Shimenawa

Final and non-reviewable: Competitive pricing and ebooks

Today I attended the GigaOM summit on the “Disintermediation in Publishing” session, run by Giga’s Michael Wolf. One of the most heartening things about the meeting was the relatively large number of authors and agents attending, and one well known agent, Nathan Bransford of Curtis Brown in San Francisco, was a panelist.

I was intrigued by some of the complaints from authors about pricing policies relating to major retailers. I had heard about these issues in various forums, but I had not grappled with them in sufficient detail to grok their consequences. Today, I began to understand how authors – particularly those pursuing self-publishing – are trapped by the struggles around publisher pricing strategies, major online retailers, and distributors.

I was directed to an Amazon program as an example of how an author’s selling options can be coerced. Amazon recently initiated a self-publishing program for ebooks called the Digital Text Platform that permits authors to claim royalty rates of either 35 percent or, within certain strict limits, 70 percent. As they are enacted in the real-world, those limits unfortunately have the consequence of restricting competition in pricing and dampening ebook markets.

Among its other restrictions, the 70 percent royalty rate can be claimed only against U.S. consumer sales, and only when the book is sold within a very narrow band between $2.99 and $9.99 (accessed 25 August 2010). Fine. Well, not fine if the book is sold elsewhere for a lower price – Amazon can set the new ebook price as the lowest price in the marketplace. Here is the relevant text in the Pricing Page (accessed 25 August 2010):

For any Digital Book for which you select the 70% Royalty Option, at all times that the Digital Book is available for sale through the Program, you must adjust the List Price as required to ensure that the List Price does not exceed the lowest of: (a) the lowest suggested retail price or equivalent price for any digital edition of the Digital Book; (b) the lowest price at which you list or offer any digital edition of the Digital Book on any website or other sales channel; (c) 20% below the lowest suggested retail price or equivalent price for any physical edition of the Digital Book; (d) 20% below the lowest price at which you list or offer any physical edition of the Digital Book on any website or other sales channel; and (e) any maximum List Price we provide from time to time in the Program Policies.

That’s a strong statement. For anyone abiding by agency pricing agreements, we’re sitting pretty – the publisher (/author) gets to set the price and that’s that. But there are major ebook vendors that don’t always play by agency – among them, Kobo Books, Barnes & Noble, and Sony. While increasingly they might sign agency contracts, they might not always, particularly against small publishers. Further, any existing distributor contracts have probably one to three years to run before expiration.

If any of these booksellers discounts the price of the author’s book as obtained by a distributor, then Amazon will reset its own for-sale price to that discounted level. As an author, I have no attractive recourse against this:

Our determinations regarding price-matching are final and non-reviewable. If you object to our price-matching determination with regard to one of your books, your sole and exclusive remedy is to switch your Royalty option for future sales of the Digital Book to the 35% Royalty Option … .

This policy has a variety of consequences, most of them negative for the author. (N.B.: Apple is reported to have similar “most favored nation” [pdf] pricing policies, but I have not seen them, and Apple does not have the market share of Amazon).

Under the DTP conditions, if I (in a guise as author) present a book that I have approved to sell at $9.99, and Barnes & Noble discounts it to $7.99, then Amazon will automatically reset its sale price to $7.99 and provide me the 70 percent royalty against that figure (less “Delivery Costs”, as common to all royalty tiers). Of course, Barnes & Noble could then discount the book further, driving down my aggregate income from the book’s sales on each iteration.

I could theoretically attempt to game the system: e.g., I could price my book at $9.99 knowing and expecting that B&N is likely to discount to $7.99, and then expect that pricing at Amazon. However, that places final pricing control in the square dance between B&N and other discounting retailers on one hand, and Amazon on another.

There are more pathological conditions. Should the price be discounted below Amazon’s minimum threshold of $2.99 by another bookseller, my only resource as a self-published author is to be content with a 35 percent royalty rate, cutting my royalty rate in half. That’s a tremendous loss of revenue.

That wouldn’t matter if Amazon was merely one retailer in a competitive market. But it might not be. Recently, the VP for Kindle, Ian Freed, was quoted in C|net as stating that Amazon overwhelmingly dominates the ebook market:

CNET: Well, Apple’s saying it’s got 20 percent market share and I’ve heard Barnes & Noble saying it’s got 20 percent as well, so that would leave you guys with…

Freed: Honestly, something doesn’t add up because we’re pretty sure we’re 70 to 80 percent of the market. So, something, somewhere isn’t quite working right. I encourage you to do some more research. Obviously, from the beginning of Amazon we’ve been very metrics-focused and we don’t typically throw out numbers we don’t firmly believe in.

This level of market dominance, combined with the pricing controls as enforced through the Digital Text Platform, would lead me as an author to do some quick spreadsheet calculations on my sales data and pricing levels. And here’s what they might suggest:

In many cases, it would behoove me to remove my books for sale from all other retailers except for Amazon (and possibly Apple), because, due to price maintenance, I would make more money as an author by only utilizing Amazon (and possibly Apple). The curve crosses far more quickly if I am threatened with dropping below the $2.99 threshold price for the 70 percent royalty rate.

