one of the Big 6 publishers is responsible for compiling an "unbiased" list of bestselling eBooks. I wouldn't have known anything about this if Mike Shatzkin hadn't mentioned it in passing in his blog. When I first read Shatzkin's blog, I was sure that I was reading it wrong--surely Lubart had worked at HarperCollins before leaving to set up Iobyte Solutions, but a quick check with LinkedIn showed that I read it correctly. Lubart is apparently continuing to run Iobyte Solutions while he also works for HarperCollins.

This opens up an enormous can of worms. Did Greenfield and Nussbaum not know that Lubart had a massive conflict of interest? Mike Shatzkin certainly did, and he's quoted in the press release that announced the new bestseller list. If Greenfield and Nussbaum did know, why didn't they reveal that information? They had plenty of opportunities to do so. Unless Lubart was suffering from a case of selective amnesia, he should have revealed his employment in the post he made describing the list's methodology. He spent an entire paragraph talking about his background, with no mention whatsoever that he's currently employed by HarperCollins.

Any argument that Digital Book World or F+W Media might make about Lubart's ability to somehow keep a "Chinese wall" in his head separating his duties at HarperCollins from his work for Digital Book World is laughable. This is an inherent conflict of interest. It should have been fully disclosed, and even then, it undercuts the impartiality of the list. The best thing that Digital Book World could do is admit what happened and separate itself entirely from Iobyte Solutions and Mr. Lubart. Another option would be if Mr. Lubart ends his employment at HarperCollins, declines to accept any consulting business from the company, and works full time at Iobyte Solutions. Failing that, the Digital Book World list has to be seen as inherently unreliable.

Update, August 21, 2012: Nate Hoffelder at The Digital Reader picked up on the story, and contacted Digital Book World to ask some questions. As of this writing, DBW hasn't responded to Hoffelder, but after it received Hoffelder's request, it edited Dan Lubart's biography to add a mention of his employment at HarperCollins:

About Dan Lubart

Dan Lubart is a technology strategist and data junkie who founded Iobyte Solutions in 2000 following a previous decade of solo consulting. Dan currently works with HarperCollins as S.V.P. of Pricing and Sales Analytics while concurrently managing Iobyte and the eBook MarketView service providing retail data and analytics on both physical and ebooks. (Emphasis added.) Still fairly new to the publishing industry, Dan has been involved with digital disruption in the past, spending a year at Universal Music Group right around the time Napster was rearing its head and now focuses mainly on the familiar challenges and opportunities of the eBook marketplace. With Iobyte, Dan also developed a very cool consumer learning site for Scholastic, and has consulted with major clients in banking, pharmaceuticals, retail and media. Follow him at hiswebsite and on Twitter.

Note that DBW didn't just add a mention of Lubart's employment at HarperCollins--it also edited other parts of the biography out. They did this without explaining the reason why, and without addressing Lubart's conflict of interest. In addition, note the wording that "Dan currently works with HarperCollins as S.V.P of Pricing and Sales Analytics...", implying that his relationship with HarperCollins is that of a consultant or contractor, when his LinkedIn resume makes it clear that he works FOR HarperCollins as a full-time employee.

F+W Media's and Digital Book World's logic for how they're handling this revelation isn't clear to me. Surely Lubart isn't the only researcher in the country who could put together this bestseller list. I've done market research and industry analysis for years, and what Lubart says he's doing is nothing that literally thousands of other analysts couldn't do. Instead, DBW's actions are like the New York Times hiring the head researcher for the Obama or Romney campaign to do its election polling, and responding "Yeah? So what?' when the truth is discovered. No organization with any pretensions to journalism would act this way, so the question becomes, what kind of organization is Digital Book World, and why should anyone believe that its eBook bestseller list, or anything else it publishes, is untainted by conflicts of interest?

Major publishers launch and expand digital imprints

Publishers Weekly writes that Big 6 and other major publishers are stepping up their launches of digital imprints. Some are digital-first, while others are digital-only. Here's a list:

• Penguin is reviving Dutton Guilt Edged Mysteries, which started as a pulp imprint that released 82 noir detective titles from 1947 to 1956, as a digital-only imprint. In addition, its InterMix imprint will serialize titles, starting with the original erotic romance Because You Are Mine, which will be released in eight parts, with one part released each week.
• HarperCollins will double the output of its Impulse digital-first imprint from one title per week to two, and will add William Morrow and Harper Voyager to Impulse.
• Random House's Loveswept is focusing on eBook reissues of Bantam, Ballantine and Dell paperbacks that haven't previously been released as eBooks.
• Hachette's Forever Yours digital imprint does eBooks first, with Print on Demand versions one to two months later; the company plans to have simultaneous eBook and POD releases by the end of this year.
• Harlequin's digital-only Carina Press imprint allows Harlequin's international divisions to release its titles as both print and eBooks.
• Kensington has launched eKensington as a digital-only imprint.
• F+W Media is taking its Crimson Romance eBook imprint from beta test to full release, concurrent with the rollout of a new eBook subscription site for romance titles. In addition, the company's Prologue Books imprint has reprinted eBook versions of 300 pulp fiction titles from the 1940's, 50's and 60's, and will release 30 titles per month.

