Kristine Kathryn Rusch

The Business Rusch: Writers And The DOJ Lawsuit

Written By: Kristine Kathryn Rusch - Apr• 11•12

The Business Rusch: Writers and The DOJ Lawsuit

Kristine Kathryn Rusch

This week, the Department of Justice filed its lawsuit against Apple and five publishers. Three publishers settled immediately with two, as of this writing, going forward—Penguin and MacMillan.

I am not a lawyer, so I cannot comment on the filing.  A few have, including Charles Petit on his website. He points out various things not discussed in the filing, how the filing shows multiple hands on the complaint (legal and “policy wonks”), and talks about other publishing concerns.

The story hit all the major news outlets. Let me caution you as you read these news articles: reporters are generalists. They have to be or they can’t do their jobs well. As generalists, they must rely on “experts” and “analysts” to interpret a news story, particularly one like this, which relies on some arcane knowledge of an arcane industry (publishing), some technical knowledge of a technical industry (e-commerce), and a legal education in both politics of the law and the law itself (to understand the DOJ).

A reporter is only as good as her sources. And on a story like this, reporters usually have no sources at all because publishing is a poorly covered industry. Most reporters hope to break into “real” writing one day (“real” writing being getting a book published), so they’re both in awe of the publishing industry and afraid of rocking a boat while covering it.

In other words, what you read in the mainstream press comes from sources of dubious provenance, press conferences (the DOJ), statements from the parties involved (usually drafted by lawyers to avoid any legal issues), and whatever is in the media already (usually misinformation or partial information). Add to that the need to cover a complicated case in either a story that lasts 30 seconds to two minutes (TV/radio) or in about 1,000 words (print/blogs), and you have the makings of severe misunderstandings.

What does the DOJ case mean for writers, traditional or indie?

Um…no one knows.

Not yet, anyway. It depends on how things transpire. If MacMillan and Penguin settle, then we can actually discuss what the case means for us, if anything. Sometimes large corporate lawsuits have an impact on the vast business in its internal practices, but means nothing to the cogs in the machine (us small fry). Sometimes large corporate lawsuits change everything.

Is this one a game-changer? Again, we don’t know.

We would be having a different discussion if we worked at Penguin or Apple or MacMillan right now. Or if we worked at (or ran) Amazon or Barnes & Noble. (The announcement of the filing had an immediate negative impact on B&N’s stock price, for example)

Readers might also see some kind of impact years down the road, especially if we bought books through the iBookstore. As Michael Cader in Publishers Lunch pointed out on Wednesday, don’t expect any immediate changes in any ebookstore, including Apple’s iBookstore. The settlements aren’t final for the three publishers—there’s a sixty-day review period in which anyone can comment on the terms of that settlement directly to the Justice Department—and of course, the lawsuit against the other two publishers and Apple has just been filed, not litigated. (And if you don’t know the difference in those terms, you’d better not be writing mystery novels and/or ever bring a lawsuit yourself.)

So pretty much anything you see in the press aside from the facts of the filing itself is most likely speculation.

Although you won’t be able to tell it’s speculation from all the screeching that is already going on.

Why didn’t they go after Amazon? the pundits are asking. Amazon is the Big Bad here. Forgetting, of course, that the five publishers and Apple were responding to Amazon’s domination of the marketplace in 2008-2010 when the actions cited by the DOJ occurred.

And as Charles Petit points out, a resolution in this case will have an impact on Amazon and Amazon’s relationship to its publishers because Amazon also uses a term in its contracts that Apple used in its—the Most Favored Nation clause. This clause was specifically cited by the DOJ, and referred to in the settlement with the three publishers.

If the Most Favored Nation clause becomes poisonous in relationships between Apple and its publishers, then it follows that the clause will become poisonous to other retailers and the publishers they deal with.

All of that is arcane legal stuff that I barely understand.

However, I do understand two things: the impact a lawsuit of any type has on a business, and the subtle effect that media coverage has on perception.

Let’s deal with the impact of a lawsuit first.

If you’ve read this blog for the past three years, you’ll notice that I often advise you to settle problems early to avoid even the possibility of lawsuit. For writers, that usually means making certain that you understand contract terms so that you know what you’re signing. You have to know what you’re giving up as well as what you’re settling for. You have to know how those terms will apply to a successful project as well as an unsuccessful one.

A corporate lawyer friend of mine has stated his position repeatedly: if a case goes to court, someone has failed. Not because they’ve failed at negotiating their contract, or because they’ve done something wrong, but because someone—somewhere—has been intransigent and is unwilling to compromise. [Note that my friend is a corporate attorney, not a criminal one. He works in the civil side of the law, which, by the way, is where the DOJ brought this lawsuit. It’s not a criminal complaint, but a civil one.]

Avoiding court and all that a legal case entails has been my friend’s job for decades. Even before I knew him, I did my best to avoid court even when I had the law on my side.

Lawsuits cost both time and money. Often, the only winners in a case are the lawyers themselves.  Lawyers bill for their time. They get paid money for that time. Lawyers will profit from a lawsuit because that’s how their business is structured. Most people’s businesses aren’t structured that way. If you’re being sued—or if you’re doing the suing—you will lose both time and money. You will not profit.

John Sargent of MacMillan is standing on principle—or so it seems from the statement he released on Wednesday. He is clearly aware of the benefits of a settlement. He writes, “It is always better if possible to settle these matters before a case is brought. The costs of continuing—in time, distraction, and expense—are truly daunting. But the terms the DOJ demanded were too onerous….”

He goes on to explain the legal thinking from MacMillan. Then he adds (and I think this is his true point), “It is also hard to settle a lawsuit when you know you have done no wrong.”

From our (the writers) perspective, what John Sargent and the other CEOs did or did not do doesn’t matter. That is truly a matter for the courts now—at least in the case of MacMillan, Penguin and Apple.