While such a strategy makes short term financial sense for me as an individual author, in the long term it severely restricts my opportunities to reach readers through other outlets, and it makes me dependent upon a single retailer. It is also detrimental for the broader ebook market because it generates a positive feedback loop that deepens Amazon’s share of self-published and low-priced ebooks. For anyone who believes that self-published ebooks will grow as a percentage of book industry sales, there should be concern that Amazon’s pricing policies will weaken retailers that are abandoned by authors seeking to avoid triggering Amazon’s pricing retaliation.

Amazon’s stance might also force other retailers into broader adoption of agency pricing at a time when both Apple and Amazon have come under scrutiny by State Attorney Generals who question the legality of agency pricing.

Amazon’s pricing policies are unfortunate for authors, and ultimately, for readers.

Eye to eye: The Authors Guild, Random House, and GBS

At the end of July 2010, a well known agent, Andrew Wylie, created his own publishing company, Odyssey Editions, and licensed a set of classic backlist titles in new electronic editions exclusively to Amazon for a two-year period. These titles had not been released as ebooks by their print publishers, and the authors or their estates had been unable to negotiate attractive enough deals to culminate new arrangements. They are not obscure titles: they include works such as Lolita (Nabokov), Fear and Loathing in Las Vegas (Thompson), and the Rabbit series by John Updike (who, when previously breathing, was) a reluctant entrant into the digital age.

In this particular case, Random House – the publishing company most persistent and notorious for its aggressive pursuit of electronic rights from its backlist authors, responded aggressively by disputing Wylie’s ability to exploit their author’s titles, alleging that Wylie had set himself up as a direct competitor to Random, and by refusing to negotiate with Wylie over any additional titles.

The issues behind this dispute are complex, but at its heart is the fact that e-rights were not clearly negotiated with authors before the digital technology for ebook creation and distribution became more widely disseminated in the 1980s. This is not a surprise: it’s hard for pundits to accurately predict the intercourse of media and technology, just as much as it remains difficult to forecast weather beyond 48 or 72 hours. As a result, the right to publish digital editions, and the royalty rates that would accrue to authors for those publications, are often opaque to the stakeholders and subject to negotiation. Or litigation.

In fact, the landmark legal precedent in this case was a 2002 denial of a preliminary injunction, Random House v. Rosetta Books [pdf], by a judge in the Southern District of New York. The court ruled that Random House was unlikely to succeed on the merits of its allegations. Among other organizations filing supportive briefs was the Authors Guild (AG), an agency that represents a relatively small number of authors; its filing was submitted by an attorney named Michael Boni.

The Authors Guild (AG) reacted to Random House’s threats in the Wylie imbroglio with a chastising note:

To a large extent, publishers have brought this on themselves. This storm has long been gathering. Literary agencies have refused to sign e-rights deals for countless backlist books with traditional publishers, even though they and their clients, no doubt, see real benefits in having a single publisher handle the print and electronic rights to a book. Knowledgeable authors and agents, however, are well aware that e-book royalty rates of 25% of net proceeds are exceedingly low and contrary to the long-standing practice of authors and publishers to, effectively, split evenly the net proceeds of book sales.

Today (August 24 2010), Random House and Wylie announced a deal that marked a victory for the publisher in this most recent skirmish over the rights to digitally exploit backlist titles:

We are pleased to announce that The Wylie Agency and Random House have resolved our differences over the disputed Random House titles which have been included in the Odyssey Editions e-book publishing program. These titles are being removed from that program and taken off-sale. We have agreed that Random House shall be the exclusive e-book publisher of these titles for those territories in which Random House U.S. controls their rights.

As Kassia Krozser has commented, this was a skirmish. There will be others.

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Six months after the GBS hearing in the New York court, the world still wonders about the nature of the opinion that Judge Chin must eventually deliver. Most observers are skeptical that the settlement will be approved in its current form; conjecture is actually most heated around the possible endgames that might result from the parties – the Authors Guild; the five publishers from the original publishing suit and their associative organization, the AAP; and Google – being pressed back into active litigation.

The litigation process that brought us to this point started in 2005 with a class action filing by the Authors Guild; the AG’s lead attorney in the complaint was Michael Boni. (The publishers did not participate in a class action until they later procedurally joined the class action settlement proposal with Google.) At the time of its filing, the AG class action drew sharp criticism from not only Google, but many prominent authors as well, who did not believe their own perspectives were represented by the Authors Guild – a concern that would be echoed by many observers in detailed objections in the months ahead. The AG’s class action was then joined by a suit from five individual New York publishers alleging copyright infringement.

Eventually, a proposed class action settlement involving the Authors Guild, the publishers, and Google was entered before the Court. During the painful course of its two and a half year gestation, Google continued to digitize books from partner libraries. The proposed settlement was audaciously broad in scope, and secured opposition even from the U.S. Government’s Department of Justice [pdf] for – among other sins – the proposal’s departure from the motivations of the initial litigation.

