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A primer on digital publishing, Apple’s alleged collusion, and Amazon’s alleged evilness

April 20, 2012

If you’re not a technical superstar, all this talk about proprietary formats, digital rights management, piracy, and the inherent evil of Apple and New York Publishing or of Amazon, can make your eyes cross. Today’s post is aimed at explaining as much as possible in layman’s terms so anyone can understand.

What’s a proprietary format and why do I care?

When you buy a Kindle, you have to buy your e-books from Amazon. The Kindle is designed so the e-books you buy from Barnes and Noble or iTunes don’t work for you. If you have a Kindle and you want to buy an e-book, you need to buy it from Amazon.com, unless you convert it for use on other hardware (or convert other books to run on the Kindle).

Okay, so there’s a conversion process. So what’s the big deal?

For one thing, conversion is an extra step, and one of the selling points of e-books is user-friendliness and immediacy. For another, it’s technically illegal to use a program called Calibre to do the conversion. The conversion breaks the digital rights management (DRM) software installed with the book. According to the Digital Millennium Copyright Act, that’s illegal.

What’s digital rights management software?

Digital rights management software software that can included with electronic products such as music, software, and e-books to prevent you from posting a copy to a server somewhere and letting the world get a free copy of what you bought.

That’s stealing, right?

It depends who you’re asking. The Recording Industry Association of America (RIAA) decided it was stealing and prosecuted people who distributed electronic copies of music. The efforts were not well-received. Although the original Napster that allowed you to freely swap music was taken down, efforts to prosecute people were often PR nightmares. And even the recent removal of Megaupload, which (wink-wink) never, ever thought its servers were being used for piracy, met with mixed approval at best. There’s a consistent Internet-based subculture that believes intellectual property is an outdated concept and that content should all be free.

Where does an author get money if not from selling books?

That’s a good question. And it’s something authors may need to come up with an answer for. The music industry has accepted that it’s not going to make tons of money any more selling music, so it makes its money on concerts. And merchandise. People will pay hundreds of dollars to go see their favorite band. They won’t pay to go to a reading or a book-signing by their favorite author. But with downward price pressure on books, some outside-the-box thinking may be required.

Okay, but I like paying $9.99 for e-books. Or less. And I don’t understand why an e-book should ever be more than the hardcover, given the cost of printing and shipping the books.

There are instances in which an e-book costs more than the hardcover, but that’s usually because the hardcover has been heavily discounted. In general, hardcovers cost between $12 and $15 in ebook form (of the top-selling single titles on Amazon and Barnes and Noble, none cost more than $14.99). If a hardcover book is heavily discounted online, it might sell for less than that.

Assuming that’s reasonable, why is there such a stink about e-book prices? I mean, why would Apple and the publishers collude to force Amazon to raise prices?

Amazon was selling e-books at a loss to build an audience for its Kindle hardware. At the time, Kindles were still almost $300 and no e-reader tablets had emerged. Amazon knew that to spend that kind of money on a single-purpose piece of hardware, they would need to get a return on their investment. So Amazon took a loss on the books to entice people to buy the e-reader. It worked, too. At one point, Kindle had an enormous majority of the e-reader market.

So why would a publisher care? They’re getting paid.

Amazon has amassed an enormous amount of volume in book sales. For many publishers–particularly smaller publishers–Amazon represents a majority of their sales. Because of that volume, Amazon can almost dictate the terms of doing business with publishers, and seems to have started doing that. Publishers are concerned about Amazon’s power in this regard and looked for a way to counter that power.

By breaking anti-trust laws…

Although that’s up to a court to decide, Apple and the publishers seem to have made it easy to prove the point. If you have a CEO-only dinner where the topic is how to band together to fight Amazon, that sure looks like collusion.

So what’s with all the anti-Amazon stuff? They’re a victim, right?

As referenced a couple questions ago, even though there was arguably collusion, Amazon’s showing the kind of behavior that concerned the publishers. They’re also starting their own publishing imprints and competing with the publishers. If they were to establish a foothold, they would own the entire supply chain, which concerns Apple, Barnes & Noble, and the New York publishers.

What do I care?

If Amazon winds up dominating the publishing supply chain, competition will be scarce and will have to play by Amazon’s rules to get their books to readers. Borders collapsed. Books-A-Million isn’t very healthy. And even Barnes & Noble isn’t a robust business powerhouse.

Okay, okay. But what’s this agency model thing?

The agency model is when the wholesaler determines the sale price and you take a cut of the sales. That’s what Apple and the publishers allegedly colluded on–forcing the agency model across the board. With the agency model, Amazon can’t set the book prices and can’t take a loss.

So if the anti-trust suit is successful, e-book prices will go back to where they were, right?

Not necessarily. The pricing model has changed. Now Amazon has competition in the e-reader and lightweight tablet market and has reduced its prices for e-readers. Even companies with deep pockets have to make money somewhere, so Amazon will probably be selective with its discounting. Plus, with the glacial speed of the court system…

What does it all mean to me as an author?

It means the future’s unclear and the business model is evolving. This is still an immature business model for books and the rules are sorting themselves out. The DOJ may at some point be forced to look critically at Amazon, as they are looking at Apple. Just because Apple and the publishers may be guilty of collusion, doesn’t mean Amazon’s not violating anti-trust laws, too.

In general, if you’re an author and you’re getting interest from a major publisher, you probably need an agent who understands the legalities and business drivers around digital publishing, and can help you get the best deal possible. For the rest of us, it means we should pay attention and understand the business world we’re trying to dive into.

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One Comment
  1. April 20, 2012 10:05 am

    Chris, I guess I goofed. I meant to put 5 stars on this and ended up with only one. Just not star-savvy! Anyway, I liked your article a LOT!!

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