But Sargent’s insistence on his innocence here opens his company to all kinds of risk that he clearly hasn’t considered. Seeking Alpha, a website devoted to stock market opinion, analysis and “vibrant, intelligent finance discussion,” Dana Blankenhorn has an article titled, “Apple, E-Books And The DOJ: Even If You’re Right, You’re Wrong,” which is a fascinating look at what the costs of a case like this to a company.

Blankenhorn, a business journalist who spent years covering the Microsoft antitrust case, focuses on Apple in his discussion as well he should. Apple is publically traded and its stock is riding high at the moment.  Blankenhorn believes this suit will have a serious negative impact on Apple’s creative culture, and he may be right. He dismisses out of hand the impact of the suit on MacMillan and Penguin, saying they can compartmentalize.

He’s wrong about that.

But his point about Apple is valid. Let’s just look at it in a publishing context.

He writes, “Simply put, having Justice Department lawyers around is bad for any company. Especially anti-trust lawyers…. That’s due to the peculiarities of the antitrust law—actions that seem perfectly natural in any other context take on a whole new meaning when you’re seen as trying to create, or enforce, monopoly rents. The result is that stuff has to be saved, things have to be remembered and (more important) hands have to be stayed before they do many normal business activities….Apple has plenty of cash to fight this. That’s not the issue. The issue is what happens when lawyers go into other departments….”

The problem here for the publishing companies is that, as part of this suit, the Justice Department will be looking at book prices and profits. When you look at book prices and profits in an old-fashioned business like publishing, which has really not updated its computer systems to account for e-books in particular, you will be looking at accounting practices.

Accounting practices include royalty statements, and relationships with authors. Many of the bigger publishers have fudged the royalty statements and their e-book accounting systems, either deliberately or because of antiquated systems. See this post to understand what I mean. In at least one case, systems have not yet changed within the publishing house.

If the two publishers involved in the actual case change their accounting practices now, is it something the DOJ will look at as a way to avoid parts of the lawsuit? Is it just normal business practices? Or is it something more sinister?

Because as Blankenhorn writes, “actions that seem perfectly natural in any other context take on a whole new meaning” when antitrust lawyers are investigating a company.

Personally, if I were CEO of a publishing company being pursued by the DOJ, I’d settle like HarperCollins, Hachette Book Group, and Simon & Schuster did, even if I had done nothing wrong.

The costs of having lawyers, intent on finding misdeeds, examine the way that these businesses are run would be too high for me to risk–again, even if I had done nothing wrong.

Blankenhorn points out that Microsoft won its case with the DOJ after fifteen years. He believes the fight seriously damaged Microsoft and turned it from a competitive company into one that isn’t competitive.

He adds, “I know from having covered the story what the presence of the Department of Justice lawyers did to Microsoft over many, many years. This is a path I wouldn’t wish on my worst enemy.”

Right or wrong, the CEOs of MacMillan and Penguin are taking huge risks with their companies at a time when the entire industry is struggling.

So what does this mean for writers?

As a writer who keeps one foot in traditional publishing, I’ll be keeping my eye on the earnings reports from MacMillan and Penguin, the sideways news stories that come out of this case, and on the companies’ overall good health. Because there is stuff to be found in the accounts of most traditional publishers due to old-fashioned systems, neglect, and long-standing disregard for contracts and contract terms. Today’s decisions by two major publishers will have an impact that will be felt in a variety of ways. We just don’t know what those ways are.

Now let’s discuss media coverage.

The media will lose interest in this case relatively quickly because they don’t understand it. If they do cover it, they’ll cover it from the perspective of Apple and tech companies, not from the perspective of publishers. We’re seeing that already. When the news broke on Wednesday, I had to go through three different articles to find out which publishers settled and which didn’t. In some ways, I’m being as negligent as some of the journalists, because I’m not going into the filing and getting the names of the divisions of the corporations and/or conglomerates actually named in the suit. In other words, I’m not being specific either, partly because I’m lazy and partly because I hate reading legalese unless it pertains directly to my own career.

(All right: 90% lazy, 10% legalese)

So how will the media coverage impact indie and traditional writers? Simply put: pricing.

I’m on a lot of listserves with other professional writers, and for the most part, the majority of the listserves haven’t even discussed the DOJ filing. Most writers who’ve been in this business for a long time know that this stuff is above their pay grade and whatever happens happens. Some writers, though, seem to have just become aware that something happened—even though this has been in the wind for months—and are now panicking based on mainstream media reports, worried that the suit will cause theft of the writers’ profits (!) (These writers should really look to their contracts first. I’ll wager the writers signed contracts that’ll hurt them worse than any DOJ suit will.)

The DOJ case is about collusion to set prices and to keep those prices artificially high. Whether or not that actually happened is another matter, and will eventually be determined (or not) as the case goes along.

But as the media reports this, talk of e-book prices has hit the airwaves for the first time, as far as some consumers are concerned.   Richard Alan Dickson, a businessman turned writer, made this comment on one listserve I’m on (and I reprint it here with permission):

“For those who might still fear the suggestion of raising their e-book novel prices above $2.99, or $3.99, or $4.99, think about what the general public will be hearing as this issue spins in the press for the next few weeks….Will your e-books priced at $6.99 or $7.99 (and even, gasp, $8.99) really be considered too expensive when the press spins a price of $9.99 as selling a book at a loss?” [emphasis mine]

I learned long ago that people listen to media coverage with half an ear. And one phrase that’s being repeated over and over and over again in this coverage is exactly the one that Rick pointed out: publishers consider novels sold at $9.99 underpriced. Sold at a loss. Cheap. (Look at NBC Nightly News’s coverage of this story on the day it broke as an example of what I mean.)

