Is the Agency Model a Clear Case of Price-Fixing Collusion in the eBook Market?

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by: Stephen Windwalker

We learned this week that Texas Attorney General Greg Abbott has begun a preliminary investigation into the agency model price-fixing deal between Apple (NASDAQ:AAPL) and five of the Big Six publishers. While I am sure that some of those players hope that Abbott's inquiry is a fishing expedition that will amount to nothing more than some irksome legal bills, there is a significant chance that it-- or another inquiry-- could lead to a major legal battle and, ultimately, the possibility of legal remedies that might cause publishers to wish that they had never heard of the agency model. Let's take a closer look.

For the past few months, in the course of reporting on the agency model, I have suggested at several points that it seemed likely that some of the issues involved would end up in court. After all, regardless of what else you might think about the agency model, there can't really be any argument about two of its fundamental features:

  1. it is a manufacturers' price-fixing arrangement intended to dictate and maintain certain price minimums at the retail level; and
  2. it developed out of collusion, either through direct communications or through communications that were brokered by Apple, between --what one would expect to be-- competing publishing companies. (Collusion, I understand, is not a neutral word; if you are more comfortable using some other word, that's fine, but, well, it is what it is.)

I have been criticized in a few quarters for suggesting, in earlier posts, a "conspiracy theory" and collusive behavior by some combination of Apple and the five big agency model publishers in bringing about the fundamental restructuring of ebook prices and business relationships earlier this year.

Guilty as charged: I did refer in my post to Penguin's "agency price-fixing model co-conspirators," and I am sure that if I took a few moments I would find other instances of calling things as I see them. There have been times when I have crossed the labeling line, and for instance I apologized just yesterday to Publisher's Marketplace editor Michael Cader for referring to him and Mike Shatzkin as "publishing industry mouthpieces;" it was unfair and unnecessary of me.

But my point is unchanged: in all likelihood, the mass structural transformation of the ebook business that occurred earlier this year could not have occurred without the collective development of a pricing strategy by some or all of the key players. To suggest otherwise would be to imagine a process, something like the final round of Jeopardy, where all the participants write down the same answer to the question: "What can we do about these $9.99 ebook prices?"

Are we to believe that all of the agency model publishers independently thought up, and used their light pens to write down "We'll throw out decades of wholesaler relationships and 'manufacturers' suggested retail prices' and dictate that customers must pay 30 to 50 percent more for ebooks, and we'll call it the 'agency model'"?

Pardon me, but I'm not buying that.

Does that make it a conspiracy? I suppose it depends on your point of view. But if the major players got together across company lines to restructure their industry and fix prices at higher levels, and the result was a violation of the law, you don't have to be sporting tin-foil headwear to call that a conspiracy. "Conspiracy" would be the word that a prosecutor would use, or a grand jury, or a judge, or a trial jury. I suppose you could call it a garden party, but the legal terms are conspiracy and collusion.

What law would they have been conspiring to violate?

The Sherman Antitrust Act, for starters, but there is a long history and legal tradition against such price-fixing collusion at the federal level, at the individual state level, and in a number of other nations where these business matters will be played out. Although the U.S. Supreme Court acted three years ago to narrow the circumstances under which businesses could be found in violation of the Sherman Antitrust Act, they left the teeth in the law for the courts to act when a manufacturer's (the publishers) enforcement of minimum price maintenance on its distributors (Amazon (NASDAQ:AMZN) and other ebook retailers) could be shown to have an "anticompetitive effect" that is "harmful to the consumer."

It is also worth keeping in mind that, although the agency model was initially rolled out in the U.S. ebook market, eventually these issues will be played out globally and may face even greater scrutiny in the U.K. or by the European Commission. In the U.K., the leading book trades observer, The Bookseller, has reported that some publishers have walked away from negotiations with Apple because "concerns over the legality of the agency model, first highlighted in The Bookseller, have still not been addressed for many."

I've been writing for the past few years in books and blogs and newsletters about the Kindle and various other ebook-related issues and news, and at times I have spoken out strongly with criticisms of Amazon (AMZN), but one would not be wrong to say, as one would expect from its name, that Kindle Nation Daily is a pro-Kindle blog. Far more than it is pro-Kindle, however, Kindle Nation Daily advocates for the interests of Kindle owners, and it is clear from thousands of messages of feedback, emails, and comments that many Kindle owners see us as effective, informative, and reliable.

When the controversies of the agency model began to unfold, I even gave brief consideration to playing an organizing role in support of legal action against the ebook price-fixing collusion under the anti-trust act. While it seemed quite possible that a plaintiff class with legal standing could be organized and a serious and legally plausible action initiated, the resources necessary to pursue such a cause and do it justice seemed truly prohibitive for any volunteer effort.