One of the keystones of the settlement proposal is lodged in Attachment A (Author-Publisher Procedures), which attempts to clarify the digital rights issues that have brought authors and publishers so often to litigation or its brink. The proposal provides for a default bright line assignment of revenue from the exploitation of works included in the terms of the settlement. As Pamela Samuelson of UC Berkeley notes in a footnote of her filing [pdf] (Fn. 15) before the Court (Supplemental Academic Author Objections to the Google Book Search Settlement, Authors Guild, Inc. v. Google, Inc.):

Appendix A takes advantage of the settlement on other issues as to which Google is the antagonist to bring about a new allocation of copyright ownership, licensing, and reversion rights and procedures that, but for the settlement, could only have been accomplished through legislative action.

This outcome could never have independently arisen without the Google Book Search litigation. As Samuelson notes in the same paragraph:

Had Random House tried to resolve this e-book rights issue by bringing a class action lawsuit on behalf of a class of publishers against a class of authors in order to negotiate a settlement along the lines of Appendix A, the case would have been dismissed because the dispute would have involved both varying contract language and different state laws so that Rule 23 requirements could not have been satisfied.

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It is not too much to suggest that the conflict over ebook rights and royalties is one of the most outstanding irritants in the transition to digital publishing. It is an irritant that has drawn the Authors Guild and authors, and the AAP and publishers, into conflict time and time again. These actions have repeatedly involved the same small circle of actors – Paul Aiken, the Executive Director of the Authors Guild; Michael Boni, class action attorney for the Authors Guild; and Richard Sarnoff, the Co-Chairman of Bertelsmann, Inc. (responsible for the acquisition of Random House), the Chairman of the AAP, and widely attributed as an architect and lead negotiator for the GBS settlement.

In some lights, the proposed settlement in the Google Book Search case is really a proposed settlement in the conflict between the Authors Guild and the AAP over the exploitation of digital rights. Google, a bystander to that particular conflict, managed to drop a convenient litigation container for a class action settlement that could be alleged to contain all authors and publishers in a common agreement. The eventual proposal attempts to bring wholly new benefits to the other parties in the suits; benefits that Google might not have even imagined when it first began the Google Print program.

As Pamela Samuelson noted in Footnote 15 in her submission, Paul Aiken testified before Congress on this same point:

One of the reasons this thing [Attachment A] took 30 months to negotiate was that we weren’t just negotiating with Google. It was authors negotiating with publishers, and we rarely see eye to eye. So we had months and months and months of negotiations, trying to work out our differences.

These words echoed those that Paul Aiken had made almost a year previously, at the release of the first instantiation of the settlement in October 2008. As Library Journal noted:

We had a major disagreement with Google, and we still do,” said Paul Aiken, executive director of the Authors Guild. “We also don’t see eye-to-eye on with publishers on book contract law,” he added, before calling the settlement the “the biggest book deal” in U.S. publishing history. Aiken said two “guideposts” helped lead his organization through a thicket of issues in the suit. “Authors like their books to be read,” he noted, “and like they like a nice royalty check.”

It’s always nice to work out differences, but Google is arguably the party most likely to benefit out of all proportion to its potential liabilities from this divertissement. In the unlikely event that the settlement is approved, it moves forward on its merry way (subject of course to a lengthy appeals process). More likely, if the settlement is denied, it is difficult to envision a scenario where active litigation will re-commence. As a not necessarily naive bystander to the fundamental conflict between the AG and publishers, Google makes out like a bandit.

In the last five years, Google has amassed a singular and growing compendium of digital books; established a nascent rights registry; digitized historical Copyright Office renewal records; and moved to deepen commercial relations with publishers through its Google Editions service – whose release keeps coincidentally slipping in concert with the withering expectations of a summertime ruling from the SDNY. It is hard to imagine the AAP pursuing their case when Google is a useful potential ally in the publishers’ ongoing ebook pricing struggles with Apple and Amazon, which have themselves drawn scrutiny by State Attorney Generals.

And for the AG, it will have lost a most critical product: a determination of royalty revenue for the digital editions of backlist books that would have taken much of the provocation away for continuing uncertainty and conflict with publishers. With not that much to gain on the flip side.

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The firefight between Wylie and Random House, and AG’s strong public interest in its outcome, highlights the fact that the struggle to obtain mutually perceived value in royalty outcomes for backlist titles is very much a matter of the moment. The AG’s engagement on behalf of its clientele in the rights and royalty struggles emerging over the next few years grow ever more at odds with the terms it has attempted to obtain through the proposed settlement.

Those terms – certainly for prominent authors and their estates – are increasingly likely to be improved when aggressively negotiated by authors or their agents, or when titles are re-published digitally through new publishing ventures, such as those established by well-known and highly respected agents – e.g., Andrew Wylie’s Odyssey Books, Richard Curtis’ E-Reads, and Scott Waxman’s Diversion Books. Independent self-publishing firms such as Smashwords promise to bring mid-tier authors of backlist titles equally promising results when they take back titles for themselves.

The participation of the ASJA and the NWU in the Open Book Alliance, which contests the proposed GBS settlement, suggests that not all author agencies believe these issues can best be determined through this particular resolution.

As the summer months march into autumn, a historical engagement of a small circle of actors around the Authors Guild and the AAP may be increasingly misaligned from the interests of their larger, and evolving, constituencies.