In other words, folks, those of us publishing indie will actually benefit from this week’s press coverage—if we are willing to price our books above bargain basement pricing (free/99cents/$1.99).  The media is repeating that $9.99 novels are bargains. And those listening with half an ear will absorb that thought, and never examine it. So when they see your e-book priced under $10, they know they’ll be getting a bargain.

And those folks pricing at 99 cents or $1.99? Well, their books will be treated like those books sitting outside a bookstore in bins to attract customers. Readers usually give those books a glance, then walk on by. Only readers looking for something special or bargain hunters actually stop.

I want readers to buy my books the moment they come out, not because the books are cheap or on some bargain shelf. I want readers to see that the books have value.

Ironically, traditional writers are running scared, because their publishers are running scared. Amazon has already announced that it will lower e-book prices on some titles, most likely titles from the companies involved in the DOJ suit.

So what kind of impact will the DOJ suit have on writers? Hell  if I know. But I do know that the media coverage will have a positive impact on the indie writers who price their books between $4.99 and $9.99.

The coverage is doing us a favor.

The rest of it…

Well, let me simply say that I’m glad I’m not Penguin, MacMillan or Apple going forward. I have a lot of lawyer friends, and no disrespect to them but I’d hate to have to do my job with a bunch of lawyers looking over my shoulder. That’s the future for those three companies.

Me, I’m going to follow my own advice on indie book pricing, continue to read the publishing business trades, and look at the earnings reports for the companies involved.  That’s the extent of my knowledge and involvement in this lawsuit. It should probably be yours as well.

A lot of traditional publishing has just discovered direct-to-consumer marketing (yeah, I know. Head-shaking). This blog is direct to consumer because I designed it that way three  years ago in the deepest darkest part of the Great Recession. I wanted to advise freelancers on how to survive as they started their new businesses (more businesses start in a recession than at any other time). I did that with The Freelancer’s Survival Guide, which is still free on this website, and will have a new edition at the end of the month.

But at the urging of readers, I continued this when I finished the Guide, and then because I couldn’t ignore the elephant in the room, I decided to focus on publishing. You can read all of the blog posts for publishing if you follow this link.

When I write this blog, it takes a hefty chunk of my weekly output and turns it away from fiction which is where I make my living. So I do need financial support to keep the blog going.

If you got any value out of this or previous posts, please leave a tip on the way out. Thanks!

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“The Business Rusch: Writers And The DOJ Lawsuit” copyright © 2012 by Kristine Kathryn Rusch.

 

 

 

 

 

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56 Comments

  1. Joshua Kehe says:

    Wow, that was quick, Kris.

    On the one hand, I tend to prefer your posts that discuss the nuts-and-bolts of publishing as a business (both traditional and indie), so I’m a bit disappointed to see a “big picture” kind of post.

    On the other hand, I’m impressed and grateful to see you addressing this news the day after it broke. I know you do a lot of work to put together these blog posts and it had to have been a bit of a rush to gather all you information. Thank you so much for your continued diligence.

    I have to admit, even though I’d been hearing about the potential DOJ lawsuit against publishers for a few weeks now, it didn’t really hit me until I read the open letter from MacMillan’s CEO. It really captures how grey this whole issue is for me, which was important for me to realize amid the storm of black and white, Amazon vs. publishers, etc. arguments that seemed to erupt as soon as the news broke. While I agree that Apple and the publishers haven’t been too smart with their business practices (or fair, but how do you quantify something like that?), I don’t think Amazon or anyone else is entirely innocent either. They’re all trying to make a profit, just like us, and sometimes that leads to questionable business practices. It just annoys me when people seem to jump at the opportunity to attack one or the other, instead of recognizing that they’re both run by humans.

    Ah, sorry. Ethical digression. It’s just what I’ve been thinking about after all of this.

    Anyway, thanks again for the post. The analysis of pricing (which you and Dean seem to be talking about a lot lately) was another welcome data point for me to consider. Looking forward to applying it to my growing business model. :)

    • Kris says:

      Thanks, Joshua. Yep, sometimes the old journalist in me flares up and demands to be current. Besides, I was reading all that stuff anyway. :-) But…ethical digression? Really? LOL. We’re not talking ethics here or even justice. Just a legal filing. And yes, sadly, most large businesses have serious ethical issues. Don’t get me started. I’m writing an entire novel series about this (the Retrieval Artist), where I pour my disillusion in the ways of human beings into storytelling. :-) And yeah, pricing. Apparently it’s on our minds.

  2. J. A. Self says:

    Glad to hear your analysis on pricing for the short term. I’m still not sure what will happen long-term, though I would guess that if forced to drop prices the traditional publishers will congregate around the $9.99 mark. The fact that they sell a book for $12.99 at 35% profit instead of $9.99 at 70% profit right now doesn’t make their case look very good. Or do they have a special exemption from Amazon?

  3. Sarah Wynde says:

    Pearson (Penguin) has been working with the lawyers looking over their shoulders for a long time now. I don’t even know what the lawsuits were (although I should) but there was one about freelancers, one with Google, one that had something to do with images used in books and our dealings with artists — and those are just the ones that I know of. It may be true that this is qualitatively different because it’s the Department of Justice, but adding layers of work because of mysterious lawsuits seems to me like business as usual for Pearson. My hard drive had emails going back ten years when I left because as an acquisition editor, I was on a long, long, long list of employees whose files were potentially needed for discovery in some court case. I am not actually surprised that Penguin is fighting.

    • Kris says:

      Thanks, Sarah. Yeah, I know of several filings against Pearson/Penguin. My understanding is that antitrust lawyers can dig for things traditional lawyers can’t. But I’m not a lawyer, so I might just be talking out of my hat. There are dozens of suits pending right now. It’s pretty amazing. That curtain I referred to a few weeks back is really getting yanked aside….

