Department Of Justice Joins E-book Pricing Probe

The U.S Department of Justice has joined its counterparts in the European Union in looking into the pricing of e-books. A Justice Department spokesperson confirmed that the agency’s probe was concerned with the possible “anticompetitive practices involving e-book sales.”

The news comes on the heels of European regulators’ announcement of an investigation into five of the largest international publishers—Hachette Livre, Harper Collins, Simon & Schuster, Penguin, and Macmillian—and Apple for possible “illegal agreements or practices that would have the object or the effect of restricting competition.”

Although details of the DoJ’s probe haven’t been disclosed, some speculate the effort will likely follow along the lines of the European investigation. Regulators there are trying to determine if publishers illegally worked together to raise prices on e-books by changing how they are sold.

The Los Angeles Times reports that the U.S. Justice Department, European regulators, and attorneys general in Connecticut and, reportedly, Texas are trying to determine if such pricing practices harm market competition and, ultimately, consumers.

Justice Department investigates e-book pricing [Los Angeles Times]

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  1. cheri0627 says:

    I still won’t buy any Kindle book for more than $9.99.

  2. Loias supports harsher punishments against corporations says:

    Welcome to the conversation!

    Like it hasn’t been obvious to everyone else that e-books shouldn’t cost more than a physical book.

    • PlumeNoir - Thank you? No problem! says:

      This is what has prevented me from getting an e-book for so long (although, I’ll probably break down in the next few weeks).

      Yes, I know a lot of classic literature can be had for free, but when e-books cost more than hardcovers? No thanks.

    • Dallas_shopper says:

      Exactly…some of those e-book prices are outrageous. I had always heard that most of the cost of a book was tied up in the publishing and distribution of the actual physical book.

    • caradrake says:

      I don’t think I have ever seen an ebook costing more than its physical (and new) counterpart. Can you provide an example? Amazon frequently has some new paperback releases priced the same for both physical and digital copies, but will also have the ebook cheaper in many cases, depending on the publisher.

    • FatLynn says:

      Why? If consumers want e-books more than physical books, then publishers have every right to charge more. That is not at all what is at issue. It is collusion by the publishers that is a problem.

    • Sad Sam says:

      And if I can do less with an e-book, i.e. I can’t resell it when I’m done, I can’t give it away to someone else, many e-books are not loanable and those that are loanable I can only lend for 14 days. So if I can do less with an e-book, if the costs are lower, the price should be lower.

  3. brneyedgrl80 says:

    I guess I’m just a cheapskate, but all my books are bought used. It pains me to pay brand new full price on a physical book. I couldn’t imagine paying more for a virtual license of a book.

    • Overshoot says:

      I wrote the following online at Amazon:

      To make things worse for the publisher, rather than buying reasonably priced Kindle books I’m often buying very inexpensive used books through Amazon (of which the publisher gets *nothing*). I then give them to friends (for which the publisher gets (*nothing*). And I know that my friends then give them to other friends (for which the publisher gets *nothing*). Eventually they make their way to Goodwill or recycling (and the publisher gets *nothing*).

      Publishers need to wake up and understand that their business, profit opportunities, and customers are radically different than they think they are.

    • vivalakellye says:

      Even better, I check mine out from the library. If I can’t find a book at the library, I’ll buy it new or used on Amazon.

  4. framitz says:

    Apple involved in price fixing? I believe it based on past history.

  5. Blueskylaw says:

    E-books priced more than their print edition.

    How could this possibly be? Paper costs more than electrons, so surely e-books should be cheaper, right?

    Believe it or not, this isn’t a glitch. And it’s not happening because publishers are asleep at the wheel either.

    Come down the rabbit hole with me into the wholesale/agency tunnel, and I’ll tell you why this is happening.

    Ye Olde Wholesale

    First, as always, we have to start with some dry background information. For a very long time publishers have had a system where they set the suggested retail price and take roughly half of that. Whatever the bookseller wants to charge from there is their business.

    So, napkin math, if a book is listed with a $24.99 cover price the publisher would get about $12.50 of that, which they would split with the author, cover their costs, hopefully make a profit, etc. (Further background here.)

    If the book sells for $24.99 the bookseller also gets $12.50. Or, if the bookseller discounts it to $19.99, well, that comes out of the bookseller’s take and and the bookseller gets about $7.50. Heck, the bookseller could charge the consumer $10.00 and take a loss. That’s their business. The publisher still gets their $12.50.

    For a long time this system worked without too much disruption. Then came Amazon.

    Enter the Kindle

    A couple of things happened in the past couple of years that had publishers rather nervous.

    First came the Kindle, which enabled Amazon to jump out to a massive early lead in e-book market share. For a while there it looked like Amazon was going to win the e-book war going away, and they were using their massive scale to help further that process.

    Originally Amazon was selling e-books based on the wholesale model. So take that $24.99 hardcover. For every new e-book, Amazon was paying publishers roughly 50% of the hardcover price, or $12.50. Only… for some popular titles they were selling those e-books for $9.99. They were taking a loss on some titles in order to sell Kindles, build market share, and establish a massive early lead with their proprietary e-book format.