Libraries are doing it to themselves

Brett Bonfield writes in the Library with the Lead Pipe blog that, by allowing eBook aggregators like OverDrive to license, rather than sell, eBooks, and publishers like HarperCollins to put restrictions on how eBooks are used (and how long they can be used before they expire), libraries are making the same mistakes that they did by turning abstracting and indexing over to companies like Elsevier. He says that libraries are abandoning the First Sale doctrine and fair use. Bonfield writes "We are 'paying for stuff' and we are 'sharing it with our community,' but unlike before, we are not actually buying anything."

Bonfield gives examples of alternate models that give libraries more control over their eBooks. The problem is that all of the models still depend on the cooperation of publishers and eBook platform providers. In addition, at least one of the models he proposes, Sneakernet, is in direct violation of some eBook reseller licensing agreements.

U.S. eBook price-fixing trial set for June 2013; Apple and publishers still have issues

Reuters reports that Judge Denise Cote has set June 3, 2013 as the the start date for the U.S. eBook price-fixing trial against Apple, Macmillan and Penguin. According to another report from the Associated Press, the Department of Justice has asked the judge for permission to continue gathering evidence for the case until March of 2013, but Apple wants the DOJ to wrap up its discovery by the end of 2012. (Apparently, the publishers are siding with the DOJ on this issue, not Apple.)

A third report from CNET News says that the three publishers that are in the process of settling with the DOJ--Hachette, HarperCollins and Simon & Schuster--are asking to be treated as "non parties" to the lawsuit, so that they won't be required to provide discovery in the case unless a party provides "good cause." The DOJ says that the publishers aren't entitled to "special treatment" because there was no allowance for it in their settlement agreement, the companies are likely to be "sources of highly relevant evidence," and they've turned over documents to European investigators that they haven't turned over to the DOJ.

Penguin to test eBook lending with the New York and Brooklyn Public Libraries--and 3M

The New York Times reports that, after exiting the library market in February, Penguin is planning to reenter the market--with a different distribution partner. Penguin stopped distributing new eBook titles through OverDrive last November when it learned that OverDrive was violating its contract by serving eBooks to Kindle users through Amazon's servers, and cut off all eBooks to OverDrive in February. Now, Penguin is working with 3M, the New York Public Library and Brooklyn Public Library on a year-long pilot eBook lending program to begin in August. Penguin will make more than 15,000 frontlist titles available to the libraries, but there will be a six-month delay from the books' initial publication dates, in order to help prevent cannibalization of eBook sales. According to a Penguin spokesperson, library pricing for the eBooks will be similar to consumer prices, with licensing on a one borrower/one copy basis. If the program is successful, Penguin and 3M will roll it out to libraries around the country.

This test is a huge win for 3M, and a slap in the face for OverDrive, since public libraries that want eBooks from Penguin will have to get them from 3M. The company has already signed up Random House and HarperCollins, and is adding publishers at a rapid pace.

Publishers are undercutting their own arguments for agency pricing with discounting

The An American Editor blog looks at a new trend: Big 6 publishers deeply discounting selected eBook titles. One example is Zoe Ferraris' City of Veils, published by Little, Brown, which was put on sale by the publisher at $2.99. The first book in Ferraris' series, Finding Nouf, has a list price of $13.95 and is being discounted to $11.16. Another example is Matthew Dunn's Spycatcher, normally sold by HarperCollins for $9.99 but discounted with an excerpt of Dunn's new book Sentinel for $0.99.

The $2.99 price point is catching on, even with the Big 6 publishers. The An American Editor blog points out that publishers are thoroughly undercutting their arguments for why they need agency pricing in order to "protect the value of print books" when they sell new eBooks for $2.99, or for that matter, backlist titles for $0.99. With these discount prices, they're setting consumer expectations for how much fiction eBooks should sell for, and they're doing much more damage to themselves than Amazon's $9.99 pricing policy ever did.

The problem isn't agency pricing, it's Most Favored Nation clauses

PaidContent writes about a letter written by American Booksellers Association president Oren Teicher, protesting the proposed eBook price-fixing settlement between the U.S. Justice Department and Hachette, Harper Collins and Simon & Schuster. In his letter, Teicher writes that the publishers shouldn't be prohibited from using Agency pricing, saying that the loss of the agency model would “significantly discourage new entry, and will lead to the departure from the market of a sizable number of the independent bookstores that are currently selling e-books." In an earlier letter to the Justice Department, Barnes & Noble made a similar request, with similar arguments.

The problem with these arguments is, as Jane Litte wrote on the "Dear Author" blog, that agency pricing is meaningless without Most Favored Nation (MFN) clauses in place with all the major book resellers. Apple's MFN clause requires publishers to insure that Apple can always sell their eBooks at a price no higher than the lowest price offered by any other reseller. The combination of Agency pricing and MFN is necessary in order to make this work.

