The Department of Justice Is Suing Apple for Fixing E-Book Prices. It Shouldn’t Bother.

Commentary about business and finance.
April 11 2012 12:30 PM

Leave Penguin Alone

Who cares if book publishers are colluding with Apple to raise e-book prices?

The world of publishing is changing fast. How can publishers adapt?
The world of publishing is changing fast. How can publishers adapt?

Photograph by John MacDougall/AFP/Getty Images.

This week, the United States Justice Department filed a lawsuit against Apple and several book publishers, alleging they had colluded to raise e-book prices after launching the iPad. A few publishers settled out of court, but Apple and the publishing houses Penguin and Macmillan will reportedly fight to protect the right of publishers, rather than vendors like Amazon, to set e-book prices. Last month, Matthew Yglesias argued that even if Apple did fix prices with publishers, it’s unlikely to have much of an effect on competition in the book business. The full piece is reprinted below.

A bit buried in last week’s iPad 3 excitement was the news that Apple, along with five major American book publishers, was given notice by the Justice Department that it’s about to be sued for colluding to raise prices. A tech giant can afford to shrug off something as petty as an anti-trust lawsuit over books, but for HarperCollins, Penguin, MacMillan, Hachette, and Simon & Schuster (full disclosure: my publisher) the implications are potentially quite dire. Scott Turow, president of the Authors Guild, went further and argued that “everyone who cherishes a rich literary culture” should be alarmed by the DOJ’s actions. He’s wrong. If there’s a case against the government’s actions it’s that the forces of disruption buffeting traditional publishing are much too large to be blocked by any cartel. The good news is that literary culture should survive either way.

The basic question here is, how much should a digital book cost? A traditional book is, among other things, a rather heavy manufactured product. Like many manufactured goods, it’s much more efficient to make a whole bunch of books at once rather than crafting them one at a time on demand. Consequently, to bring a book to market a traditional publisher needs to make a substantial up-front investment in inventory, and that inventory then needs to be lugged around the country. If consumer demand turns out to be low (the sad fate of my first book), then unsold copies end up languishing in warehouses. Factor in the retailers’ rent and labor costs plus their desire for a profitable markup, and it’s clear that each copy needs to be fairly expensive or the whole business will collapse.

Digital books are not like that. There are fixed costs associated with getting the book together in the first place, but selling five copies costs about the same as selling 5,000 or 5 million. A properly motivated individual or organization might even give a digital book away for free the way the Center for Economic and Policy Research’s Dean Baker did last year.

A for-profit company like industry leader Amazon doesn’t want to give tons of books away for free, but they do have interests beyond pricing things at a profit-maximizing level. They’d like people to buy Kindles, for example, and they want as many folks as possible to start reading digital books. That’s why they launched the Kindle with a mandate that books be sold for a flat rate of $9.99 even when charging more in specific cases might have made more sense. And that’s also why they ignore bandwidth and storage costs and give public domain books away for free (I’ve been enjoying The Adventures of Sherlock Holmes).

Publishers were, of course, free not to release Kindle editions of their titles, but most could see the need to get on the digital bandwagon. This was a very dangerous situation for major publishers. They’d gone from lording it over a landscape of thousands of independent retailers to dealing with just a handful of major chains. Now they were threatened with being suppliers to a monopsony purchaser of e-books, perennially stuck under Amazon’s thumb. Enter Apple, the tech giant with an insatiable appetite to “control the whole widget.” Even though the Kindle Reader for iPad is, in my opinion, the very best way in the whole world to read books, Apple wanted its own iBooks store. And to get it, they were prepared to give publishers what they wanted—the right to set their own prices, in exchange for sending a hefty 30 percent cut to Cupertino, Calif.

So far, so good. Except the government is alleging that Apple didn’t just show up offering a better deal. They’re saying it actively colluded with the five major publishers to raise prices.

Turow and the Authors Guild say they have no idea whether collusion happened. Either way, they argue, the higher prices are good because they’re helping to keep physical booksellers in business. “In bookstores,” Turow writes, “readers are open to trying new genres and new authors: It’s by far the best way for new works to be discovered.”

I share my colleague Farhad Manjoo’s skepticism that old-fashioned bookstores are all that great. Turow should also consider the fact that e-books can be advantageous for new authors. In the digital realm, an author can make a short piece available for little or no money as a loss-leader for potential future works. And digital sellers have no shortage of “shelf space” that has to be dedicated to a handful of specially favored books. The back catalog can live forever, and sales can come from the long tail of niche tastes.

Conversely, whatever the facts of the case, the Justice Department’s notion that we should fear a book publishers’ cartel is borderline absurd, on par with worrying about price-fixing in the horse-and-buggy market.

What makes a major publishing house a major publishing house is its expertise in the manufacture and distribution of books. As an ancillary element of the business, publishers are also good at recruiting authors, editing prose, and publicizing new works. But firms with expertise in writing, editing, and publishing text are a dime a dozen. Slate has that know-how, as does every newspaper and magazine in the country and a huge quantity of independent and university presses. Even more troubling for traditional publishers, famous authors now have unprecedented ability to simply bypass the entire publishing system. If Suzanne Collins wants to sell a Hunger Games prequel directly to her readers, does anyone doubt she’d sell vast quantities? Celebrities could even potentially become their own publishing brands, using their fame to substitute for a traditional market apparatus. Oprah Winfrey has a proven ability to drive book sales. Why not launch an Oprah Press?

That’s not to say the six big publishers are doomed to go extinct. But the only way for these firms to stay viable is to publish books people like and to sell them at a price readers want to pay. Whether they merge, collude, or simply find a convenient confluence of interests around Apple’s efforts to compete with Amazon, there’s no real threat to competition here. Literary culture, for better or for worse, is dealing with a radically transformed business landscape. The Justice Department is, at best, irrelevant to this process.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.