    And then during the holiday season of 2009, Amazon engaged in a price war with WalMart, Target and others, and discounted some very popular hardcovers to $9.99. Again, at a loss.

    This created several very pressing concerns for publishers. For one, Amazon was helping devalue consumers’ notion of what a new book “should” cost. And two, they were growing extremely, extremely powerful. Bookstores definitely couldn’t compete with $9.99, and neither could many other e-book sellers, even massive corporations.

    Publishers badly wanted to level the playing field to make sure there was competition in the marketplace. They didn’t want Amazon creating a monopoly and turning up the screws on their terms.

    So…

    Publishers Say Homey Don’t Play That

    Enter the agency model.

    When Apple entered the e-book fray with the introduction of the iPad, they brought with them the app store model: Publisher sets the price, Apple gets 30%, publisher gets 70%. Publishers, who wanted a way to slow down all the deep discounting and create a create a leveler playing field, say heck yeah, and they tell Amazon that’s the new game in town. They raise prices to somewhere between $10.99 and $14.99 for new e-books, and e-booksellers aren’t allowed to discount off of those prices.

    Makes sense, right?

    Well, here’s the thing that’s kind of wacky about the wholesale model vs. the agency model: the publisher made more money per copy with the wholesale model.

    Again, napkin math for a $24.99 hardcover. Let’s say the e-book would have sold for $9.99 at Amazon in the old days but now the publisher charges $12.99:

    Wholesale model e-book:
    Publisher: $12.50 (roughly 50% of $24.99 hardcover retail price)
    Amazon: – $2.50 (selling at $9.99)

    Agency model e-book:
    Publisher: $9.09 (70% of $12.99)
    E-bookseller: $3.90 (30% of $12.99)

    See what’s happening there? Publishers left money on the table to have more control over pricing and so more e-booksellers could compete with the elephant in the Amazon.

    The result: It actually seems to have worked. B&N now claims 25% market share in the e-book world, and with iBooks also going strong the competition in the e-book marketplace that publishers wanted appears to be taking place.

    Where We Are Now

    So now there’s a system in place where print books are still sold based on the wholesale model and e-books are sold on the agency model. This results in…. curiosities.

    Let’s take one of the examples that had Reddit perplexed. THE GIRL WHO KICKED THE HORNET’S NEST is selling on Amazon for:

    E-book: $11.99
    Hardcover: $11.89

    Doesn’t make sense, right?

    Well, here’s how that breaks down between publisher and Amazon:

    E-book: $11.99
    Publisher: $8.39 (70% of e-book price)
    Amazon: $3.60 (30% of e-book price)

    Hardcover: $11.89
    Publisher: $13.95 (50% of $27.95 list price)
    Amazon: – $2.06 (customer price minus $13.95 paid to publisher)

    So… unless there’s some sort of special arrangement there, Amazon is using the hardcover as a loss leader.

    And the publisher would tell you: we can’t control that. All we can do is set our own prices, and what Amazon charges the consumer for print books is their business. Publishers make more money on the hardcover sale, they set the list price for the hardcover at $27.95 and the e-book at $11.99, and they don’t have much incentive to discount the e-book any further than it already is.

    I’m not privy to the strategic discussions at publishers, but if this also has the effect of slowing down the rate e-book adoption or steering people toward the print editions…. I’m guessing they’re probably okay with that. They have print operations to consider and bookstores that they’d like to survive as long as possible. As long as it’s still primarily a print world (and it is), publishers have many rational incentives to protect their print sales.

    But the biggest problem, as that Reddit discussion illustrates, is that it creates a great deal of consumer confusion and angst. It doesn’t make any intuitive sense for e-books to cost more than paper. By keeping e-book prices high, it opens up a huge opportunity for the 99-cent Kindle bestsellers to exploit. Also: As the music industry found out, annoy digital consumers at your peril.

    • tsukiotoshi says:

      Your point about the 99 cent books is well taken. I’ve found a number of great series because the first one was free or 99 cents to $1.99. That of course causes to me to buy the rest of the damn series which often rises in price on the subsequent books.

      Your point about devaluing books is also well taken. Because I remember getting e-books for sub-$5, it gets harder and harder for me to pay more than that for a book, or an electronic one anyway.

    • Draw2much says:

      From my perspective it just looks like these publishers don’t actually want to go digital. They don’t LIKE digital media, they want to keep their paper model going at the expense of a new business model.

      What I mean is, digital should never cost as much as hardcover copies of a book. Hardcover novels are more expensive because of the quality of materials. Paperbacks are cheap because… well… they’re flimsy paper. (Or, well, that’s what publishers have lead everyone to believe.) By that logic, digital copies should start off as *at least* the same price as paperbacks because they aren’t made of any paper at all!

      So yes they can set their terms on pricing, but it ought to make sense. If they want to force Amazon’s prices to be similar to B&N or Apple’s, that’s fine. But they shouldn’t be treating digital copies like they’re hardcover novels, because they’re not.