As Teicher's letter points out, the Justice Department doesn't claim that Agency pricing is illegal. In fact, the settlement with the three publishers expressly permits Agency pricing with some restrictions. What it forbids, for five years, are MFN clauses. So what, exactly, is Teicher asking for? It sounds as though he wants the publishers to be able to implement Agency pricing with no exceptions. No reseller would have the ability to discount for sales or special events. Resellers couldn't negotiate with the publishers--the entire pricing scheme would be "take it or leave it." In other words, he wants industry-wide MFN in practice, without individual MFN clauses.

In any event, given that the ABA has lost its eBook eCommerce partner (Google) and hasn't come up with a replacement, Mr. Teicher's arguments are largely moot.

HarperCollins Launches Epic Reads, a Community Reading Site for Teenagers

PaidContent reports that HarperCollins has launched a digital community site for teenagers called Epic Reads. The site serves as an "umbrella" for three "channels": The main epicreads.com site; pitchdark.com, which features “a curated list of titles that appeal to readers of dystopian and paranormal fiction”; and storycrush.com, which focuses on the “romance, realistic and contemporary fiction genre.”

The site allows users to log in with Facebook or Google, share and "Like" content, review titles, post comments, take polls and quizzes, enter contests, and search or browse for specific authors and titles. Each HarperTeen author has their own page, although the content on the pages is currently limited to links to their books and a picture of the author.

HarperCollins will be able to use the postings and activity on the site to build profiles of its readers. There's currently no eCommerce capability on the site and no sales links to external resellers, but its likely that the publisher will add one or both of these capabilities to Epic Reads over time.

Self-published Iowa writer gets seven-figure deal from Penguin

The Des Moines Register reports that Tracy Garvis Graves, an author whose manuscript was rejected by 14 publishers before she decided to publish it herself, has just signed a two-book deal with Penguin imprint Dutton & Plume for what she reports as "seven figures." The contract covers On the Island, the title that she self-published, and Covet, a novel to be released in 2013.

Graves' manuscript was rejected by 40 book agents and 14 publishers before she spent $1,500 for editing and formatting and posted the eBook to Amazon. It only sold 100 copies in the first month, but then sales took off, thanks to word-of-mouth and thousands of positive online reviews. She's also released the title as a paperback, and as of last week, it rose to #7 on the New York Times' combined print and eBook bestseller list. Amazon, HarperCollins and Dutton & Plume all bid for book rights; Graves sold the rights to Dutton & Plume because of Penguin's relationship with Temple Hill Entertainment, the production company that made the "Twilight" films. They also work with MGM, which acquired the film rights to On the Island.

Graves has quit her day job at Wells Fargo Bank and is focusing on writing her second book.

British supermarkets compete for the U.K.'s eBook business

PaidContent reports that J. Sainsbury, the third-largest supermarket chain in the U.K., has purchased a 64% stake in aNobii, a social discovery web engine for books whose other owners are HarperCollins, Penguin and Random House. Of the 64%, 45.4% came from HMV, which disposed of its ownership in aNobii after selling off Waterstones. The former owners who sold their shares of aNobii didn't value it very highly--Sainsbury's only paid £1 for its stake.

aNobii may help Sainsbury's in competition with Tesco, the biggest supermarket chain in the U.K., which has launched an eBooks store and acquired 80% of Blinkbox in order to get into on-demand movies. Both Sainsbury's and Tesco offer digital music downloads.

Did Apple and the book publishers get what they wanted?

With all the Sturm und Drang surrounding the eBook price-fixing charges against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster, and the counter-charges that their actions prevented Amazon from establishing an eBook monopoly, a fair question to ask is: Did Apple and the publishers get what they were after? The short answers are "no," "yes" and "don't forget the Law of Unintended Consequences."

Apple: It may have hoped to become a major bookseller by getting the publishers to force all its competitors to sell eBooks at the same price, but if that was its hope, so far it's failed. Apple's eBook market share in the U.S. is, at best, in single digits, while Amazon still controls around 60% of the market and Barnes & Noble has approximately 25% market share.

The publishers: They wrested pricing control for their eBooks away from Amazon and were successful in getting Amazon to raise its prices. They also, at least in part, enabled Barnes & Noble to become a viable competitor to Amazon in the eBook market (although a good part of the credit should also be given to B&N's own strategies, including selling and supporting its Nook tablets and eReaders in its stores.)

The unintended consequences:

1. Amazon moved quickly to develop a supply of titles that are beyond the control of the Big 6 publishers, first by strengthening its self-publishing efforts with the Kindle Direct Publishing program, and then by entering the publishing business itself with Amazon Publishing. Amazon is now competing directly with the Big 6 for contracts with top authors and licenses for popular backlist titles. Had the publishers not taken away Amazon's pricing power, the company probably would have gone much slower in building up its own publishing business.
   
2. Price-fixing lawsuits have been filed in the U.S. by the Federal government, 16 state governments and private individuals, and in Canada by private individuals. Lawsuits are being considered by the European Commission and Australia. These lawsuits have the potential to cost Apple and the publishers hundreds of millions of dollars in damages and legal costs, not to mention years of management distraction, reputational damage and constraints on how they do business. Hundreds of millions of dollars may be negligible to Apple, which has $110 billion in cash and equivalents, but the cost is much more significant to the publishers. 

