Dear Author » Antitrust

Is Macmillan’s Retail Price Maintenance Move Legal?

Jane — Sun, 31 Jan 2010 10:00:21 +0000

Please note: I am not an expert in antitrust law. I’m giving my own interpretation of the law. There are a myriad of legal issues implicated by this situation, not the least of which is Amazon’s own publishing ambitions and possible anti competitive behavior.

Macmillan announced yesterday that it would be selling all of its ebooks at a minimum retail price that would disallow any discounting by a retailer. Macmillan would set the price and the retailer gets a cut (30%). Retail price maintenance is often used for luxury goods such as Allan Edmonds, Coach, and the like. Nine West had engaged in RPM and was slapped by the FTC until the Leegin decision came down in 2007.

For 97 years, the Supreme Court had deemed RPM as per se illegal. This meant that if a supplier was engaged in it, they were in violation of the antitrust law. But in a 5-4 decision with heated dissents, Leegin made RPM legal, under some circumstances. (For lawyers out there, vertical price restraints were changed from per se illegal to being judged under the rule of reason).

The argument made in the Leegin decision by the manufacturer (or supplier) was that RPM was necessary to protect a manufacturer from “free riding”. Free riding is where a consumer would go to a high end store and learn all about the product from trained and specialized customer support individuals and then go to a discounter and buy the product. The discounter would not have invested in the specialized customer support that the high end retailer had.

As an example of this, Nine West proffered the instance:

For example, in one instance an independent retailer with minimal floor space who provided little customer service offered Nine West styles at rock-bottom prices, taking advantage of a nearby retailer’s superior customer service, displays and advertising.

Or from the Leegin decision:

If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider.

In Amazon’s case, however, it provides more service than most retailers. It is not in the position of the deep discounter who benefits from the training and service of the high end retailer. The danger of free riding isn’t necessarily there. Often people use Amazon’s database to provide information about upcoming books, covers, and consumer reviews without actually purchasing from Amazon. Books are not a product that require expertise to purchase.

The majority of the Justices in Leegin, led by Justice Kennedy, felt the RPM could increase interbrand competition. Interbrand is the competition among manufacturers selling different brands of the same type of product. Interbrand competition is, generally, what the antitrust laws target.

Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.

In terms of the book market, this would mean that Amazon, and others, would promote the low-price brands like Samhain, self published authors, authors using Amazon’s publishing service, independent publishers, and the like. The high-price products would be those of Macmillan and other publishers who would seek a price floor.

Of course, books are a unique product in that each book is its own tiny monopoly. No one else can produce and publish a Stephen King book. There are other mystery books and other horror books but there is no other Stephen King. So is Macmillan attempting to use RPM to gain monopoly profits improperly?

The Supreme Court gave little guidance as to what would be deemed improper. It said that the following factors are relevant:

Number of manufacturers that are engaging in RPM
Source of the restraint (i.e., if it came from the retailer versus the manufacturer)
Manufacturer’s market power

The agency model and the RPM is good for new entrants who don’t have the market power of Amazon. Mike Tamblyn of Kobo Books and Bob Livosi of Books on Board have both said that $9.99 price point isn’t sustainable for them, as retailers, presumably because they couldn’t afford to suffer the loss that Amazon could. In fact, one retailer of ebooks informed us that they purchased ebooks at Amazon so that Amazon would take the loss instead of their company. New entrants into the market is a pro competitive aspect even if price increases are anticompetitive (antitrust is supposedly all about protecting the consumer).

Amazon itself could be engaged in anticompetitive behavior by refusing to allow access to 90% of the ebook market by tying the print sales to the ebook prices.

Justice Stevens noted the dangers of RPM in the dissent:

In doing so, they can prevent dealers from offering customers the lower prices that many cus-tomers prefer; they can prevent dealers from responding tochanges in demand, say falling demand, by cutting prices; they can encourage dealers to substitute service, for price,competition, thereby threatening wastefully to attract too many resources into that portion of the industry; they caninhibit expansion by more efficient dealers whose lower prices might otherwise attract more customers, stifling the development of new, more efficient modes of retailing; and so forth.

RPM has served to increase prices for consumers. Comparing the States who had allowed for RPM versus the States that had not, the Department of Justice argued that minimum resale price maintenance had raised prices by 19% to 27%. There are several other sources that note that RPM results in higher prices:

The Federal Trade Commission (FTC) staff, after studying numerousprice surveys, wrote that collectively the surveys "indicate[d] that [resale price maintenance] in most cases increased the prices of products sold with [resale price maintenance]." Bureau of Economics Staff Report to the FTC, T. Overstreet, Resale Price Maintenance: Economic Theories and Empirical Evidence, 160 (1983) (hereinafter Overstreet). Most economists today agree that, in the words of a prominent antitrust treatise, "resale pricemaintenance tends to produce higher consumer pricesthan would otherwise be the case." 8 Areeda & Hovenk-amp ¶1604b, at 40 (finding "[t]he evidence . . . persuasive on this point"). See also Brief for William S. Comanor and Frederic M. Scherer as Amici Curiae 4 ("It is uniformly acknowledged that [resale price maintenance] and other vertical restraints lead to higher consumer prices").

However, the landscape for RPM is changing. In 2009, Maryland became the first state to pass legislation expressly contradicting the decision in Leegin.

"[A] contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade or commerce.

The question of whether State laws can override federal antitrust interpretations is still up in the air (this is called preemption).