  4. I think one of the most difficult issues for people to grasp here is the difference between the traditional model and the agency model. The agency model seems to have become almost necessary in a world of ebooks. After all, with ebooks, it makes no sense for a publisher to sell, say, 15 licenses to a retailer and force the retailer to come back for more. If 1 million customers decide on one day to buy the book, you want to let them do that, and the agency model allows for that.

    The other problem happens when a retailer, such as Amazon, decides to become a publisher. There’s a reason the movie studios were forced to sell off their movie theatres in the middle of the last century….

    • Kris says:

      Michael, sorry. Your post is mostly wrong. No one complained when B&N became a publisher back in the 1990s. They published and still do most of their own bargain books. I’ve been in countless anthologies published by B&N. It’s a longtime tradition, going back more than a century, for a retailer to be a publisher. Mysterious Press Books is a great mystery outlet, and it originated with Otto Penzler’s bookstore. So big, small, many retailers have a publishing arm. It’s been part of our business from the beginning.

      I’m not going to argue the agency model with you. I am going to point you to the settlements with the three other publishers from the DOJ, which did not make them stop using agency. DOJ is mostly after the collusion, not the method chosen by those to avoid Amazon’s predatory pricing.

  5. Seth Gordon says:

    So if I understand Petit’s summary of the complaint correctly, here’s the DOJ’s problem:

    Suppose I am a publisher and I sell ebooks through Apple, Amazon, and Acme. With Apple and Amazon, I sell using an agency model; with Acme, I sell as a wholesaler. Suppose I have a book that retails for $2.99 on all three channels.

    Then Acme wants to drum up business by having a sale, and it discounts my book to $1.99. Since I am selling through Acme with the wholesale model, Acme eats the extra dollar. BUT, because of my MFN agreements with Apple and Amazon, I have to drop the Apple/Amazon retail price of that book to $1.99, and I lose revenue-per-copy from all my Apple/Amazon sales. Obviously I can’t do business this way, so I call Acme pronto and renegotiate my contract. From then on, Acme, too, gets to sell my books on the agency model.

    But now Acme has no way to compete with the big boys on price. Antitrust violation!

    • Kris says:

      I think so, Seth. That’s why I let Charles speak for this part of it, since I’m not a lawyer and don’t even want to try to boil down the facts of the case in a good way. If folks have links to other lawyerly blogs on this very topic, let me know. The Passive Voice, which I’m hoping will do something, does have this analysis from PW: http://www.thepassivevoice.com/04/2012/the-broad-strokes-of-the-hachette-harpercollins-and-ss-price-fixing-settlement/

      Michael B, do note that it also mentions that agency isn’t dead.

      I’m sure that by next week, there will be more analysis and some really excellent blogs on this. I’ll probably have moved on to something else, so if you folks want to link to the good stuff here, I’d appreciate it. Watch the comments for good lawyerly posts on this. (I hope.)

  6. Erin says:

    Thanks for the dose of common sense. I had to close Twitter yesterday when I saw a bunch of authors bemoaning that now their e-books would drop to 99 cents. *sigh*

    . . . back to writing.

  7. Paul Sadler says:

    Hi Kris,

    A great post as always, and I get what you and Dean are saying about the price point “rising”. However, if I want to keep my gadfly status, I have to respectfully disagree. And separate from my logic, I really HOPE you’re wrong as higher prices do nothing but reduce # of units sold.

    I’ve got a series of posts lined up on pricing (economics, stats, accounting, behavioural economics, psychology, and personal choice approaches to setting prices), and would love you to return the gadfly status when they go live for the two readers that actually follow my blog (probably one accidentally who doesn’t know how to unfollow), but the bottom line is that most readers disagree with what the publishers are saying. When they hear that publishers are complaining that $9.99 for an ebook is a loss, they think the publishers are full of crap. And they are mostly right.

    The surveys I’ve seen (including PEW) are using somewhat flawed question methodology or hitting pockets of romance readers who are a weird bunch of purchasers. The average reader balks at the $9.99 price point still for paperback (hence part of the reason for massive decreases in sales), and most of them are switching to ereaders not only for convenience / tech / etc but for price. They know, just as with CDs, that packaging and distribution is expensive. And so even my mother (who knows zero about technology and is 83 this year) knows/expects/thinks a non-paper version should be cheaper. They can do the math just as easily in the new digital world as everyone else:

    a. $$ for author – profit
    b. $$ for agent – profit
    c. $$ for publisher – profit
    d. $$ for pre-production (editing) – cost
    e. $$ for production (physical) – cost
    f. $$ for transport – cost
    g. $$ for physical marketing – cost

    And people know that “E” and “F” are huge. I haven’t even talked about the rest of the overhead that goes with a physical book. And most people expect G to go down too.

    I also think that any “bump” you get from media discussion is totally negated by the fact that you, Dean, Barry, J.A., etc. are touting the new paradigm loud and hard where you dump “B” and “C” too (generally).

    Bottom line is people know, particularly from the music world, that costs can and should come down with digital distribution. It’s a bad analogy, but I liken it to a comparison between a picture of a car and the actual car — why would the two cost the same?

