Why The DoJ Lawsuit Is Bad For The eBook Marketplace

Before the introduction of the agency model and the iPad, e-books were nearly synonymous with one word: Kindle. More than once I heard someone refer to "Kindle book" when they really meant the generic "e-book." Some analysts claimed that Amazon had 90% of the e-book market.

It wasn't that there weren't other retailers, but none of them could compete with Amazon on pricing. (And to Amazon's credit, most of them couldn't match the experience, either. I had a Sony reader and bought all of one book because their website and interface were so terrible.)

Amazon's dominance in the e-book marketplace wasn't good for publishers, who knew that one day Amazon would stop selling e-books at a loss and would want a bigger piece of the pie (see this piece about Amazon's latest negotiations with publishers); it wasn't good for authors, whose income would be negatively impacted by any decrease in their publishers' e-book revenue; and it wasn't good for readers to have only one viable e-book retailer--especially one that locks readers in with a proprietary e-book format.

Enter Steve Jobs, the iPad, the iBookstore, and the agency model.

Up to that point, e-books were sold on a wholesale model: publishers set a list price, sold to retailer at wholesale (about half of list), and then the retailer was free to sell for whatever price they chose, even at a loss. Under this model, Amazon had been setting the price of bestsellers at $9.99 (at a substantial per-unit loss). Then came the agency model: the selling price is set by the publisher, no discounts are allowed, and the retailer is given a 30% cut of the sale. Amazon was now being forced to sell those bestsellers for $12.99 or $14.99, at the publisher's discretion. The DOJ lawsuit alleges that this increased the price of e-books. But did it? In fact, the average purchase price for an e-book from every retailer other than Amazon is lower under the agency model, as this piece from PaidContent explains. Publishers were making less money per unit sale, but they clearly felt the short terms losses were worth the long term gain of a more competitive e-book market.

The DOJ alleges that the move to agency was anti-competitive and bad for the market. But have e-book sales suffered? According to the AAP, e-book sales in 2009 were $313 million. In 2011, post-agency model, sales were up to $969 million. That's phenomenal growth in the market.

How about innovation? B&N has released several iterations of their Nook e-reader, including the the Nook Color, which was the first e-reader of its kind. Amazon has also released several versions of the Kindle, including the Fire, their first tablet-like device. Kobo has several different devices, as does Sony, not to mention two more iPads, released under agency. I'd argue that great competition drove all of these companies to innovate.

The DOJ says that their lawsuit and settlement terms are intended to return competitiveness to the market. But just one retailer, Amazon, stands to gain.

To oversimplify some very confusing accounting, retailers will be allowed to discount again, but will not be allowed to lose money. But they won't have to profit, either. The only retailer with the financial means to sell e-books without making any money? Amazon.

The settlement doesn't do away with agency pricing entirely, so the irony is that publishers could raise prices in order to counteract the retailer discounts. I think Scott Turow, president of the Authors Guild, put it best: "Our government may be on the verge of killing real competition in order to save the appearance of competition."

There's no question that the state of e-reading in 2012 is better than it ever has been. But just as the arrival of the agency model leveled the playing field, increased the number of competitors, and sparked innovation, I worry that the DOJ lawsuit, settlements and trial will only serve to raise prices and stifle both competition and innovation, dragging the industry back to where we were in 2009.

A competitive market, more than anything else, is the best thing for my clients, so it's hard to feel anything other than anger and disappointment at today's news.