      If they’re afraid of people buying digital over paper, than maybe they should take a tip from Hollywood. They release Blue-+DVD+Digital bundles and people pay more for them. They could do something similar, having a “free” digital version to go along with the hardcover releases. (If they were REALLY smart they’d only release a stand-alone digital copy at the same time as the paperbacks…. it would force everyone to buy the hardcover novels, which is where they make all their money anyway!)

      Ok, so maybe I’m not making sense. I did try. I might also be wrong. I just strongly suspect that Publishers aren’t in it just to equalize competition. I think they’re trying to slow down the transition, period.

    • phead says:

      Correct but you miss out the important point:

      “Publishers Say Homey Don’t Play That

      Enter the agency model.”

      should say

      “Publishers Say Homey Don’t Play That
      They got together to set prices.
      Enter the agency model.”

      Which we call forming a cartel and illegal price fixing. There is no doubt about it, it is just a question of how involved each company was, and how much the fine will be.

    • absherlock says:

      Okay, here’s the flaw in the logic as I’m seeing it (and if I’m wrong, please correct me):

      if the manufacturers suggested retail price (MSRP) of a print book was $24.99 (the amount the publisher needed to break even and make a profit x 2 to allow for the bookseller to profit), the MSRP of an e-book should have been the $24.99 less the amount the publisher was saving on paper, ink, printing, shipping, etc. According to your explanation, this savings was never passed on by the publisher. Again, if you’ve taken this into account and I missed it, my apologies.

      • SkyeFargo says:

        The ink, printing, binding, and making of the book is the least expensive element of the book’s production. Offset against the extra time and labor involved in having to convert files to ebook formats, quality control those files, and have the process overseen, your talking less than a dollar.

    • PlumeNoir - Thank you? No problem! says:

      Thanks Blueskylaw. I’ll have to take your word for it, but this is a very interesting peek into the rationale. I presumed there was some explanation behind the scenes for the e-book costs being the same as hard cover books.

      Plus, since you went through posting all that, I did want to acknowledge that it wasn’t a tl;dr case. Thanks.

    • SPOON - now with Forkin attitude says:

      And thus is written the demise of the independent new book seller.

    • elangomatt says:

      I wish that you would have included the cost of the printing for the dead tree version of the book and the associated costs like storage and transporting the books too. Even if all of that adds up to just $3 per hardcover book, that still changes the amount of profit for the publisher. If the publisher is getting $12.50 wholesale for their hardcover book, then they would still make the same exact profit as long as their cut of the ebook was $9.50. That is ~$13.50 for the price of the ebook under the Agency model.

  6. maynurd says:

    For what the Ebook readers cost, the books should be free.

  7. Rjones465 says:

    I get mad when I see paperback books on Amazon on a promotion of buy 3 + get 1 free with free shipping but the kindle version is the same base price but you can’t apply the promotion. My main reason for investing in an e-reader was to stop using up space in my home to store books, but there is financial incentive to still buy the physical copies.

  8. Sad Sam says:

    As an avid reader and a Kindle owner, publishers should like me and keep me happy. I buy way more books via Kindle than I ever did in hard back or paper back. When I was reading paper books I got most of my books from the library or traded with friends.

    It is very difficult to lend or borrow e-books (I know there are some libraries who are making it easier, but mine does not) so now with my handy Kindle I buy probably 3-4 books a month vs. buying @5 a year in paper (and many were used). Why, publishers, do you want to piss me off, I’m giving you a lot more business in e-books so why do you want to charge me 12.99, the last price I paid this week, for an e-book that I can’t resell, can’t lend and can’t give away. I’m almost to the tipping point where I’m going to go back to my library/trading habit and I will limit my e-book purchases to those that are priced properly.

  9. SkyeFargo says:

    Two things:

    1) Amazon determines the price of ebooks on Amazon–and they shift regularly. That $9.99 copy of Fahrenheit 451 could be $6.99 tomorrow.
    2) The difference in cost between producing an ebook and producing a physical book is miniscule when you factor in editorial, design, conversion, marketing, overhead expenses, and author royalties. The least expensive part of the book production process is the actual printing/binding of the physical book.

    • elangomatt says:

      I bet that Amazon still has a lot of ebook titles sold under the wholesale model, so they do indeed have control over what they sell those books for.

      And while the costs of making the paper book are not the biggest part of the publishers price, it still can’t be an insignificant part of the price. Even if the book printing (and other costs associated with the physical copy of the book) was 10% of the overall price, people who purchase ebooks should still see ebooks priced 10% less than the printed book.

  10. vdestro says:

    It’s the fundamental problem of digital products (books, movies, music, games, etc) and trying to fit them into traditional business models. What happens to supply and demand when the supply is effectively infinite?

    • Mrhdoc1 says:

      A well taken and insightful point. If one human being (or a team of people) design a copy protection modality, another human being can undo it. All digital media can be pirated and replicated with perfect fidelity and infinite copies. With the pressure of an infinite supply it is only a matter of time when digital media becomes cheaper so it can compete with “free” and pirated media.