16. April 2012 · Categories: Politics

After reading through the complaint from the DOJ, it details a lot of hard nosed bargaining between the parties, but not a lot of behaviour that constitutes anti competitive behaviour. The commission model is a valid way to sell books, and for ebooks it makes sense to stop giving volume discounts and ask for a fixed compensation per unit sold. And we have seen that with the App Store the commission model can create a vibrant and very competitive market place.

There are two issues though that warrant scrutiny.

The Most Favored Nation clause

In the Most Favored Nation (MFN) clause, the publishers promise to adjust their prices on the iBooks store to match the cheapest available price on any competing platform. This is highly unusual, because the end effect is that the publishers would help pay for and monitor to actively match the prices on the Kindle, effectively guarding Apple from price competition.

I regard this clause as wrong, and it should be replaced by a more common MFN clause: the guarantee that wholesale prices to Amazon are not lower than those for Apple.

The Insistance on forcing Amazon to adopt commission pricing

There is nothing against forcing Amazon to accept per unit pricing for ebooks actually sold, but insisting on them to adopt the same sales model as Apple is using is only possible by collusion. The problem here is of course that the publishers want to protect other formats, especially the hard cover, from ebook competition, and that they are afraid that a prolonged period of discounting by Amazon will reduce their pricing power over the long term by changing pricing expectations. Here the publishers have gone a bit too far, and they should have been content with insisting on per unit pricing, now that there is no longer inventory to finance and manage. But it would not have been out of character for Amazon to fight very hard to keep volume discounts and other old style gimmicks to keep its purchasing prices lower.

The long term strategic goal is of course to reduce the chance that Amazon will become the gate keeper for ebooks, and that the publishers will become powerless against its pricing power. And here the case is completely silent, even though the actions can be easily understood as a move to prevent Amazon from becoming a way too dominant buyer.

One important problem is the tendency of Amazon to pursue very aggressive pricing, sometimes even predatory ones. The best way to guard against this is to have laws that limit the ability of players to pursue such pricing. The conceptually easiest would be to restrict a players ability to raise prices again after it has destroyed competitors. If we force retailers to maintain margins for at least 10 years after they have driven competitors out of business, then they would think twice about using too aggressive pricing, because they would need to maintain them for so long that they will really hurt.

And also I wonder why the US still insist in not raising sales tax from Internet retailers. It is really stupid to subsidize something that effectively cuts local employment. It really is time to change the US tax system to make sales tax a federal tax and give the states / counties a larger proportion of income and wealth taxes.

Why no direct sales?

What is so strange about all of this is that there is another strategy to fight back: Offer all books in ePub format, and sell them directly to customers via the web. But why is it not considered viable? Are publishers so afraid of copying that they insist on copy protection, which has been dropped in the music area without problems? Are they afraid of colliding with the printed book? But in a few years the ebook will have replaced the paper back and a lot of hard cover sales, publishers need to prepare for this future. And the only way to ensure that the device sellers will not become the gatekeepers to the books will be by adopting an open format, selling in this format, remove copy protection so that customers have a chance to switch without losing access to their library, and ideally establish an online sales operation.

And switching to ePub without any copy protection will completely remove the competitive threat of a Kindle lockout, as users would be free to move all their books to a competing platform. Also forcing everyone to support ePub as the canonical format for ebooks will mean opening up the Kindle, and allowing publishers a way around Amazon, as users would then be able to load new books onto their Kindles even when purchased from a competitor.