Why everyone is probably wrong about the DoJ ebooks case

Thu Apr 19 2012 16:49:34 GMT+1000 (AEST)

I didn’t mean to write a post about this, but I couldn’t help myself.  Some of you won’t like what I have to say.  I have been following the Department of Justice versus Apple and the Big Five case for a little while now.  Or rather, I have been following the commentary online.  Reading the posts and the comments, there seem to be two main themes - either what could be loosely summarised as “DoJ #FAIL” or “Amazon gives me cheap eBooks what’s the problem?”  Let’s take a moment to embrace the assumption that the legacy publishing industry will continue to exist and examine both arguments.

DoJ #FAIL

There appear to be many people who don’t actually understand what the US Department of Justice is alleging and what their job is.  The claim is that several major publishers and Apple colluded to fix eBook prices.  The Department of Justice is not empowered to pass judgement on Amazon’s business model, unless it breaches US law, and nobody appears to have any evidence that it does.  The Wall St Journal reports that Macmillan CEO John Sargent complained the decision will “have a very negative and long-term impact on those who sell books for a living” but this misses the point.  Jordan Weissman in the Atlantic also wanders into the irrelevant when he complains that “Amazon isn't simply a garden variety retailer, or a helpless, well-meaning innovator.”  The Department of Justice is required to investigate when businesses appear to be colluding on price.  Whether their competitors are large and successful or not doesn’t matter.  Whether the people running the businesses believe colluding on price is the only way to maintain a profit is also of no import.  It is not the DoJ’s job to keep publishers’ and writers’ incomes high, but rather to keep the price consumers pay low.  The law states that you can’t collude to artificially hold up the price consumers pay.  Everything else is noise. If publishers can’t work out how to make money from $9.99 eBooks, then so be it.

Amazon gives me cheap eBooks what’s the problem?

The problem is that although it is not the Department of Justice’s job to make publishers’ lives easier, Amazon still currently holds what amounts to a virtual monopoly on the sale of eBooks.  Estimates I’ve seen range from 70% to 90% of the entire market which even at the lower end is still high enough to be overwhelming.  When you buy an Amazon ebook you will only ever be able to read it on a Kindle or within a Kindle app. When you buy a Kindle you will only ever be able to read books you bought from Amazon in AZK format or ebooks in PDF or ePub format that don’t have DRM restrictions.  So once Amazon has you it’s very difficult to escape, because your books can’t be transferred between devices.

The other issue is that, as Charles Stross has noted in his excellent overview of this issue, Amazon could be said to be engaging in predatory pricing.  By charging less than it costs publishers to produce an eBook, Amazon is ensuring that nobody else can charge less than them. Although Apple could in theory have spent some of its mountain of cash in a price war with Amazon, nobody else can afford to burn money like that.  Once the competition is gone, Amazon can increase prices again or simply use cheap ebooks as a way to sell something else, like expensive Kindle readers or simply other goods once they have hundreds of millions of customers.

A monopoly of the publishers' own making

The complaint of many is that Amazon has a monopoly and it is therefore they who should be under investigation.  This argument may have a small amount of merit due to the factors above, but there are a few problems.  The main reason for Amazon’s stranglehold on ebook sales is the publishers’ own pig-headed insistence on a model that has already failed once before - Digital Rights Management.  By insisting on DRM, publishers have pushed out small independent online retailers and ensured Amazon maintains control over ebook sales through it’s domination of the ebook reader market.  Since Kindles don’t read non-DRM ebooks, publishers insisting on DRM cede their power to Amazon.  Basically, Amazon has a monopoly of the publishers’ own making.

If publishers want to survive, they need to end the use of DRM. One senior Hachette executive publicly stated that he thinks it is unnecessary just a few weeks ago - if Hachette’s board have any brains they’ll listen to him.  Removing DRM means suddenly Amazon loses some of the lock-in powers of the Kindle, whilst also making non-Amazon ebooks more valuable to customers because they are transferable to whichever device is most convenient.

