Explanation of the Settlement between DOJ Hachette, Harper Collins and Simon & Schuster and What Happens Next
The DOJ filed suit against five publishers (Penguin, Macmillan, Hachette, HarperCollins, Simon & Schuster) on April 11, 2012. The DOJ then immediately filed a notice of settlement and a request for approval of the settlement. A judge assigned to this case will then either approve the settlement and order the parties back to the negotiating table. Any interested party has the right to write a statement to the court within 60 days to encourage or discourage acceptance of the proposed settlement.
Two things are at issue here:
1) The restriction on retailers ability to discount books and
2) The Most Favored Nation clause (MFN for short). The term MFN essentially means that the retailer gets the best deal offered to other retailers. If HarperCollins was going to price a book at Apple for $1.99, the MFN clause that Amazon had in its contract with HarperCollins would kick in and Amazon would automatically lower the price to match the $1.99. The Final Judgment defines banned MFNs to include
- clauses that require the publishers to match retail prices from ebook retailer to ebook retailer (If BN prices the book at $5.99, Amazon lowers the price to $5.99)
- clauses that require publishers to match the wholesale price that the ebook retailer is getting (i.e., if BN gets 14.99 wholesale price, Amazon gets 14.99 automatically)
- clauses that required publishers to match revenue share or commissions. (I.e., if BN says they want 30% of books sold on commission, Amazon also gets 30%)
Assuming the settlement is approved, the timeline is as follows:
- The judge approves the settlement.
- Within 7 days, the Settling Defendants (Hachette, HarperCollins, and Simon & Schuster) will need to sever their contracts with Apple.
- Within 30 days, the Settling Defendants will need to bring their pricing arrangements in line with the terms dictated in the Settlement Agreement.
- Within 30 days, contracts that restrict an ebook retailers ability to set the price of an ebook or a most favored nation clause must be broken. Amazon would be a retailer with whom publishers have an MFN clause.
- Publishers must designate an Antitrust Compliance Officer to train the employees of the publishers in how to abide by the rules set forth in the agreement; to conduct an audit; provide quarterly reports of compliance to the DOJ, and to maintain a log of communications between “officers and directors” and others if the communication involves selling of ebooks.
Other lawsuits include
- 16 States’ Attorney Generals filing suit against Penguin, Macmillan, Simon & Schuster and Apple. Hachette and HarperCollins settled, agreeing to a payment of penalty purported to be $51 million and some unspecified injunction (an order to stop doing things)
- Civil class action litigation that is still ongoing. My guess is that Hachette, HC, and S&S have little stomach for protracted litigation but obtaining a partial settlement in the class action with approval from the court (as class action settlements must be court approved) may be difficult right now.
- EU investigation (not a lawsuit but important). According to this article, all publishers but Penguin are reportedly talking settlement with the EU.
What happens next?
- 3 of the big 6 publishers will make new agreements with Amazon and the other retailers.
- These new agreements can have staggered termination dates. This means Hachette’s annual contract with Amazon would end on a different date than HarperCollins contract with Amazon. This is to ensure that there is no concerted and collusive action.
- The publishers can consider joint ventures (aka Bookish) but only upon approval of such a plan by the DOJ.
- The publishers will need to provide DOJ a copy of their agreements with retailers for the next five years on a quarterly basis.
- For two years, the publishers cannot restrict the right of retailers to discount books. After two years, publishers can ask for and receive agreement to sell ebooks through a retailer under the current scheme – where the publishers restrict retailers from discounting.
- For five years, the publishers cannot include MFN clauses in their agreements.
- The publishers are allowed to negotiate a soft floor under which books cannot be discounted but only if the retailer agrees to this. The clause in the settlement agreement allows a retailer, like Amazon, to discount books but limits the discount in one year for one publisher to not exceed the retailers aggregate commission. Assume Amazon signs an agreement with Hachette and Amazon agrees to accept a 30% commission on every book sold. For one year, the total amount of discounts cannot exceed the total commission Amazon received for that year. Some of the books could be half off, buy one get one free, or not be discounted at all. But the total discount cannot exceed total commission. Assume Amazon sold 100 books for Hachette that were retail priced at $9.99. The total commission for Amazon would be $299.70. Thus, the overall discounts Amazon gave to us readers could not exceed $299.70.