To further complicate matters, the Fourth Circuit found that if there was a true agency relationship, this defeated any claims of improper price fixing after Leegin. In true agency relationship, the manufacturer (publisher) holds the ownership of the book and sells it to the consumer directly. The bookseller, like Amazon, only assists in the sale. Amazon would not be a reseller in this circumstance. Instead the sale is made from the publisher to the consumer. An example of this would be real estate agents. These agents facilitate the sale between the owner of a house and the buyer of the house. The real estate agent doesn’t buy the house and then resell it.

In a true agency relationship, one wonders whether Macmillan would have to source the digital file and provide the DRM as well because Macmillan must be in control of the book, must remain the “owner” of the digital file until the ownership transfers to the reader.

Individually, Macmillan may be able to prevail under Leegin standards. A supplier can refuse to deal with retailers who do not follow suggested pricing. Further, Macmillan is only one publisher. Should all six follow suit, however, and attempt to enforce a retail price minimum across the board, Amazon would be in a much better position to argue that the publishers have tacitly created a horizontal cartel to artificially set prices above market conditions.

I don’t think Macmillan can back down now. To do so would seem to harm it’s negotiating power with Amazon for a long time. Can Amazon serve its customers with just the secondary market? I’m unsure.

Amazon Flexes Its Market Muscle

Jane — Sun, 30 Mar 2008 09:00:14 +0000

So, this Amazon thing. It sounds bad. For those who might have missed it, Amazon decided to stop stocking Print on Demand books that do not use Amazon’s own service, Booksurge. I’m not sure who falls under a Print on Demand service. I have always viewed PODs as any publisher who has print books but does not have a print run. This can vary from printing to order (i.e., if the bookstore orders 1000 copies, the publisher prints 1,000 copies) or it can be a simple as a book that is printed, bound and shipped upon each individual sale.

Small print publishers like Samhain and Whiskey Creek Press use POD services but in different ways. Samhain partners with Ingrams that prints stock to fill orders and keeps some inventory on hand. Ellora’s Cave used to do it this way but bought their own printing presses. Whiskey Creek Press and NCP use POD in yet another way but it appears that some of those booksellers retail agreements with Amazon are in jeopardy. Whiskey Creek Press and another epress, Pawprints, have seen the “buy” links on their book pages disappear. Samhain and Amber Quill Press books seem to be unaffected at this point.

For how long, though, only time will tell. The largest POD printer is Lightning Source (owned by Ingram). Lightning Source sells over 400,000 titles on Amazon according to LSI’s own site. Publish America has over 30,000 titles on Amazon.

This should be expected, as Kassia Krozser of Booksquare, states. Amazon is trying to create a publishing empire. Not just a retail publishing empire, but a publishing empire. For example, Amazon used to sell ebooks in differing formats including Adobe and MS Reader. I believe that it used Lightning Source as its fulfillment for those books. In 2005, about the time that Amazon bought Booksurge, it also bought Mobipocket. Some time in 2006, Amazon stopped servicing and selling its ebooks. It sent out a notice to all readers to download their ebooks or lose them forever. Fast forward to 2008 and we have the Kindle and its super proprietary software and the only way to read a Kindle book is on the Kindle itself. Want to read a book on the Kindle? You email it to yourself and it is stored on the Amazon servers. As Krozser writes:

Your content is being locked to their device. Your content is being locked to their service. They get to set the terms . . .

Currently, Amazon will turn your bytes and bits into a published book for $299.00 (this is the cheapest service). You are entitled to 35% royalty on all retail services sold on Amazon.com and then fulfilled by Booksurge.

In the meantime, Amazon makes it attractive for bloggers to use it services. For each book that someone buys through a Dear Author Amazon link, we get a 5-6% referral fee. This is the one way that we monetize our blog without being too intrusive (at least I think it isn’t intrusive). It’s also easier to use Amazon to link to books because so many developers have put together Amazon related tools for bloggers. When Sarah and I were debating how to make a list of the 64 books that were part of the DA BWAHA tournament, I was disheartened because of the time I thought it would take. Instead, Amazon had the software for Sarah to make a DA BWAHA store in just minutes. I made one for Dear Author over the weekend. We are participating in feeding Amazon business because a) we get a monetary benefit from it and b) it is easy to use. (As an aside, we haven’t submitted the DA blog to be a paid for service on Kindle.)

As a reader, Amazon’s move bothers me for the reasons I can’t articulate because I can’t foresee all the dangers. I can see a decline in small press publishing. Small press publishing is really important. Honestly it is small press publishing that drove the erotic romance market into mainstream publishing. How long would it have taken for that sub genre to grow if small print publishers hadn’t taken those chances and shown it could be profitable? What is the next sub genre that the small presses will make popular?

The move to require everyone that uses some kind of POD service to pay Amazon will have some deeper portent in the future. Amazon is thinking ahead, are you?

Minimum Resale Prices for Books Could Be on the Horizon

Jane — Tue, 27 Mar 2007 13:59:09 +0000

A very important consumer rule is being considered by the Supreme Court which would impact retail pricing in the US. Yesterday, in the case of Leegin Creative Leather Products Inc. v. PSKS Inc., No. 06-480, the Supreme Court heard oral arguments on whether the rule which prevents manufacturers from dictating to retailers what price a good should be sold at and when sales can occur.

Leegin sold Brighton products at a discounts that Brighton did not authorize. Brighton refused to continue to supply Leegin, arguing that Leegan violated their contract regarding resale prices. Nine West, in 2000, had to pay a $34 M fine for resale price fixing when it tried to proscribe when a sale could occur on its products and for what price.

To do away with the rule against resale price fixing is bad for the consumer. Publishers could set minimum resale prices for books, like Harry Potter, at a certain price and booksellers, per the agreement, would not be able to discount the books. Changing the rule is not good for the consumer.