Monday, July 14, 2014

Amazon and the ebook "price fixing" debate

A lot of folks irresponsibly use legal and economic terms without clearly understanding what they mean. 

Case in point: In the ongoing pricing dispute between and Hachette, advocates for the publisher have recently begun charging with "price fixing":

"Brooke Warner, publisher of She Writes Press in Berkeley…said, "I think Hachette is making a statement in taking Amazon on, and they're being championed by the publishing community because that's something no one has been able to do." Warner added, "Amazon is author-friendly but not publisher-friendly. 
The question I have is, 'Is Amazon devaluing intellectual property?' If you write an 80,000-word book and Amazon prices it at $2.99, is that right? If you self-publish through Kindle, Amazon controls the prices. They force authors to price their books between $2.99 and $9.99. If you do that, you get a 70 percent royalty. If you price it below $2.99 or above $9.99, you only get a 30 percent royalty. To me, that's price fixing."
The classic definition of price fixing involves ostensible competitors secretly colluding to maintain higher prices

To cite the most simple example: Suppose that the CEOs of Exxon-Mobil, Marathon, and Shell were to collude to maintain the price of gasoline at $3.95 per gallon in the U.S. Besides being a violation of antitrust laws, this would be an example of anticompetitive price-fixing, and therefore, illegal.

But this is not an accurate metaphor for what Amazon is doing. Amazon is not in competition with publishers and authors. Publishers and authors are part of's supply chain.

When Walmart, Foot Locker, Bass Pro, or any other retailer signs a contract with a member of its supply chain, you can bet that the retailer always conveys pricing expectations. 

This is because retail space (whether physical or virtual) has a scarcity value. Retailers want to sell goods so that both they and their suppliers can generate cash flow and turn a profit. 

Foot Locker doesn't want to stock running shoes that sticker at $500. Why? In the absence of some very special and unique features, $500 running shoes would never sell. They would remain on the shelves forever. (Most running shoes cost between $40 and $80.)

What Amazon is doing is setting expectations for its suppliers (authors and publishers) in order to maintain ebook prices at a competitive level. As Brooke Warner notes, Amazon strongly incentivizes ebook prices in the range of $2.99 and $9.99. In return, it gives independent publishers a 70% share of the revenue. (This is superior to what any author (even Stephen King, I would suspect) receives from a traditional publisher's contract.) 

Does this mean that Amazon is "devaluing intellectual property?" Well, you'd might as well claim that Foot Locker is "devaluing the running shoe" when it refuses to stock $500 shoes. 

Amazon clearly wants to incentivize Kindle ebook sales. This isn't going to happen if there is not a significant price break to the consumer who forgoes a physical copy and contents herself with electronic data bytes. Amazon recognizes that ebooks priced like hardcovers are not competitive in the marketplace. 

In all this talk of "price fixing" we see yet further evidence of two conditions that prevail among authors: Most of them don't have a solid grasp of business principles; and they tend to be a touchy, easily offended lot. They over-personalize everything.

Writing may be an art, but book retailing is a business. Amazon is not engaging in anticompetitive "price fixing". Amazon is trying to make ebooks more price-competitive and attractive to consumers. This is an important distinction.