- Retailers like All Romance, Fictionwise, Kobo will be able to provide coupons and include a greater number of books into their rewards programs for at least a period of two years.
Predictions
My prediction is that Amazon will begin to discount the books that it can once the settlement agreement is approved which will NOT occur until the 60 day comment period has passed. I also feel that given the marked decline of mass market that the format will be phased out and be replaced with primarily trade and hardcovers thus increasing the overall suggested retail price for books. This would serve to elevate digital book prices even if Amazon would choose to discount aggressively.
Thus while book prices might fall in the short term, beginning in late summer, within two years, many print book prices may increase, thus increasing the retail price. Mass markets may go up to 8.99 per book and trades up to 15-17.99 with hardcovers increasing as well. MMPB buyers are very price sensitive but with large numbers of mmpb readers moving toward digital, publishers might see the increased price as a worthwhile risk.
In other words, you may want to stock up in the late summer and early fall (and thus you might want to save for that time). Christmas 2012 might be a banner year in ebook sales again due to discounted pricing.
I also think that the publishers have sustained a big public relations blow. People who never read an ebook or haven’t followed this issue closely now are exposed to this idea that publishers stand accused of engaging in price fixing. John Sargeant’s public post that is addressed to authors, agents, and illustrators, speaks so clearly to the lack of good PR within publishers and how they aren’t well suited at this point of dealing directly with consumers.
I would also expect traditional publishing to move forward toward a digital first model. Within the 50 Shades of Grey phenomenon is the success of the digital first model. A book might need to prove itself in digital sales in order to be moved to print. This would dovetail with retailers like Barnes & Noble increasingly devoting retail floor space to non book items; the reduction of book presence at retail outlets like Wal-Mart, grocery stores, and drugstores.
Highlights of the lawsuit going forward
Given that the suits against Penguin, Apple, and Macmillan are the ones going forward, I’ve excerpted the allegations of the DOJ as it relates to those publishers. The DOJ will attempt to prove that the two publishers and Apple worked in concert with one another to increase book prices and reduce the competition to Apple from Amazon. The DOJ has said the parties engaged in a per se antitrust violation and thus do not need to define the market but to the extent that they are required to define the market, it is “trade ebook.” I think that they shouldn’t have limited it to this and that it is unduly narrow.
The italicized parts in blue are taken directly from the complaint or impact statement.
- In 2008, 2009, and 2010, the major officers of the publishers held in person meetings, sometimes quarterly, but also over the telephone to talk about “competitive” matters including combating Amazon.
- Apple CEO Steve Jobs wrote to an executive of one Publisher Defendant’s corporate parent that the publisher had only two choices apart from signing the Apple Agency Agreement: (i) accept the status quo (“Keep going with Amazon at $9.99”); or (ii) continue with the losing windowing policy (“Hold back your books from Amazon”). According to Jobs, the Apple deal offered the Publisher Defendants a superior alternative path to the higher retail e-book prices they sought: “Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.”
- After each round of negotiations with Apple over the terms of their agency agreements, Publisher Defendants’ CEOs immediately contacted each other to discuss strategy and verify where each stood with Apple. They also used Apple to verify their position vis-a-vis other Publisher Defendants. Penguin, for example, sought Apple’s assurance that it was “1 of 4 before signing”—an assurance that Apple provided. Two days later, Penguin and two other Publisher Defendants signed Apple Agency Agreements.
- The negotiations between Apple and Publisher Defendants culminated in all five Publisher Defendants signing the Apple Agency Agreements within a three-day span, with the last Publisher Defendant signing on January 26, 2010. The next day, Apple announced the iPad at a launch event.
- Initially, Amazon attempted to resist Macmillan’s efforts to force it to accept either the agency model or windowing of its e-books by refusing to sell Macmillan’s titles. Other Publisher Defendants, continuing their practice of communicating with each other, offered Macmillan’s CEO messages of encouragement and assurances of solidarity. For example, one Settling Defendant’s CEO e-mailed Macmillan’s CEO to tell him, “I can ensure you that you are not going to find your company alone in the battle.”