    Like you said, we’ll see where this shakes out. Oh, and if it helps to understand the legalese around “Most Favoured Nation” status, it’s actually quite simple…it says if I agree to buy a bunch of copies of your book, you’ll sell it to me for say $5 each — but you also agree that if Dean’s buddy John Doe comes to you next week and wants to buy it, you won’t give it to THEM for $4 each…In exchange for me buying now and early, and entering into a long-term arrangement with you, you’ll always give me the best price. It’s funny because certain cultures used to do this as a matter of course — in the 80s, if prices rose for example and you couldn’t produce it for $5 (i.e. you were losing money), a Japanese company would just renegotiate with you so that you weren’t out of pocket. The original contract would give them permission to screw you, but they would let it lapse and do a different deal — because ST benefits would destroy a LT relationship. Western companies would just say “too bad, you struck a bad deal” and exploit it. But the Japanese approach is what MFN is about — ensuring long-term benefits. When it doesn’t work, you definitely notice — think about the deals that Cellphone companies offer…if you’re an existing member, too bad, cuz we’re offering a huge bonus to a NEW customer that you’re not eligible for — a good reason for people to start venting because your loyalty as a customer actually HURTS you in those cases. For the book biz, it’s not a lot different from what Amazon / Walmart / Target / Future Shop / Best Buy / etc. does on price matching — it just happens on the back-end too, instead of just on the front-end retail side. See? Clear as mud :)

    Poly the Gadfly

    • Kris says:

      Good points, Poly the Gadfly. :-) Yes, when prices go up, sales numbers go down. After a certain price point. Realize here that I’m discussing indie publishing, not traditional publishing, trying to get folks to increase their prices to a reasonable level. Thousands of retail studies–and I do mean thousands–show that underpricing is as devastating as overpricing, but for a different reason. If an item is underpriced, then it doesn’t have enough perceived value. All value happens to be perception anyway, and if the buyer doesn’t perceive enough value, then they won’t buy something that’s too cheap. Weird, but true. But retailers (not book people) have studied this for decades. Pricing has a sweet spot. So I’m just trying to get indie folks to that sweet spot.

      As for the MFN clause, thanks. Yes. That’s helpful.

  8. Lee Allred says:

    The Passive Guy is reporting this morning that even the companies that SETTLED will have DoJ ninja lawyers combing through their ledgers, performing feats of derring-do and forensic accountantship.

    http://www.thepassivevoice.com/04/2012/the-broad-strokes-of-the-hachette-harpercollins-and-ss-price-fixing-settlement/

    Pull quote:

    Under the Settlement, the DoJ can also inspect the publishers’ offices, and “require Settling Defendants to provide to the United States hard copy or electronic copies of all books, ledgers, accounts, records, data, and documents in the possession, custody, or control of Settling Defendants, relating to any matters contained in this Final Judgment.”

    Fishing season’s open — it’s not happy day for worms!

    • Kris says:

      Thanks, Lee. Just saw that. Oooo. Honestly, those fishing expeditions are great news for writers. I know what the DOJ will find in some instances. I wonder what else they’ll find… :-)

  9. Kristi N says:

    Kris, thanks for another thoughtful and insightful post on a complex problem. You’re absolutely right about lawyers poking around a company’s internal workings. With the size of the publishers, unless every employee (from building services to CEO) is absolutely, fanatically devoted to following the letter of the law without one iota of deviation, the DOJ will find something. I’m betting on a lot of somethings, including a very nasty and far-reaching category called ‘fraudulent practices’. If John Sargent is playing brinkmanship with the DOJ, he’s playing Russian roulette with an automatic pistol.

    • Kris says:

      Yeah, Kristi. Fraudulent practices indeed. I really wanted to write yesterday that I was breaking out the popcorn and going to sit back to watch. But I didn’t want to be that crass. Today, I’m that crass. :-)

  10. Later in the day, following announcements of the DoJ lawsuit, it was announced that 16 states are also filing suit against the same parties (Apple + five publishers): Alaska, Arizona, Colorado, Connecticut, Illinois, Iowa, Maryland, Missouri, Ohio, Pennsylvania, Puerto Rico, South Dakota, Tennessee, Texas, Vermont, and West Virginia.

    This could get expensive.

    http://www.mediabistro.com/galleycat/16-state-attorneys-general-sue-major-publishers_b50037

    • Kris says:

      Thanks for the link, Laura. Expensive, yes, but more than you think. Imagine all those lawyers and forensic accountants digging in files that you and I know are…ahem…messy. :-)

  11. Annie Reed says:

    I’ve been a litigation paralegal for more years than I care to think about. Legal disputes are one thing, and depending on the businesses involved, may be unavoidable. Lawsuits are a whole other ballgame, especially if one party’s in it “for the principle of the thing” or wants someone in authority (judge, jury) to tell him he’s right and the other guy’s wrong. That’s not a business decision. Whenever any party says something like the guy from MacMillan, the lawsuit has become personal. Reasonable settlements rarely happen when disputes become personal. This one might be going on for a really, really long time. Just the discovery phase is going to be a nightmare.

    • Kris says:

      Thanks for the reality check, Annie. Yes, I had the same sense that it’s personal for MacMillan. And Amazon for that matter. They didn’t have to make the announcement that they were going to lower prices yesterday. That’s just sticking a knife in a bleeding wound and twisting…

  12. Desmond van Heerden says:

    Hi Kris,

    The filing is quite an easy read actually. You can find it here:

    http://www.techdirt.com/articles/20120411/07155418453/online.wsj.com/public/resources/documents/ebooks04112012.pdf

    And I agree. Lawsuits take time and money away from core business activities – time and money that the publishers should rather be spending trying to adapt their business models to the ‘new’ publishing environment. After all, publishing is a button now…

    • Kris says:

      I love that quote about publishing being a button, Desmond, and I was going to deal with it the other day, until I spent most of yesterday tracking down the DOJ thing. :-) And I did read the filing. It is easy to read. I just don’t trust myself to deal with things like that accurately without help.

  13. Kris says:

    A couple of people sent me some information on some of my sources. I appreciate the info, but I’m not going to post it here. I don’t do personal attacks, and these were too close to that. But if you have information that you think I should know, in the future, do send it in e-mail. Thanks!

  14. But I was getting myself all worked up and ready for a really good panic! Plus, I don’t want to wait and see! I want everything to happen now! If we’re all doomed, then it’s best doom get here quickly!

    Nice article, ma’am.

