You’re Paying Too Much for E-Books
According to a new antitrust lawsuit filed against Amazon
The big idea
The lawsuit, filed a couple of weeks ago by the firm Hagens Berman, accuses Amazon of illegally colluding with the Big 5 book publishers — Hachette, HarperCollins, Macmillan, Penguin Random House, and Simon & Schuster — to fix the price of eBooks and raise the price of eBooks sold through Amazon’s competitors by as much as 30%.
In exchange for these higher prices, and therefore higher revenues, the Big 5 protect Amazon from competition from both existing eBook retail platforms and new entrants to the market. The anticompetitive agreements also prevent publishers from selling their eBooks to consumers at lower prices on websites that compete with Amazon. This, in turn, forces consumers to pay more for eBooks than they would under normal circumstances.
We’ve been here before
Perhaps the most surprising part of this story is the fact that it’s happened before. Hagens Berman is the same firm that successfully sued Apple and the Big 5 on the same charge in 2011. Hagens Berman won that suit and forced the Big 5 to settle for $166 million. Apple, meanwhile, went to trial, lost, and had to pay out $450 million in 2016.
According to the lawsuit, there are several different ways Amazon handcuffs publishers and prevents them from partnering with any of its competitors. They’ve apparently been doing this in the U.S. since 2015. To keep things brief, I’ll go over two described in detail in the lawsuit.
Agency price parity: “The agency price parity provision requires the Big Five to set the eBook price for books they sell through Amazon no higher than the eBook price charged on eBook retail platforms that compete with Amazon.com.” In other words, Amazon tells these publishers, “you can’t sell your books for cheaper anywhere else in the market.”
The lawsuit goes on to say that, “If this clause did not exist, the Big Five would have a financial incentive to lower their eBook prices on rival platforms that charge lower commissions than Amazon and steer more sales to those platforms, thereby increasing the publishers’ overall revenues and profits and evading Amazon’s ‘stranglehold’ over them.”
Agency commission parity: The commission or discount that the Big 5 provide Amazon has to be the same or greater than the one they provide to any of Amazon’s competitors. This prevents the Big 5 from diversifying their distribution channels because it does not allow them to offer an Amazon rival a larger discount on titles.
In addition to preventing its rivals from competing with Amazon on price, other clauses stifle eBook innovation and reduce the viability of alternative business models like subscriptions, streaming, rental, book clubs, bundled print and digital offers, or reduced prices for partial downloads. These clauses simultaneously weaken competition and strengthen Amazon’s hold on the market.
For example, Amazon’s contracts with the Big 5 include a business model parity clause. The lawsuit describes how this clause, “requires the Big Five Co-conspirators to notify Amazon of the distribution of their eBooks through alternative business models and offer to Amazon the same material terms and conditions as any other eBook retailer, even if the retailer operates under a different business model.”
In other words, if the Big 5 decide, hey, let’s experiment with our pricing models and offer bundled book promotions to this new bookseller. They’d have to provide the same terms and conditions to Amazon.
If one of the Big 5 tried to circumvent any of these clauses, Amazon could retaliate “by removing the buy button for one or several of publisher’s eBooks on its platform, by excluding the publisher’s eBooks from all promotional activity, by removing the pre-order buttons or by prominently displaying banners for alternative eBooks in an attempt to dissuade potential buyers.” This is essentially a death-knell since Amazon controls ~90% of eBook sales. (Yes, you read that right. Roughly 90% of all eBook sales go through Amazon.)
As the lawsuit concludes, “It is in the Big Five Co-conspirators’ economic self-interest to expand their share of the retail sales of their eBooks and diversify their distribution. It would serve this interest to allow Amazon’s retail rivals to develop alternative business models that cost less to consumers but increase the Big Five’s revenue. Offering Amazon’s retail rivals special edition or enhanced eBooks would also attract new customers, increase sales, and reduce the Big Five’s dependency on Amazon. Similarly, avoiding the commissions charged by Amazon and selling through their own websites at a greater discount or allowing Amazon’s retail rivals to add their own discounts and promotions to steer more sales to their platforms would also serve the Big Five’s economic self-interest. But Amazon and its Co-conspirators agree not to do this, so as to preserve the supracompetitive prices of the Big Five’s eBooks.”
“The lawsuit calls for monetary reimbursement for consumers who purchased e-books through e-book retailers that compete with Amazon, and also seeks injunctive relief that would require Amazon and its co-conspirators to stop enforcing anticompetitive price restraints.”
We shall see what happens!