Given Apple's inability to turn the deal into significant market share and the publishers' inability to keep Amazon from maintaining control of a majority of the U.S. eBook market, it's hard to argue that Apple's and the publishers' actions were worth the cost.

David vs. Goliath? How about Goliath vs. Goliath?

In the U.S. Federal, state, and private eBook price-fixing lawsuits against Apple and five of the Big 6 publishers, some observers have equated the battle to David vs. Goliath. The defendants are David and Goliath is Amazon, which, they argue, would have monopolized eBooks and wiped out the publishers if they hadn't imposed agency pricing. The problem with both the analogy and the rationalization is that most of the Davids are actually Goliaths. Here's a rundown:

• Apple: Until recently, it was the most valuable company in the world, with $100 billion of cash and equivalents on its balance sheet and profit margins that Amazon, and the other defendants, would kill for. 2011 revenues: $108.25 billion.
• Hachette: The second-largest publisher in the world, and a division of Lagardère Group, which owns magazines including ELLE and Paris Match, a variety of television broadcasters in Europe, a network of duty-free shops, and 7.5% of EADS, which is the parent company of Airbus. Parent company 2011 revenues: $10.02 billion.
• HarperCollins: A division of News Corporation, which owns Fox, The Wall Street Journal (which has been one of the most vocal critics of the Justice Department's lawsuit,) the New York Post, a bunch of newspapers in the U.K. (which are embroiled in an ever-widening phone hacking scandal,) newspapers and broadcasters in Australia, 39.1% of British Sky Broadcasting, and a lot more. Parent company 2011 revenues: $33.4 billion.
• Macmillan: A division of Georg von Holtzbrinck Publishing Group, owner of Macmillan Education, Nature, Scientific American, several German publishers and the newspaper Die Zeit. Privately held; parent company 2010 revenues: $2.98 billion.
• Penguin: A division of Pearson PLC, the world's largest education and trade book publisher; owns Pearson Education, the Financial Times and 50% of The Economist. Parent company 2011 revenues: $9.45 billion.
• Simon & Schuster: A division of CBS Corporation, which owns the CBS television network, multiple television and radio stations in the U.S., Showtime, CBS Television Distribution (which used to syndicate Oprah and still syndicates Dr. Phil and other shows,) and CBS Interactive (which owns CNET among other Internet properties.) Parent company 2011 revenues: $14.2 billion.

Amazon is certainly no slouch; its 2011 revenues were $48 billion. However, that compares to total revenues of the defendants of $178.3 billion. Even if you leave Apple out of the comparison, the parents of the five publishers had revenues of $70 billion. You can argue that publishing is only a small portion of the revenues of some of the parent companies, but books only represent a small portion of Amazon's revenues as well. In 2011, Amazon's media sales, which include books. music and video, were $6.01 billion--12.5% of the company's total revenues.

In short, the conflicts between the five publishers and Amazon aren't David vs. Goliath--they're actually Goliath vs. Goliath. When Apple is added into the mix, it's Amazon that could justifiably be called David.

It's On: U.S. Justice Department sues Apple and five publishers for eBook price-fixing, settles with three of the publishers

The long-rumored eBook price-fixing lawsuit against Apple and five of the Big 6 publishers (Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster) was filed in Federal court in New York today by the U.S. Justice Department. In addition, the Attorneys General from Texas, Connecticut, Ohio and Pennsylvania are filing their own lawsuits today in Federal court in Texas. Here's a summary of U.S. Attorney General Eric Holder's remarks:

• Hachette, HarperCollins and Simon & Schuster agreed to a settlement, which must be reviewed by the court, with the following terms: 
• The publishers will go back to the wholesale model and allow retailers to set their own prices for eBooks.  Update: Publishers Lunch Direct has clarified the situation (and given the actual verbiage in the settlement, I use the word "clarified" advisedly.) The three publishers will be allowed to continue to offer agency contracts, and they can use variable commissions and discounts to encourage resellers to limit their discounting of eBooks to consumers. However, they can't prohibit resellers from offering discounts. Publishers Lunch Direct claims that this clause prohibits resellers from selling eBooks below the retail price less commission set by the publishers, but I don't read it that way: Resellers can sell eBooks at any price they choose and take as much of a loss as they want. In addition, resellers can refuse to purchase on agency terms, but publishers can refuse to sell to them.
• They will terminate their "Most Favored Nation" agreements with Apple, Amazon, Barnes & Noble and other eBook retailers. 
• They're prohibited from placing constraints on resellers' ability to offer discounts on eBooks for two years. 
• They're prohibited from conspiring or sharing competitively sensitive information with their competitors for five years. 
• They must implement a strong antitrust compliance program. 
• Justice charges that the defendants held regular, near-quarterly meetings to discuss confidential business and competitive matters as part of a conspiracy to raise, fix and stabilize retail prices. 
• They also mutually agreed to seize pricing authority from resellers, agreed to pay Apple a 30% commission on eBooks sold through the iBookstore (and to impose the same 30% on other resellers,) and used most-favored-nation provisions to guarantee that no reseller could sell their eBooks at a price lower than Apple's. 
• According to the statement, "...one CEO allegedly went so far as to encourage an e-book retailer to punish another publisher for not engaging in these illegal practices." 
• Acting Assistant Attorney General Sharis A. Pozen quoted from the complaint as follows: "One executive said that, 'the goal is less to compete with Amazon as to force it to accept a price level higher than 9.99.' And yet another said, 'we’ve always known that unless other publishers follow us, there’s no chance of success in getting Amazon to change its pricing practices.' Our complaint also quotes Apple’s then-CEO Steve Jobs as saying, 'the customer pays a little more, but that’s what you [he’s referring to the publishers here] want anyway.' As you can see, we allege that these executives knew full well what they were doing. That is, taking steps to make sure the prices consumers paid for e-books were higher." 