  15. Petit writes: “The difference between a litigator and a policy wonk is that the litigator doesn’t jump from point A to point B without travelling through the parts in the middle. Much of that journey is procedural, and concerns availability of evidence and standards of proof. Those are of concern to policy wonks, but usually are peripheral… and their evalution is usually archly ideological and/or partisan and/or self-interested.”

    I think we’re going to be hearing a lot more commentary from the “policy wonks” than the litigators, which means finding unbiased coverage of this issue will be futile.

  16. C.E. Petit says:

    I’d like to add a few random thoughts here for completeness:

    (1) Regarding the settlement by some of the Publisher Defendants: It doesn’t really matter unless all Publisher Defendants settle, promptly, on the same terms. And the settlement is approved by the judge as being in the public interest. And the Publisher Defendants comply with every aspect of the settlement down the road (they never have before, so why start now?). Even then, the case will still proceed against Apple.

    (2) Regarding the misnamed “agency model”: As I’ve been objecting for an awful long time, it’s not an agency model, for a very simple reason: Apple (or any other vendor) has no duty of loyalty to the Publisher, so Apple/the other vendor is not an agent. Period. End of discussion. It is, instead, a Resale Price Maintenance Agreement (in the convoluted language of antitrust law), which until a few years ago was a per se antitrust violation even without collusion. I discussed this in a bit more detail when Macmillan and Amazon engaged in their little episode of determining which was the bigger a/s/s/h/ silverback gorilla a couple of years ago, with a simultaneous sideways look at the Google Book Search settlement that was (then) pending.

    (3) Regarding the state lawsuits: These represent, at most, an interesting sideshow, because most of the states simply do not have the appropriate jurisdiction in the first place… and in the second place, choice-of-law problems make it difficult to accept application of, for example, CUTPA (the Connecticut Unfair Trade Practices Act) to companies based in New York and Connecticut in the face of an overriding federal regulatory scheme (the Sherman and Clayton Antitrust Acts, for starters). And without the state-law claims, they’re merely tagging along with the DoJ for the ride.

    That’s not to say that the state lawsuits (there will be at least one more) are meritless, or that they should not have been filed. They serve a rather different purpose: They provide a basis for standing to object if a defendant in the federal action settles with the federal government and the respective states think that defendant got off too easy. They also represent a political leverage point in the states’ attempts to collect sales tax on internet-based “sales” of data and other intangibles to their respective residents.

    (4) What happens next? Well, the DoJ has already filed the proposed settlement for Hachette, CBS’s Simon & Schuster unit, and HarperCollins with the court. There will be a two-month comment period, followed by submission of a brief requesting approval of the settlement (with, perhaps, some minor alterations).

    The other three defendants will either (ill-advisedly) file one or more motions to dismiss, or begin the discovery process. The knee-jerk reaction from expensive bill-by-the-hour defense lawyers is to file a motion to dismiss against every lawsuit — a motion that claims that even accepting everything stated in the complaint arguendo, the complaint does not provide any basis for any legal relief that can be granted by the court. In this particular instance, the very first request for relief forecloses an effective motion to dismiss, because the facts alleged in the complaint would clearly allow a court to declare that the conduct alleged violates antitrust law. I thus think a motion to dismiss will only run up fees and irritate the judge… but it might also prove a valuable source of delay that is valuable primarily for non-legal reasons. Given my past dealings with the various nonsettling defendants, I expect a motion to dismiss from Penguin even if none of the others file one. We’ll know for certain on or about 01 May 2012 (subject to extensions).

    Then things get into discovery. I expect the publishers and Apple to run rings around the DoJ attorneys. That includes any settling defendants, who are subject to discovery both due to the terms of the settlements and as a general matter. This is going to be fun, for certain values of fun that may seem amusing only to cynical sharks like me… who know where the rotting, decayed corpses are buried.

    • Kris says:

      Thanks for the follow up, CE. I think you’re right. This is going to be amusing to me as well. That discovery process…nightmarish–for them.

  17. Dario says:

    Nicely summarized bottom line, Kris. I know some writers who believe that once Amazon gets a monopoly (I’m not holding my breath), they’ll start chipping away at authors’ royalties. I’m not convinced they’ll go there. So far, Amazon’s behaviour with regard to royalties (in my very limited experience with KDP) has been nothing short of exemplary.

    • Kris says:

      Dario, like all gigantic companies, Amazon acts according to its best interest. Right now, its best interest is to get as many “content providers” on board–and that’s us. They’ll give us good deals because it doesn’t cost them much and because it keeps us coming back. That’s all it wants. It doesn’t want the middlemen if they’re going to be trouble. So yeah, nothing to worry about–at the moment.

  18. “It really captures how grey this whole issue is for me, which was important for me to realize amid the storm of black and white, Amazon vs. publishers, etc. arguments that seemed to erupt as soon as the news broke.”

    Interesting you should put it that way, Joshua.

    I’ve always kind of seen the agency pricing issue as not Publishers vs Amazon but Publishers (and Apple) vs. consumers. Because consumers are the ones who were hurt by it (which is why the DOJ took up the case; consumer protection is, at least in theory, the purpose behind anti-trust law). Amazon sure as hell wasn’t hurt – they made more money with agency pricing, especially if they really were taking a loss on ebooks for a while there (though a part of me questions that assertion. I have no data to back it up, but it seems no one else does either, or at least no one has cited their data when they assert that Amazon was intentionally taking losses. Not that there’s anything wrong with taking a loss; if that’s how you want to run your business, all power to you). But it was contrary to their business model, and who likes being forced to do something in a way they’d prefer not to?

    It’s also, in a perverse way, Publish vs. themselves, since they all plainly admit to making less money in the agency pricing method than they would have via wholesale. So I have to question the business savvy and, frankly, the sanity of those who decided to impose it. Oh, I understand Apple’s motivation just fine. They didn’t want to get into the discounting game, and didn’t want to have to manage the prices of the multi-thousands of new products they were about to start selling. But the Publishers? *facepalm*

    Yeah, yeah, I know. They have to protect their print sales. And Amazon (the great and evil) had a 90% market share.