- Mr. Shanks, the CEO of Penguin, twice chastised Random House for continuing to sell ebooks under the wholesale model and criticized RH for “not helping the group.” “Mr Shanks also encouraged a large print and e-book retailer to punish the other publisher for not joining Defendants’ conspiracy. In March 2010, Mr. Shanks sent an email message to an executive of the retailer complaining that the publisher “has chosen to stay on their current model and allow retailers to sell at whatever price they wish.” Mr. Shanks argued that “[s]ince Penguin is looking out for [your] welfare at what appears to be great costs to us, I would hope that [you] would be equally brutal to Publishers who have thrown in with your competition with obvious disdain for your welfare…I hope you make [the publisher] hurt like Amazon is doing to [the Publisher Defendants]. Likely this is referring to Barnes and Noble
Read every word. This is fascinating stuff to read as a consumer into the minds of these publishers and seeing evidence that they were doing this in part to help B&N among other things. Fascinating stuff. I’ve never been a fan of John Sargeant but his publisher has given us some great authors like Julia Spencer-Fleming and Chelsea Cain.
What I don’t understand is…what defense do the defendants have or stand to gain if the other three publishers have already settled and given over evidence of collusion? Destroying evidence is certainly indicative of knowing that what you were doing was probably illegal. Do you think the DOJ can win this case? I know nothing is a sure thing but was wanting your opinion on this case and the likelihood of the DOJ case succeeding in court.
Where were the defendants’ legal departments when all this going on? Reading the allegations in the complaint leaves me a bit stunned. If just the timing of the actions is correct then I think they never even considered the possible legal issues.
Thank you for putting the settlement provisions in an easily understandable format.
@DS: From my experience with management teams who consider themselves above the law, my guess is that the lawyers were trying to tell them and were being ignored. *sorry, personal bias against management teams who consider themselves above the law showing*
So what I’m getting out of this is that once the settlement is in place and approved and everything, there’s a two-year window where Agency pricing will go away. After that it will return, and probably worse than ever. If that’s the case, then jeez, what was the point?
It’s sort of amazing how publishers seems unfailingly to make the stupid business decisions, and now apparently they can’t even make illegal activity profitable.
I also feel that given the marked decline of mass market that the format will be phased out and be replaced with primarily trade and hardcovers thus increasing the overall suggested retail price for books.
I found this very interesting. What will this do to book store bottom lines? because as I recall, unsold MMPBs are able to be returned for credit, but not so hardbacks and trade-sized books.
@becca: That first paragraph is a quote from Jane’s article – I guess I didn’t put in the quote tags correctly.
I can’t imagine print books won’t take a big hit if MMPB go the way of the dinosaurs. Who wants to take a hardcover into the tub?
@Everyone — yes.
Special thanks to Jane for putting this in straightforward language for us non-lawyers.
@Azure — Same experience here. The mindset seems to be (in my experience anyway) “We can make a lot of money off this, so it can’t possibly be illegal.”
@Avery Flynn — I agree. I think what’s going to happen is that as mmpb goes away and trade and HC go up in price, there will a (possiblyh reluctant) big shift to digital. I think Amazon knows/believes this and has poised themselves to take big advantage of it. B&N is probably trying to position themselves better for it and may be able to salvage themselves. I don’t think HC and TPB will compensate for the disappearance of MMPB; that void will be filled by digital.
jmho.
@Azure: I think that there is some thought in the two-year window and the five-year supervision period that the market will have sginficantly changed and that this type of agency pricing just won’t be the preferred model – look what’s happened in the past couple of years.
I’ve believed for several years that we’re headed for a market in which the only formats are digital, trade, and hardcover. I never particularly thought about that leading to an increase in the suggested retail price for digital books, however, although I can certainly see that happening if the major publishing houses continue to try to tie the price of the digital book to the price of the corresponding print book. I wonder, however, if that will make sense in the future, because I suspect we will have many more digital-first books, which means that digital is now the replacement for the straight-to-mmpb release. If there is no print copy available, how can the price of the book be tied to the format of that non-existent book? I’m interested to see how the major publishers are going to sort that out.