Apple: Don Quixote de Cupertino?

Update, April 11, 2012: Bloomberg is reporting that the U.S. Justice Department filed suit this morning against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster for eBook price-fixing; Hachette, HarperCollins and Simon & Schuster settled with the Government.

Bloomberg reported that Apple, Penguin and Macmillan are unlikely to agree to a settlement with the U.S. Justice Department over eBook price-fixing accusations, and are preparing to go to court. The three other publishers in the case, Hachette, HarperCollins and Simon & Schuster, are said to be very close to agreeing to a settlement with the Justice Department.

Regular readers of my blog know my opinion on the subject: There's very strong evidence, even if circumstantial at this point, that the publishers imposed agency terms on all of their resellers at almost exactly the same time, including the exact same commission rate, and that all of them threatened to stop supplying eBooks to any reseller who refused to agree. Apple's precise role in the scheme isn't clear, but it's known from Steve Jobs' own words that Apple proposed the scheme to the publishers and knew that it included the part about refusing to sell eBooks to any reseller (including Amazon) that didn't agree.

Apple may believe that it didn't coordinate the actions of the publishers (or that it's covered its tracks well enough that the Justice Department can't prove that it did coordinate their actions.) It may also not want to agree to a settlement for fear of its impact on the civil price-fixing case underway in New York. However, in my opinion, Apple is taking a huge risk by not settling the case before it goes to court.

As it looks now, Hachette, HarperCollins and Simon & Schuster are close to a settlement. If they settle, they'll enter into what's called a consent decree, which doesn't require them to assume guilt for the charges. They'll be required to change their business practices, possibly pay a fine, and agree to court supervision for a limited period of time. The pain and reputational damage will be over quickly. For Apple, Penguin and Macmillan, however, their senior executives are in for months of depositions, they'll be required to provide many thousands of documents as part of the discovery process, and the court trials and appeals will likely take years to play out.

In addition, the Justice Department will be able to compel Hachette, HarperCollins and Simon & Schuster to testify against the other three companies. They'll have immunity as a result of their settlement, and they'll have no reason to protect their competitors or Apple. This is a standard part of most price-fixing cases: One or more defendants cut early deals with the Justice Department and gain immunity, and then they provide evidence against the other players in the price-fixing scheme.

The worst possible outcome for Apple would be for it to lose in court, even if it eventually wins on appeal. All they have to do is look at Microsoft to witness the damage that could be done. That case was eventually settled with a consent decree, but Microsoft was under court supervision for ten years. The company could no longer pursue the aggressive tactics that it had used in the past to suppress competition. Most importantly, it became a convicted monopolist, which changed both the public's perception of the company and the stakes for any future litigation. (When Bill Gates eventually passes away, stories about his philanthropy will have to share time with the videos of his depositions.) The press was no longer afraid of retaliation by Microsoft's public relations department for running negative stories, and Microsoft lost control of its messages.

Apple is unafraid of litigation, as witness its myriad lawsuits against Android licensees. In Walter Isaacson's biography, Steve Jobs clearly saw Android as not only a theft of Apple's intellectual property by Google, but a personal betrayal by Google Chairman Eric Schmidt, who served on Apple's board of directors for years. Jobs swore that he would spend Apple's entire cash horde, if necessary, waging "thermonuclear war" on Google and Android.

Unfortunately for Apple, its cases against Samsung, HTC and Motorola have been far from the "slam-dunks" that Jobs thought they would be. Apple has estranged perhaps the most important component supplier for its mobile products, Samsung, and it's being forced to bring alternative vendors up to its quality and deliverability standards. For example, Apple had planned to launch the new iPad with three LCD vendors, LG, Samsung and Sharp, but only Samsung was able to meet Apple's quality requirements and ship in the necessary quantities in time for the launch. In addition, some of Apple's own patents are being challenged and could be invalidated.

Apple, like Don Quixote in Cervantes' novel, enjoys its battles. Unlike Quixote, however, Apple's opponents fight back, and are likely to hurt Apple much more than Apple hurts them.

