Jun 12 2012
I wasn’t going to do anything other than mention that Barnes & Noble objected to the proposed settlement between the government and three publishers: Hachette, HarperCollins and Simon & Schuster but the adulatory statements of those publishing insiders about the statement really irked me and therefore, I had to post. For instance, Mike Shatzkin, a paid consultant to traditional publishers said this “BN’s response to DoJ (thanks David Boies) is a must-read. Obliterates the govt’s case. tinyurl.com/cysszov”. Publishers Weekly tweeted this “MobyLives: B&N joins forces with superstar attorney to explain the obvious to the DOJ in a blunt, exhilarating letter pwne.ws/KOwlFs”
What neither Shatzkin or Dennis Johnson of Moby Lives evidences is actual knowledge or understanding of the case. Barnes & Noble’s letter primarily argues, for a number of reasons addressed before, that the DOJ should not preclude parties from entering into Agency agreements as the Proposed Settlement would require. That’s the only legal argument that they make. The problem with this is that Barnes & Noble should know that Agency without MFN has no teeth because no one signs an Agency agreement without MFN. They are like peas and carrots. In sum, what B&N is asking for would not result in what it what it truly wants and that is further erosion of Amazon’s hold over the ebook market.
Yes, David Boies is a well known attorney and a competent one, but the letter has no actual legal argument against what Judge Cotes has said that the suit is about: an illegal collusive agreement.
We are currently in what is called the “comment period”, a 60 day period in which anyone can comment on the proposed settlement. According to the DOJ, over 200 comments have already been received and the DOJ expects more. (ENDORSED LETTER addressed to Judge Denise L Cote from Daniel McCuaig dated 6/7/2012 re: Accordingly, tl1e United States asks that the Court excuse publication of the public comments in the Federal Register and, instead, allow comments to be posted on the Antitrust Division website in conjunction with Federal Register publication of the internet address at which comments can be read and downloaded. ENDORSEMENT: Granted)
David Boies and Barnes & Noble are hamstrung a bit. They certainly can’t argue that Barnes & Noble knew about a lack of agreement or lack of collusive behavior because that would suggest that Barnes & Noble is more involved in the alleged collusive behavior than is already alleged. They don’t address the alleged actions of punishment that Barnes & Noble carried out against Random House, at the request of David Shanks. They have to be careful about what to say in order to avoid being dragged into the lawsuit itself.
Summary of BN’s Argument
What Barnes and Noble did, instead, was argue four essential points.
- The settlement engages in unprecedented governmental influence into a previously unregulated business. ” The proposed settlement, particularly its overreaching regulatory provisions, warrants an exacting review because of its potential impact on the national economy and culture, including the future of copyrighted expression and bookselling in general, not only electronic books (“e-books”). “
- The lifeblood of brick and mortar stores is predicated on publishers being able to price ebooks at the level the publisher deems fit.
- Prices are actually coming down and not up.
- Consumers will have less choice.
BN Gained Marketshare Because of Agency and MFN
There is no question that Barnes & Noble benefited directly from the Agency pricing model. If you recall, I wrote about that here in September 2011.
But it wasn’t Apple and the iBookstore that was the beneficiary of Agency pricing and it wasn’t small independent retailers like Books on Board or Kobo. The major beneficiary was Barnes & Noble. At the end of 2009, retail book sales were plummeting. B&N had already started to replace some of its book inventory with Toys & Games. In previous quarters, B&N was reporting a consistent pattern of brick and mortar retail loss. (-4.8% in 2010; -5% in 2009*; -5.4% in 2008)
Retail sales had fallen by 3% but digital sales, along with device sales, were shoring up BN’s bottom line. It could be argued that BN’s entire existence was saved by Agency pricing. But in a Sherman Section 1 case, Barnes & Noble’s success is viewed as fruit from the poisonous tree, if I can mix my legal metaphors.
First argument by BN is that this settlement which requires the abandonment of agency for two years is harmful. BN notes accurately that the agency model is not under scrutiny by the DOJ and therefore agency models should be permitted regardless. It is true that DOJ and even Justice Cotes does not appear to be troubled by agency. For the DOJ, the target was Agency plus Most Favored Nation clauses which prevents a publisher from pricing something lower at one retailer versus another. However, agency does not work without MFN’s. So what does BN say about MFN clauses? Nothing. There is absolutely zero reference in the letter about the issue MFNs. It mentions in two places that the DOJ’s suit includes MFNs but does not challenge the DOJ on this issue. This shows the unserious nature of this letter. The DOJ clearly despises MFNs as the settlement prevents any MFN clauses for the entire term of the settlement which is five years.
Agency Has Increased Competition
Second, BN argues that agency has positively increased competition in three ways. First, it has introduced new players to the ebook market; second, it has helped to staunch erosion of brick and mortar stores; and third, it has increased innovation.