In the meantime, it looks like those of us who self-publish need to hurry up and get our next books out in the 60 day window so we aren’t trying to compete for initial sales traction with all the suddenly discounted Big 6 books. /scurries into writing cave
Thank, Jane, for the precise explanation. Appreciate it.
Linda
@Azure: That’s pretty much what my co-worker said this morning.
Considering how disruptive ebooks have been to established publishing I think that a couple of years might make a big difference in the business. I have bought a few new hardcovers and trade paperback of my autobuy authors in the past year, but they have been mostly from small presses. I’ve bought a lot more audio and ebooks but the ebooks have been from small presses or individual authors.
I wonder why publishers haven’t raised cane about Audible’s discounting. The downloads under my plan come out to about $10.00 each which is about half or less what is charged for a set of CD’s.
Thanks for doing this, Jane. I agree with @Keishon: this is fascinating stuff. It’s good to know to save up!
I kind of want to punch the aptly named Mr. Shanks. I have mad love for many a Penguin author but I wouldn’t mind seeing him get fired.
@becca: What will this do to book store bottom lines? because as I recall, unsold MMPBs are able to be returned for credit, but not so hardbacks and trade-sized books.
Actually that’s not true. With MMPBs, you rip the covers off of them and return ONLY THE COVERS for credit. With HC & trade, you have to return the whole book for credit.
MMPB is already dead in some genres and I can’t say I miss it. I prefer HC and trade PB.
Thank you, Jane for the explanation! I am wondering, is there any punishment that goes with this? Anything that would deter the publishers from colluding again? Because from what I understand it seems like this is a big finger wagging and “now you’re not allowed to play with Billy for two years, because you guys get in trouble together”. But is there any other penalty? If not, it sounds like a good move on the publishers’ parts. They fixed prices for two years. Now they have to stop.
@DS: re: Audible pricing for audioboooks – Shhhhh! someone might hear you and take action!
The digital first idea scares the pants off me. I read – a lot and NONE of it is digital. I could go into all the reasons, but actual ownership of something is high on that list as well as being tied to a could-go-obselete-in-a-moment device. A friend, mid-list author, just published a book (probably her 10th or so), and this was digital first (or only), and I can’t read it.
Also the death of MMPB stabs me in the heart. Trade paperbacks are overpriced for what they are. If I wanted to pay hardcover (or close) prices, I’d buy a hardcover book.
I know publishers hardly think of the readers, but without bookstores (I live in LA and there isn’t one within 5 miles of my house), and reduced library hours and budgets, what’s a reader to do? I feel like you just summarized the death of publishing.
@becca: You’re right. I should keep very very quiet. Don’t want to mess up a good thing.
Jane, you rock. Thank you.
I’m with Jinni on this one. I am so dependent on MMPBs — to lend or borrow, to donate to friends and hospitals and nursing homes and libraries, to buy or sell used — none of which are currently possible with e-books (and will never be, if publishers have their way).
Of course, e-books lend themselves even more to impulse purchases (especially the sale priced ones), but don’t seem to have that same “browsability” of rows and racks of pretty paperbacks.
Jane: Good information. But I have a question.
When the Agency Model initially went into effect, there was a fairly disastrous mess where e-bookstores didn’t have contracts with publishers and couldn’t sell their e-books. Since all e-bookstores had to renegotiate contracts will all five publishing houses, there was no way this was going to happen quickly. It took Diesel six months to get contracts with all five houses in place. Even Amazon took six months before they finally signed a contract with Penguin.
So what happens in 60 days if the contracts with those three publishing houses are nullified? Do e-books from those publishing houses temporarily disappear off of the e-shelves at e-bookstores across the Net?
End of question, and now a comment. If we assume that the publishing houses opt to include the “no sustained below-cost selling” clauses in their contracts, and if Amazon resumes its practice of selling NYT best-sellers below cost, that means that mid-list and back-list e-books from the same publisher will need to have increased prices in order to compensate. I’m guessing that the total unit volume of best-sellers is a lot higher than the total unit volume of mid-list/back-list, so the mid-list/back-list prices are going to have to increase quite a bit, which will further reduce their volume, which will lead to even higher prices… Not a pretty picture for mid-list authors with those publishers.