Library eBooks: A simple solution to a difficult problem

Whether school and public libraries should have access to eBooks depends on what kind of a publisher you are. If you're a smaller general or specialty publisher, it's not an issue--your company most likely already supplies eBooks to libraries. However, if you're one of the Big 6 trade publishers, there's a 66% chance that you don't offer eBooks to libraries at all. Only HarperCollins and Random House offer their eBook titles to libraries, and both companies apply significant restrictions: HarperCollins titles can only be checked out 26 times before they have to be repurchased, and Random House recently tripled the cost that libraries pay for their eBooks. Penguin, which once sold eBooks to libraries, has pulled out of the market, and Hachette, Macmillan and Simon & Schuster don't sell eBooks to libraries at all.

Publishers that either don't sell to libraries or sell with restrictions argue that library eBook lending cannibalizes potential sales of both eBooks and print. They say that it's as easy to borrow an eBook as it is to purchase one from Amazon or Barnes & Noble. Print books require patrons to visit their local library in order to check-out and return them, and publishers want libraries to implement a similar kind of "friction" when lending eBooks (although publishers generally won't go on the record about which kinds of "friction" would be acceptable.)

A variety of solutions have been suggested, from forcing patrons to physically visit a library in order to check-out eBooks, to slicing and dicing collections and parceling out different pieces at different times to libraries. In my opinion, forcing patrons to visit libraries in order to check-out eBooks completely negates the value of the Internet and online access. It takes the progress of library access back almost 20 years. As for making available different batches of titles at different times, that's likely to become a formula for patron confusion. Consider two titles, published by the same publisher on the same day. One could be available for lending immediately, but the other might not be available for months, if ever. Who will explain that to patrons? Librarians, of course, who have better things to do with their time.

I'd like to suggest a simpler, easier approach to the entire problem for those Big 6 publishers who are afraid of what libraries will do to their businesses: Delay the release of their eBooks to libraries. If your street date for a title is X, release the eBook version to libraries at X plus 90 or 120 days. That enables the retail channel to absorb the initial demand, and those consumers who have to read the title right away will buy it. The technical name for this approach is windowing, and it's been done by the motion picture industry for decades. In the movie business, there are many windows (for theaters, pay-per-view, DVD/Blu-Ray, streaming, pay cable, free cable/broadcast, airlines, etc.), but a single window for library eBooks would be much simpler to understand and explain.

If publishers are serious about supporting libraries and aren't looking for ways to discourage eBook borrowing by making it as difficult and confusing as possible, a single library eBook window would be the best way to protect publishers' financial interests (at least until eBooks become the primary book format) while providing library access to all eBooks in a reasonable amount of time.

What would you rather have: A monopoly or price-fixing?

Last week, The Wall Street Journal reported that the U.S. Justice Department has warned Apple and five of the "Big 6" trade publishers (Macmillan, Penguin, Hachette, HarperCollins and Simon & Schuster) that it's planning to file suit against them for price-fixing as a result of their implementation of agency pricing for eBooks. Here's a brief overview (and a disclaimer: I'm not a lawyer, and this isn't legal advice):

Until 2009, virtually all publishers in the U.S. sold their books (both print and eBooks) to resellers under the wholesale model. Typically, books would be sold by publishers to resellers at 50% of their suggested list prices--the prices printed on the book covers. Resellers were then free to resell the books at any price they desired. This was the model (along with co-op payments for display locations at the front of bookstores and preferred positions on bookshelves) that Barnes & Noble and Borders used to drive hundreds, if not thousands, of independent booksellers out of business with discounting. In many cases, the "big box" booksellers sold books for less than the price that independent booksellers paid to buy them.

Amazon used the same model to launch its entry into the eBooks business. Amazon's strategy was to sell all its eBooks for $9.99 or less, even if that meant selling them below the wholesale price. Amazon quickly controlled as much as 90% of the U.S. eBook market.

In 2009, as part of its entry into the eBook business, Apple proposed a different model to the Big 6 publishers (all of the companies under investigation plus Random House), which became known as agency pricing. Under agency pricing, booksellers don't actually purchase the books that they sell to customers--instead, they act as "agents" for the publishers and take a commission on each sale, which Apple set at 30%. Since the booksellers don't own (take title of) the books, the publishers can set the prices, and the booksellers are obligated to sell the books at that price. Five of the Big 6 publishers implemented agency pricing for their eBooks (Random House waited a year before it implemented agency pricing, which is why it's not under investigation.)

The five participating publishers went to their resellers at approximately the same time, and told them that, regardless of when their existing distribution contracts were to expire, their contracts would be immediately amended to require agency pricing of eBooks. Any reseller who refused would have their supply of eBooks cut off. The first skirmish was between Amazon and Macmillan--Macmillan implemented agency pricing and Amazon briefly stopped sales of all Macmillan titles, but soon relented. That opened the floodgates, and Amazon agreed to agency terms from the four other publishers (although it has refused to accept agency terms from any additional publishers except for Random House).

So far as consumers are concerned, the net result of agency pricing is that prices of eBooks from the Big 6 publishers have gone up substantially, from $9.99 to as much as $16.99. eBooks from the Big 6 were once less expensive than paperbacks; now, in many cases, they're more expensive. In some cases, eBooks are even more expensive than the discounted price of hardcovers.