    Well duh! No one else (or basically no one else) was in the frisking market! These guys point at Amazon’s reduced share, from 90% to 60% and say, “See! Agency pricing prevented a monopoly.” To that I say bollox! They are spewing a classic logical fallacy: post hoc ergo proctor hoc. Just because Amazon lost market share after agency pricing went into affect does NOT mean it happened BECAUSE of agency pricing. I strongly suspect that when the dust settles in 5 or 10 years and economists study this little span of history, they’ll find that Amazon’s share lowered because of other entities entering the marketplace, and not agency pricing. And all those publishers, who have been crowing about how much bank they’ve been making on ebooks, will be shown to have merely passed up an opportunity for even greater profits.

    Of course, I could be wrong.

    • Kris says:

      Michael, your analysis of agency pricing is good, I think. It all comes down to what Stackpole calls the Goldilocks number–the place to set the price to bring in the most consumers. Not too high, and not too low. Agency gets in the way of that, and can hurt a dynamic market. But right now, publishers (and others) are trying to retain control. They’re (rightly) terrified.

  19. Kris wrote: “Imagine all those lawyers and forensic accountants digging in files that you and I know are…ahem…messy.”

    I’ve been thinking about that. But, alas, I’m really skeptical that we’ll ever find out if they find evidence of misreporting to writers (which I’m assuming exists and won’t be hard to find). I don’t -we- are on ANYONE’S minds in this equation or these activities. I think all of this is all about big incorporations and, in particular, about Apple. And I think it is so much NOT about writers that even if some indjustice to writers IS found by the DoJ, it’ll be kicked aside as “irrelevant” compared to what they’re REALLY after–whatever that is.

    • Kris says:

      Um, Laura R., when forensic accountants look at the books of a company, they have to look at all of the books, including the way that money flows to suppliers (that’s us). Forensic accountants with a case already pending are looking for shady activity, and in accounting, one of the many ways to be shady is to take money from this pile and hide it in that pile. So all piles must be touched.

      Since this case is about pricing and profits, all aspects of that must be examined, including writers royalties. Believe me, this is a major fishing expedition–a legal one–and if other things get found, they will be reported, and will be reported to the folks who are impacted, primarily to see if more suits can be brought. It won’t be kicked aside. Everything will be examined, used, and commented on.

      So it may not be done to benefit the writers, but if things get found–and I’m sure they will–writers will benefit.

  20. Steven Mohan says:

    Another brilliant post–thanks, Kris! I really appreciate Lee’s comment (any your response.) It may explain why two of the publishers decided to fight. Keeping DOJ out of their books may be worth the horrible, horrible distraction. I think one of the biggest risks to the traditional publishing is oversight of their accounting practices–and like you I think that may actually be a result that will be helpful to writers. I can’t help wondering if this suit might do what the indie pub phenomenon has NOT done yet–which is to force tradpub to offer more reasonable contract terms.

    Anyway, very interesting stuff–it will be fascinating to watch.

  21. I also think it very likely that the massive sums this legal mess is costing the five publishing conglomerates, whether they’re settling or going to court, will be passed on to their writers, in the form of lowering advances, refusing to raise royalty rates, and quite possibly–despite the clear danger of doing so while being probed by DoJ–faulty reporting.

    I think a lot of people (certainly the parties involved!–but also various writers) are framing this erroneously because they’re trying to cast a hero and a villain, i.e. “Amazon is the writer’s friend, and the major houses are not!” or “The major houses care about you, and Amazon does not!” Etc. And I don’t buy any of that. I think this is about exactly what it’s always been about: major corporations seeking to maximize their profits and advance their own interests.

    Amazon and Apple both seek to profit as much as possible from selling ebooks, and they sought different ways to do it–and to pressure publishers or to court publishers, depending on what they thought would work best for their individual market positions. Publishers all sought a way to maximize profit from this new format as much as possible and, in particular, to protect the price-points and sales of print books (particularly hardcovers) by trying to establish a retail model wherein ebooks prices were based on the price of the print edition, rather than based independently on ebook production and distribution costs as a format in its own right.

    This is precisely why two midlist books of the same length, in the same subgenr, from the same imprint, released the same month frequently have prices on the ebook editions which vary by 40%; the 100,000-word romance novel priced at $7.99 as an ebook was released in print as a $7.99 mass market paperback, and the 100,000-word romance novel priced at $12.99 as an ebook was released in hardcover. The ONLY relevant difference between those two books, in production terms, is the cost of their PRINT editions; yet the ebooks are priced far apart.

    Publishers wanted to base ebook prices on print prices–and to attempt to protect hardcover prices/sales/market position this way–that led to this whole trainwreck. Amazon wanted to price ebooks of hardcover releases at $9.99 but didn’t want to take the fiscal hit for making that retail choice, so it tried to pressure publishers into basing their wholesale prices on its internal retail pricing decisions. Apple offered publishers a way to maintain these artificially high prices via the agency model.

    ALL of this extremely costly legal mess now arose out of that: conflicts and cooperation that arose specifically over pricing issues of ebooks wherein the print edition was a hardcover (or trade paperback). Books whose print editions were in mass market paperback were always priced down around $6.99-$8.99. So this was never about whether an EBOOK is profitable at $9.99 or less. Clearly it is, or publishers and e-retailers wouldn’t be selling tens of thousands of them at $6.99-$8.99 (or recording such healthy profits since the emarket book, or fighting writers tooth and nail to claim e-rights to backlist books). All this wrasslin’ with ‘gators has always been about the economics of an ebook when its PRINT EDITION is in hardcover (or trade paperback?).