Disaggregation and Wordpress for eBooks

So far we haven’t covered anything not already commented upon.  But there has been something missing from most of the commentary I’ve seen.  In all the discussion around this case, there has been an implied assumption that an ebook market requires publishers to exist - in their current form if not the exact same companies.  I think this is profoundly flawed.

Amazon itself now has a system for authors to publish directly through Kindle Direct.  This is a first step, but it is simply a horizontal expansion of a retailer into production.  The real revolution will come when enough authors realise that publishers are no longer necessary.  In his recent book Cognitive Surplus, Clay Shirky writes about the origins of the publishing model.  The whole basis of the system is seventeenth century economics, whereby the owners of expensive printing presses needed to find new content to print.  Because each print run was a risk, those printing the books needed to ensure that the books they printed were high quality, well advertised and widely distributed.  Hence the integrated publishing house which combines editorial, typesetting, printing, marketing, distribution and sales.  Although some of these functions have been outsourced in recent years (notably physical printing, the whole basis of the original system), the concept of an integrated ‘publishing company’ is still alive and well.  The problem these companies have is that it will not be too much longer before authors realise that ebook publishing does not require publishers at all.

The real threat to publishers is not Amazon or even piracy, but disaggregation. There is no good reason for all the things publishers do to be done together by the same organisation.  What is needed to produce high quality ebooks and make money for authors is good writing, careful editing, clever marketing and an efficient distribution platform.  They can all work separately from each other.

Independent authors would keep their copyright, and may even choose a variation on Creative Commons licensing for particular uses (eg for students).  Editing might be a service authors pay editing agencies to perform for them, either through a direct cash payment or through a percentage of profits.  Marketing is now possible with a small investment of time by the author through social media, but may also be done by generalist or specialist marketing companies, depending on the means of the author and estimated potential readership.  Alternatively don’t discount the emergence of some kind of authors guild acting as a member-funded marketer.  Finally, the opportunity is there for a Wordpress-style open source distribution platform to hit Amazon where it hurts.

The main reason Amazon has such a monopoly is the same reason Facebook has a ‘monopoly’ on social sharing - breadth.  Authors wanting to self-publish ebooks are told they have to be on Amazon, because that’s where everyone is.  Readers often only look on Amazon, either because they are locked into the Amazon-Kindle system or simply because experience shows them it has a huge range at the cheapest price. Because ebooks are fungable goods, (or arguably, fungable services) being sold in a frictionless and almost entirely transparent marketplace, whomever sells at the cheapest price is likely to get the vast majority of sales. At the moment authors have few choices about where they sell.  They can hand over 30% of their income to Amazon, hand over 30% of their income to Apple and hope the censor doesn't block them, or hand over 40% of their income to Smashwords. It shouldn’t be particularly difficult for appropriately keen coders to develop an open source system along the lines of Wordpress whereby authors or small cooperatives can maintain autonomy in publication, but utilise the benefits of a common searchable database.  Once that happens and reaches a large enough size, suddenly Amazon and Apple look very vulnerable.  When you can get the benefits of a large unified database and only pay 2.5% to PayPal to handle payments, why would you cop a 30% Amazon tax?  When you are selling your ebook for a 20% discount compared to Amazon or iBooks, why would I buy from them?

The best way to predict the future is to invent it

This is not a prediction.  I don’t know what is going to happen with ebooks.  Some, like Eli Neiberger, argue that ‘bits have no value’ and soon ebooks are likely to be virtually impossible to monetise.  I don’t subscribe to this view, but I think it’s more likely than the current model continuing.  What I do know is that the future of books is not the present of books. I know that if you concentrate on the legacy container instead of the contents you will go out of business.  And I know that librarians need to understand all of these things, and work out what they’re going to do to ensure they are still able to provide their communities with the information and cultural works they need and want.

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Inventing the future