While some speculated that legal action against agency model collusion might come from Amazon itself, or from the Department of Justice, or from other ebook owners, there are good reasons why such action hasn't originated from these sources. Amazon, for one, is unlikely to pursue a strategy of litigation because such a strategy would be even more destructive to its business relationships with publishers, because it would require the company to make information public that it generally keeps very close to the vest, and because it could well be vulnerable to counterclaims about its own efforts to manage prices, regardless of whether such claims were considered legally actionable. I won't be surprised if the Department of Justice becomes involved, but I'm also aware that it has plenty of more important issues on its plate.

Instead, we have heard this week, the Texas Attorney General's office has begun an inquiry into the agency model that, according to publishing industry columnist Sarah Weinman "appears to focus on pricing practices for e-books and Apple's entrance into the [e-book] market in particular.... Though the investigation is still in preliminary stages, there's a good case for legal action -- and it's all about the current state of antitrust legislation."

For those of us whose take on these issues lists toward a consumer's point of view, such an investigation -- and the possibility of antitrust litigation -- has seemed inevitable. However, among publishing industry insiders, there seems to be genuine surprise, or at least puzzlement. Weinman herself questions why Texas would be interested, and suggests that the near-monopoly that Amazon held in the ebook content market prior to the launch of Apple's iBooks store makes such scrutiny puzzling. (It is worth pointing out that a number of much smaller ebook retailers have also been disadvantaged by the agency model; some that tried to attract customers by offering coupons and special deals are no longer allowed to do so).

But Amazon was using its market power and deep pockets to lower prices, and while a strong argument can be made that the company's goal was to use those lower prices to build and maintain dominant market share, there was no collusion or collective price-fixing involved. Supporters of the agency model may try to make the argument that Amazon's strategy of aggressive price competition is itself anti-competitive in the long run, but such an argument would seem to conjure up a rather slippery slope of "small is beautiful" opposition to free market forces and competition. Many of Amazon's other initiatives in support of independent publishing companies and authors over the past few months, as well as its significant history of "big tent" relationships with other retail partners large and small, may also help give the company cover against such charges.

Amazon relied on an individual corporate strategy to reduce and subsidize consumer prices, and went on paying publishers based on the retail list prices of their hardcover editions. Apple's agency model play was demonstrably different: it relied on a collective price-fixing agreement among competitors, and the effect of that price-fixing, of course, was not to lower ebook prices but to raise them by 30 to 50 percent. The fact that Apple was a "fledgling" player in the ebook marketplace at the time of these actions would likely be offset both by the fact that it achieved more or less immediate success in brokering a collective price-fixing agreement with five of the six targeted players and by the size of its installed base of ebook-compatible devices: there are roughly 30 times as many iPads, iPhones, and iPod Touches in the world as there are Kindles. And, of course, there is relevant history in the music industry's experience with Apple and the iTunes store.

With all of this for state or federal attorneys general to chew upon, I'm frankly puzzled by the number of times in the past few days that I have read remarks by agency model supporters expressing puzzlement about the Texas investigation. Representative of many of these remarks was a post I read yesterday by publishing industry consultant Shatzkin, entitled "Agency seems (to me) to be working; I hope it’s legal." Shatzkin concludes the piece with a fair demonstration of just how colossally an industry insider can misjudge his own industry's ultimate consumers -- that's you and me, the readers: "It would appear that the Agency model is good for just about everybody except the e-tailers that would use price to drive others out of the market," he says. (I'm sorry, Mr. Shatzkin, but if at this point you need someone to explain why that's a colossal misjudgment, it may just be too late to make the effort.)

He then asks a question that baffles me just as much: "But will it ultimately be ruled legal? I don’t think we know yet."

Excuse me? Why does it sound like publishers are just considering this question for the first time? This is not the Wild West; it's the once staid old New York publishing industry. Could they really have entered upon this total transformation of the way they are doing business without having it vetted not just by their corporate counsel but by the best antitrust lawyers available to them?

But maybe so. There have been signs, even in the last week, that the agency model publishers and Apple don't seem to be acting as if they are getting regular and solid legal advice, including:

  • Instances such as the return of Penguin (or its new releases) to the Kindle store with a new wave of higher-than-ever prices, and several days during which Penguin's bestselling titles were 30 to 40 percent cheaper in the iBooks store than other ebook stores.
  • The direct quotation in Shatzkin's post of a publishing industry executive who rhapsodized about his ability, under the agency model, to "maximize revenue" with no mention of cost, appropriate margin, or "the value of the book."

Maybe I am overstating the importance of such words and deeds, but it just seems to me that any lawyer worth his billable hours would be telling publishers to behave very, very carefully just now.

It will be interesting to see how it all plays out. As I hinted at the outset, the remedies in a case like this might well amount to more than just doing away with the agency model.

I am sure that I will be criticized for this post, as I have been criticized for earlier posts, for not being "objective." But there has been a strange "opposite world" resonance to much of what publishing insiders have had to say about the agency model and ebook prices lately, and under such circumstances it is best to accept a little criticism if that is the cost of challenging notions like the idea that the agency model is working for consumers or that the publishers who brought us drugstore paperback spinners are now the champions of "the value of the book."

(This post first appeared at Kindle Nation Daily).

Disclosure: Long AAPL, Long AMZN