    And I’d say that tying ebook pricing to the print-format pricing for each title has proved to be a very costly decision, given that its twisted and tortuous path has led to lawsuits and legal settlements that are costing tens of millions of dollars.

  22. Kary English says:

    Some things just make you scratch your head, and this quote in the NYT is one of them. It’s in the very last paragraph on p.2.

    “Curt Matthews, IPG’s chief executive, said publishers who dealt with Amazon “will have to insist on keeping their fair share. It is obviously true that producing good content is the hard part of making a good book, no matter how that content is captured. Why should publishers cede all of their power to this new player in the book business?” (link at end)

    Let me excerpt a choice bit: producing good content is the hard part of making a good book.

    Cool. I agree. But the next sentence boggles my mind. How in the world does one not understand that WRITERS are the content-producers?? But once that switch is made, yes, writers should not be ceding their power to ANY player in the book business.

    Keeping their fair share… And their “fair” share is some 50+ percent of the proceeds vs how much for the writer?

    Hrmpf!

    http://www.nytimes.com/2012/04/12/business/media/amazon-to-cut-e-book-prices-shaking-rivals.html?_r=4&pagewanted=1&nl=todaysheadlines&emc=edit_th_20120412

    • Kris says:

      Kary, excellent point. It’s fascinating to me how traditional publishing forgets the writers. That’s what I commented on earlier in the year, when the traditional publishing folks at Digital Book World put on a panel on improving author/publisher relationships and didn’t invite any writers or writers organization representatives to sit on the panel. Let’s talk in theory about writers. Oh, done now? Good, let’s move away from that pesky topic. :-)

  23. Kary English says:

    A fishing expedition, eh? So does this mean that a certain tendency to under-report e-book sales might get noticed?

  24. [...] The Business Rusch: Writers And The DOJ Lawsuit by Kristine Rusch [...]

  25. Andrewson says:

    Good post to read.

  26. [...] starts preparing B&N’s obit. And the ever-prescient Kris Rusch breaks down how it will affect writers (SPOILER: No one [...]

  27. [...] Kristine Kathryn Rusch: Writers and the DOJ Lawsuit on The Business Rusch. Enlightened and informative [...]

  28. Thanks for this Kris. I’ve been reading various and sundry reactions, and it is clear to see who is looking at the big picture with a curious eye to the future and who is panicking and/or biased.

    As someone who is currently doing better in indie than in trad, I am very curious to see if striking the MFN clause will affect KDP authors at any point (many of whom have gamed the price matching favorably, and some of whom have been burned by it).

    The biggest shake of my head is reserved for publishers who haven’t taken a serious look at the result of forcing agency publishing down Amazon’s throat: first, traditional authors have been hurt with lowered royalty shares for the suddenly profit-producing ebook divisions of their publishers; second, traditional authors’ sales have been undercut by indie authors who experiment with and maximize the optimal price point.

    The publishers’ actions, meant to preserve their business, is at risk of undermining it in the long tail. Every month they don’t pay attention to what the customer is saying (with actions, not words), is a month where Amazon gathers data on what works relative to indie authors, and what doesn’t. And also what works in the Amazon publishing arm. To use a sports metaphor (despite my lack of sports ability) — the publishers are keeping their eye on the baseballs in the dugout instead of the baseball in the pitcher’s hand.

    Amazon’s corporate actions have allowed me to continue to make a living at writing novels, when trad publishers were interfering with that ability (not to mention my confidence and creativity). Does that make Amazon a good guy? A bad guy? Or just a smart business entity that I am wise to do business with at the same time I am telling B&N and Apple exactly what Amazon is doing that I think would help them be more successful at reaching readers, too?

    • Kris says:

      Kelly, I love the sports analogy! Great stuff. It made me laugh out loud.

      I completely agree about the publishers’ actions. I’m finding, like you, that the reaction to the DOJ suit is enlightening all by itself. I’m really appalled at all the people (including you, Scott Turow) who say that the law can be broken as long as the motives of the breakers are pure. I explore that theory a lot in my mysteries, but um…I don’t want agents, lawyers, and others thinking that. Oh, I feel a rant coming on. :-)

      I don’t think Amazon is good or bad, any more than B&N or Apple are. They’re corporations who need to be watched, just like all corporations. Right now, Amazon has the better business model. And it’s winning. That’s scary to the others with the bad business model. And just plain scary, considering all the change going on.

  29. Aaron says:

    Kris -

    Okay, so in your opinion what is the “sweet spot” for pricing a full-length ebook? :)

    • Kris says:

      You’re going to hate my answer, Aaron. It depends on length. If it’s short, (50-70K) then $4.99-6.99. Traditional length 80-100K $7.99-$8.99. Long (120K max) $9.99. If you’re providing several books then you can go above $10, but remember on Kindle, at least you have a financial incentive to stay under $10 because of that 70% royalty. So you need to look at pricing in reference to your profit as well. But think long and hard before going above $9.99 or below $4.99 for full length novels. First books of series, that sort of thing, might be good to discount. But everything else should probably fit in that $5-10 range. You want to remain an impulse buy. (And front list should be more expensive until the next new front list title comes out.)

  30. Desmond van Heerden says:

    Hi Kris,
    Just read an interesting article that features an interesting view on why publishers seems to only have Apple vs Amazon in the ebook market:

    http://www.techdirt.com/articles/20120412/07212918466/another-reason-why-drm-is-bad-publishers.shtml

    Seems like they painted themselves into a corner there…

  31. Actually, Kris, I don’t hate it at all. :) That’s almost exactly what I’d thought you’d say, thanks. I’m still struggling with the whole “price it low so it’s a bargain” and “don’t overcharge!’ vs. “price it high enough to make a decent profit off it” and “price it high enough that people don’t think it’s cheap in quality as well as cost” dichotomy, so I appreciate the input.