Prof. Randal C. Picker, University of Chicago Law School
September 17, 2012

The book market is experiencing enormous turmoil.  This is being driven by the emergence of e-books as an important phenomenon coupled with the substantial disruption created by Amazon’s strong position in the market.  Prices are all over the place as we see churn as new institutional arrangements come into place.  Consider a few data points and then step back to consider the bigger picture.

Late last week, it was announced that one of the big six publishers, Hachette, was raising its prices to libraries for backlist e-books by 220%.  220%.  That is a startling number.  We know that overall price inflation is running a bit behind that – say 1% to 2% per year – and we can be pretty sure that e-book costs in particular are not rising anything like 220%.  So book prices are going up and in a dramatic, shocking way (I am now channeling my inner librarian).

Unless they are going down.  On April 11, 2012, the United States filed an antitrust lawsuit against Apple and five of the six publishers (including Hachette).  That lawsuit has split, with Apple and two of the publishers moving toward a trial on the merits, while the remaining three publishers entered into a settlement and consent decree with the federal government.  We of course don’t know whether the allegations in the government’s complaint are true, but accept them as true for the purpose of today’s post.

The government describes a book publishing industry on the run in the face of the rise of Amazon.  Amazon of course started as a physical book distributor in competition with independent bookstores and national chains like Borders and Barnes & Noble.  With the release of the Kindle, Amazon moved into the digital platform business and has built a soup-to-nuts e-book distribution system.

Amazon, says the complaint, has pushed down e-book prices and that has put pressure on the entire pricing system for books, both e-books and physical books.  The book publishers were looking for a response to that and found Apple.  Apple wanted to do for books what it had done for music with iTunes, so the book publishers and Apple got together to reach an agreement to change the pricing model for e-books.  Amazon had been able to get pricing freedom for e-books by buying at wholesale and then setting whatever retail price it wanted.  Apple and the publishers moved toward agency pricing, which kept retail pricing power in the hands of publishers.  And with that deal in place, the publishers then were able to force that arrangement on Amazon, and that pushed up e-book prices.  Or at least so DOJ alleges in its very detailed complaint.  DOJ has investigative powers that private plaintiffs can only dream about, so DOJ complaints are typically very, very precise (who met whom where, at what restaurants, what they had to eat – okay, I made that part up – but the complaint is a very good read).

So more book prices going up, it seems.  But Hachette, HarperCollins, and Simon & Schuster agreed to settle with DOJ and that settlement was approved on Sept. 6, 2012.  There are lots of details and the settlement is just being implemented, but with Amazon now having renewed pricing flexibility on e-books, the early returns have e-book prices going down.  (There is also a parallel state-level suit with a corresponding settlement, except that settlement should get some cash to past e-book purchasers.)

Disintermediation is a big Internet word.  The basic idea is that a firm or group of firms in the chain of distribution gets pushed out as other firms are able to reach customers directly.  We used to have big physical book warehouses and they sold to retailers who sold to you and me.  Amazon changed that for physical books – so that books moved directly from warehouses to readers – and the bookstore market is still working through that.  The Kindle platform has spurred the move to e-books and other firms are looking to succeed in that space as well.  Book publishers fear that they are being disintermediated as well and are also looking for ways to maintain revenues in the face of pricing pressures.  Book prices going down to direct customers reading e-books, and up to libraries that enable e-book sharing among their customers, are part of the same phenomenon.