@Doug:
One would hope that the settling publishers would begin negotiations now. However, even if they don’t have an agreement in place should the settlement be finalized, certain agreements have to be terminated within 7 – 30 days of the Final Settlement approval. If the agreements are automatically terminated and new agreements aren’t in place, likely books would not be able to be sold.
They already settled huh? I didn’t think they would win the lawsuit, but I didn’t think they would settle, either. I mean, come on. They had to know price fixing is illegal. Not considering the legal consequences of what they are doing is just silly.
@Nadia Lee: Thank you for the correction! I knew there was some difference, but i guess I messed it up.
Thank you, Jane, for making this understandable to my overwhelmed brain.
Granted that I don’t buy many DTBs anymore, but those I do buy are either HB or MMPB. I hate trades. I don’t like the “weird” size or the prices. Are there really that many other people who prefer them to MMPB?
I guess I’m missing the point but I also don’t understand the 2-year thing. If this behavior is wrong, why not ban it altogether instead of for only 2 years and then allowing things to revert back to the same bad practices? “Hey, Publishers, take a 2-year hiatus from banding together to screw over consumers, and then you can return to party time.” I don’t have a good feeling about this.
I prefer trade to MMPB because they are physically nicer quality. I like to keep my books in good, like new condition and that’s a lot harder with MMPB, the paper is usually lower quality and the spines bend a lot more easily (I am OCD about spine creases, hate hate hate them).
I really don’t like trade sized paperbacks. To me they are difficult to hold (too bendy and awkward to hold with one hand) and they do not fit well on my bookshelves. I much prefer hardcover or mmpb.
I am waiting to hear what happens with Penguin since many of my favorite authors write for them.
I also hope the publishers who settle are able to work out a deal with ARe sooner rather than later. It took them a long time to get back to selling “Agency” priced books the first time around.
Thank you.
What is Berkley’s position in all this? I know they were late to the party. Will this agreement affect them in any way?
@Carolyn: Berkley is owned by Penguin (Pearson PLC is the parent of Penguin). Random House was the the one to join late and they aren’t in the DoJ proceedings.
You know, I think Apple might have been listening to their lawyers and get out of this fairly unscathed. It sounds like they simply offered the same deal to a bunch of publishers and signed up whoever took it.
The publishers on the other hand . . . No one who listened to his lawyer would put this in writing: “[s]ince Penguin is looking out for [your] welfare at what appears to be great costs to us, I would hope that [you] would be equally brutal to Publishers who have thrown in with your competition with obvious disdain for your welfare”
I thought this post did a good job explaining the rationale behind the two-year thing versus banning outright: http://www.litigationandtrial.com/2012/04/articles/business-lawsuits/apple-ebooks-antitrust/
@Charming: I definitely agree with that. If anyone is going to come out of this unscathed, it will be Apple. But I’m sure they knew that at the start of this whole thing.
It does frustrate me that print is still well over half the market yet few seem to care what effect this will have on those of us who love print books and want there to be somewhere besides Amazon to buy them in 5 years. I don’t see this lawsuit as pro-consumer in general. Pro e-book consumer, maybe, but not pro-consumer.
@Rebecca: I would characterize the anti-trust laws as pro-free market, rather than pro-consumer of any specific type.
@Susan: The “wrong” isn’t “demanding a fixed-price contract and raising end prices thereby.” Manufacturers are generally allowed to do that. The wrongness was in colluding with their supposed competition so that they’d all be setting higher prices at once, so that the public wouldn’t have the option of just patronizing the less-expensive companies.
After a couple of years, they should have enough experience with different market venues to (1) decide if agency pricing really is in their best interests, rather than “eep the customers are getting cheap books! Stop them!” and (2) less ability to coordinate efforts with each other. If the contracts have staggered dates, then they can’t all switch at the same time–leaving whoever does it first with the hassle of having raised their prices alone.
It’s not illegal to decide, “this isn’t profitable enough for us; we’re raising our prices.” It’s illegal to coordinate with your competitors to make sure the public doesn’t have any other options. After a couple of years of more fair competition between publisher and more thriving ebookstores, the public should have plenty of options. If a publisher thinks their books are better than other publishers’ books, they can put their prices higher–and find out if the public agrees with them.