Both the U.S. Justice Department and the European Union are investigating Apple and the five publishers for price-fixing. The external evidence is that all five publishers implemented the same pricing policies at the same time, and all five threatened to cut off supply to any reseller who refused to agree to the new terms. In Walter Isaacson's biography of Steve Jobs, Jobs is quoted as saying:

"We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.' 

Jobs continued, "They went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books."

That certainly gives the appearance of an organized effort to raise prices, orchestrated by Apple and executed by the five publishers. Publishers and their defenders argue that agency pricing is necessary to prevent Amazon from getting a monopoly in the eBook market, which, while only 20% or so of the "Big 6" publishers' sales, is likely to become 50% or more in a few years. A monopoly would give Amazon control over pricing. Advocates of the government's position say that the actions of Apple and the five publishers have substantially increased consumer prices for eBooks, and that it's hypocritical for companies like Barnes & Noble to support agency pricing when they used wholesale pricing to wipe out their independent competitors.

One of the most important things to understand about U.S. antitrust enforcement is that it's illegal to be a monopolist, but it's not illegal to have the potential of becoming a monopolist. At the time that Amazon had a 90% eBook market share, the eBook market was new ("nascent") and both small in units sold and dollar volume.  The Justice Department almost never goes after a monopoly in a nascent market. Today, Amazon has between 60% and 65% of the U.S. eBook market--a big share to be sure, but not a monopoly. If agency pricing went away tomorrow and Amazon went back to its old pricing strategy, it's very unlikely that the millions of people who own Nooks and eBooks from Barnes & Noble, Apple and other resellers would throw away their eReaders, tablets and eBook collections and start buying from Amazon. So, Amazon didn't have a monopoly, doesn't have a monopoly now and isn't likely to have one in the future.

On the other hand, price-fixing is illegal, and it doesn't even require a formal agreement among the parties to prove that price-fixing exists. There's no question that agency pricing has raised priced for consumers, at least for titles from the "Big 6". (Statistics rolled out by some defenders of agency pricing that show that eBook prices have dropped also include titles from self-publishing authors, some of whom sell their eBooks for as little as $0.99.)

Publishers argue that Amazon is a very difficult company to do business with, and all the evidence I've seen supports them. However, tough bargainers are a fact of life: Wal-Mart has made the lives of vendors miserable for years while pursuing an "Always the Lowest Price" strategy, but vendors have learned to live with it. Taking illegal action to prevent a company from becoming a monopoly is still illegal.

My year-end waste of time: Predictions for 2012

I've decided to participate in one of the most potentially embarrassing annual blogging rituals: Predictions for the coming year. So, for what it's worth, here are my predictions for 2012, in no particular order:

eBooks and Publishing

• Both the European Commission's Directorate for Competition Law and the U.S. Justice Department will file suit against Apple and five of the "Big 6" trade publishers (Lagadere's Hachette publishing group, News Corporation's Harper Collins, Holtzbrinck's Macmillan, Pearson's Penguin Group and CBS' Simon & Schuster) for eBook price-fixing under the agency pricing model. Bertelsmann's Random House most likely won't be charged, because it joined in agency pricing long after the other five publishers. All the companies charged will strongly deny any conspiracy to fix prices, but they'll all eventually agree to a consent decree (and the European equivalent) before the cases go to court. The settlement will require Apple and the publishers to make cash payments for consumer damages, and the agency model will be discarded. eBook distribution will go back to the wholesale model.
• There's also a possibility that the U.S. government and European Union will use the antitrust litigation as a lever to force the Big 6 to make their eBooks available to libraries on commercially reasonable terms. Currently, only Harper Collins and Penguin make their titles available for library lending, and both companies impose significant restrictions.
• eBook sales in early 2012 will follow the same pattern as the last few years--there will be a huge burst of sales in January and February as millions of consumers who received eReaders and tablets as holiday gifts stock up on titles. However, the year-to-year growth rate in eBook sales will drop, due both to the increased share of eBooks as a percentage of all book sales and higher prices from the Big 6 publishers.
• Even though the growth of eBook sales will slow, print sales will continue to decline. Independent booksellers in the U.S. won't pick up the slack from the closure of Borders, nor will they make big strides in increasing their overall share of U.S. book sales.
• The Big 6 publishers' pricing policies will continue to encourage sales growth for smaller publishers and self-publishing authors, as consumers experiment with less-expensive titles and find that many of them are just as good as titles from the top publishers.
• While the number of titles from medium, small and self-publishers continues to grow, the Big 6 will continue to cut back on the number of titles that they release, focusing even more on pre-sold authors and titles, series and backlist titles that are reissued with a variety of value-adds.
• The "eSingle revolution" (short eBooks, no more than 50,000 words and typically 30,000 words or less) will grow, with more conventional book publishers offering titles. In addition, more media companies from other fields (magazines, broadcasting, cable and the web) will enter the eBook market with eSingles, either by themselves or in partnership with established book publishers.
• $99 will become the top-end price for dedicated eReaders sold in the U.S.; someone (probably Amazon) will go to $49-$59 for an entry-level model. The ad-supported/no-ads issue will become moot, as consumers show that they're perfectly happy with a cheaper, ad-supported eReader.
• The tablet market in 2012 will look very much the same as the market at the end of 2011: Apple will continue to dominate the high end of the market, with two lines of tablets: A new "iPad 3" (although I'm not sure that'll be its name) at the current iPad 2 prices, and the existing iPad 2, possibly with fewer storage and broadband options, at $100 or so below its current prices (for example, $399 for a 16GB model). At the low-end, a variety of tablets will compete in the $149 to $249 range, led (at least for the first few months) by Amazon. I wouldn't at all be surprised to see Barnes & Noble drop prices of both the Nook Color and Tablet by $50, to $149 and $199 respectively.