The end loser of this unnecessary and burdensome regulatory approach will be the American public, who will experience higher overall average e-book and hardback prices and less choice, both in how to obtain books and in what books are available. Barnes & Noble has witnessed how agency contracts have created competition by making publishers—where there are many players and where competition is abundant—responsible for pricing and price competition. In just two years, the result of agency contracts has been significant, as competition at all levels of the e-book distribution chain has increased.
Of course, BN does not have any evidence to support any of its claims other than its own existence and success in the ebook market. In arguing that agency has increased ebook retail competition, BN’s points to itself and Apple but names no other individual retailers that have sprung up to offer ebook services during the Agency period (that is because none have).
It points to the fact that agency has allowed competitors to innovate, as if innovation would have stagnated if there was price only competition. Again, it points to its own array of devices.
At the same time, the agency model has enabled innovation, with e-book distributors developing new products to differentiate themselves. Agency has encouraged new participants to invest in e-books. Barnes & Noble, for example, has introduced multiple versions of its e- reader, the NOOK; a self-publishing platform, PubIt!; and lending and Read-in-Store programs.
Surely, BN is not arguing that it would have released the Classic Nook and nothing else? Or that the only thing that it would compete against Amazon would be on price? Innovation regardless of price competition would happen regardless. One needs only look to Sony to see that it innovated and revised its digital device even before Agency. Sony introduced the e-ink, the e-ink touchscreen, and the e-ink touchscreen with light before the Kindle was even released. Six of Sony’s 10 models were introduced before 2010 and the onset of Agency pricing. Both the Kobo and the BN Nook were in the works before the onset of Agency pricing.
Barnes and Noble also argues that physical bookstores will be harmed if agency pricing were to go away. This again is misleading because of the failure to note the importance of the MFN clauses, but let’s that aside for a moment. The Antitrust laws are not designed to help one business (Barnes & Noble) or one business model (hardcover retail sales).
Prices Have Come Down
Third, BN argues that prices have come down and shows this little chart.
I mentioned how unserious this letter was previously, right? Because this chart says absolutely nothing. Does BN include the basis for such data? No. They just make up the chart and toss it into the letter. Average ebook prices are declining, yo! Is there a division between non agency priced books and agency priced books? Are they taking into account that once Agency pricing was put in place that Apple set the floor and ceiling for pricing of books? Remember, Apple required the price of digital books to coincide with a physical book price. Let’s review those numbers:
- Anything under $22.00 is capped at $9.99
- $22.01-$24.00, the maximum ebook price is $10.99;
- $24.01-$25.00 is $11.99;
- $25.01-$27.50 is $12.99;
- $27.51-$30.00 is $14.99;
- $30.01-$35.00 is $16.99;
- $35.01-$40.00 is $19.99.
No wonder the price of Agency hardcovers declined. It doesn’t take a rocket scientist to see that the decline was in part due to the alleged illegal conspiracy. The lockstep pricing is actually one of the best parts of the DOJ’s suit to show collusion.
Lack of Consumer Choice
Lastly, BN argues that below cost pricing will lead to ebook distributors leaving the market and “content diversity” will suffer. This presumes that there is content diversity now.
Unable to compete with below-cost pricing, e-book distributors will drop from the e-book space. Content diversity in that situation can only suffer. See Scott Turow, President, Author’s Guild, Apple Antitrust Suit Would Aid Amazon, Bloomberg, Mar. 21, 2012 (“if we reinstate the status quo before Apple’s agency-model breakthrough, then bookstores and publishers are going to be the first casualties. Right behind them will be readers, who will see the diversity of titles and authors diminish while leading titles get more expensive”). Consumers will also have limited choice in where they buy their books: online retailers such as Amazon or large, multipurpose brick-and-mortar stores such as Costco, Wal-Mart, and Target, which offer only mass-market selections.
Nonetheless, Amazon’s low cost pricing may lead others to leave the market, but Amazon had been low pricing for two years, between late 2007 and 2010. During that time, other entrants were coming into the marketplace including BN, Kobo, Google. Apple wanted in only Agency and Sony already existed. The uncomfortable facts are that there were several players that were preparing to enter the digital book market in spite of Amazon’s low cost pricing.
Customers also have limited choice where to buy books because of Borders’ demise which can’t be placed on Amazon’s low pricing of ebooks and the decline of Barnes & Noble stores predating 2008. Physical book retailing has become more and more difficult in the recent years and not simply because of Amazon and digital books.
BN’s legal argument, surrounded by a lot of puffery, is that the two year prohibition on agency pricing is unprecedented regulation of a nascent market. Agency pricing works only if there is an MFN clause. Agency would only work for BN if MFNs existed else another retailer, with more power, could exact lower price points than BN. Of course, if BN knows that its retail partners would never treat them disparately than another retail partner then BN is fine because they have, in essence, an unspoken MFN. And given the closeness between BN and the publishers that may very well be the case. However, Agency with no MFN helps only those who can exact the same price points and not every retailer will be able to do that (heck, All Romance can’t even bring 5 of the big 6 to their store!) Allowing Agency with no MFN has no pro competitive consequences except for the largest players in the market.