Cameras & Camcorders

• We're almost certain to see new cinema camera models from Canon in 2012. The prototype cinema camera based on the EOS body will be launched, as well as at least one new model in the C3XX range, with improved electronics including auto-focus, auto-aperture and auto white balance and 10-bit log output. The new EOS model could be announced as early as NAB in April, and the new C3XX model is likely to be shown at IBC in September.
• Panasonic's AG-AF100/101 is getting a little "long in the tooth", so I expect a refresh of the model in time for NAB in April. I also expect the GH3 to be announced in the first half of the year.
• Given all of Sony's 2011 EVIL, DSLR and camcorder announcements, I don't expect any big announcements from Sony in 2012.
• AVCHD 2.0 (also called AVC Progressive) will become ubiquitous on all new cameras and camcorders supporting AVCHD.

Motion Pictures

• We'll see major consolidation at the U.S. movie studios, like what we've already seen at Paramount, with even deeper cuts. Studios will become even more conservative about which titles they greenlight for production, continuing to focus on remakes, series and pre-sold titles (very much like the big publishers). This risk minimization strategy will lead to even more boxoffice and home video revenue declines.
• Online movie rental services such as Netflix and Amazon will continue to increase their share of home video revenues, but what could have been a huge win for Netflix will be a much more competitive market, due to Netflix's self-inflicted wounds from 2011.
• Studios will rethink the value of 3D given audiences' rejection of the format, and will put more effort into using 3D well on a smaller number of "event" titles. That means that 2D-to-3D conversion, which has never worked well, will go away. Studios will have to come to grips with the fact that 3D, like Blu-Ray before it, will not be their financial savior. Even well-done 3D won't save movies that audiences don't want to see.
• UltraViolet, the "online digital locker" system supported by most of the major studios, will fail to get significant market share, although the studios won't give up on it in 2012. Consumers will find it too hard to use, not worth the effort and not a compelling reason to go back to buying DVDs and Blu-Ray discs.
• With an handful of exceptions, independent films will reach audiences through VOD and online streaming services, not through theatrical exhibition or sales of physical media.

HarperCollins puts limits on library eBook lending

According to Library Journal, last Thursday, OverDrive, the leading supplier of eBooks to libraries in the U.S., sent a letter to its customers that stated, in part:

[W]e have been required to accept and accommodate new terms for eBook lending as established by certain publishers. Next week, OverDrive will communicate a licensing change from a publisher that, while still operating under the one-copy/one-user model, will include a checkout limit for each eBook licensed. Under this publisher's requirement, for every new eBook licensed, the library (and the OverDrive platform) will make the eBook available to one customer at a time until the total number of permitted checkouts is reached.

OverDrive didn't state which "certain publisher" had ordered the new licensing terms, but Library Journal learned that it was HarperCollins. Under its new terms, its eBooks can be checked out a maximum of 26 times before they have to be repurchased or discarded. According to the article, HarperCollins based the 26 times number on how many two-week checkout periods fit into a year.

Print books in libraries eventually wear out due to usage, and have to be discarded or replaced. Publishers get to resell the same titles to libraries for replacement, until the libraries decide to take them out of their collection. On the other hand, eBooks never wear out, so an eBook sold to library would never need to be replaced. To protect its stream of replacement revenue, HarperCollins is implementing eBooks that wear out, at least contractually.

There are many problems with HarperCollins' policy:

• This licensing change reinforces the fact that customers don't purchase eBooks, they purchase a license to use them.
• Print books wear out at different rates, depending on how they were bound. Some companies that sell to the library market offer bindings with lifetime guarantees--so long as the title remains in print, if a copy wears out, it will be replaced at no charge. HarperCollins' new model ignores all that and says that an eBook should last a year.
• The 26-loan limit is bad enough for public libraries that have two-week lending periods, but it's far worse for school libraries that typically have lending periods from three to seven days. A popular new title could "wear out" and have to be repurchased in less than three months.

If this new policy doesn't spread beyond HarperCollins, I suspect that libraries will boycott their titles and the damage will end there. However, if other major publishers implement the 26-time rule, it could greatly impact the adoption of eBooks by libraries. Even worse, if other publishers implement their own variations of the rule (for example, one requires repurchases after 15 loans, while another limits the number of loans to 50), it will be virtually impossible for libraries and eBook suppliers to keep track of all the rules.

HarperCollins and OverDrive will roll out the new licensing terms next week, and I expect public and school libraries to react very negatively. Their reactions may dictate how widely, and even whether, other publishers adopt HarperCollins' rules.