A Big Question About the Future of the Book Publishing Business: Who Sets the Price of eBooks?

Book publishers have always set the suggested list price of printed books. Bookstores were free to sell the books to customers like us at any price. In days that seem ancient now, mega-bookstore chains like Barnes & Noble, Walden, and Borders engaged in deep discounting. Many independent bookstores couldn’t compete and they went out of business.

Like any traditional content-based business encountering digital distribution, publishers tried to cling to their old ways. Please refer to the history of the music business over the past decade for how that view of the world worked out.

In other words, many publishers wanted to price their eBooks at prices very similar to their print books, even though with eBooks there is no need to buy paper and pay binderies, no warehousing, no trucks to transport boxes of books, and no returns (the expensive system through which book publishers accept unlimited return for full monetary credit of unsold physical books from bookstores). Maintaining the price of eBooks at the same level applicable to printed books could result in high margins — and could prop up physical book sales for the simple reason that if eBooks and physical books are priced more or less the same, consumers might be induced to keep buying physical books. eBooks might offer convenience but not a substantial consumer cost savings. It would be a happy coincidence if a consequence of this pricing model would be that brick and mortar bookstores have a greater chance of survival.

The questions are complex; the impacts are broad. For example, what are the effects on authors’ royalties in a new pricing system? Do legacy book publishing agreements well-anticipate eBooks and their pricing? Should we just accept change as inevitable? Is the thought of spending hours in a bookstore in London or Cambridge — finding a treasure or two — just a sentimental, romantic, outdated view?

Amazon worked hard to keep the price of eBooks at $9.99. That was below the wholesale price. In contrast, Apple was willing to offer publishers higher prices and accept the “agency model” via which publishers set the retail price and the eBook seller (e.g., Apple’s iBooks) sells at or near that price. An article describes the system and background facts well: http://www.macstories.net/stories/understanding-the-agency-model-and-the-dojs-allegations-against-apple-and-those-publishers/

Last April, the US Department of Justice sued several major publishers and Apple in an attempt to break the agency model, alleging that they had colluded to set prices of eBooks. All the major publisher defendants except for MacMillan settled with the DOJ last year. On February 8, 2013 Macmillan said it couldn’t afford the risks of losing the lawsuit, even though it expressed confidence in its position. http://mediadecoder.blogs.nytimes.com/2013/02/08/citing-potential-damages-macmillan-settles-with-justice-department-on-e-book-pricing/ Apple remains a defendant in the case.

Will the DOJ’s case result in lower eBook prices? Yes. Will lower prices result in a smaller revenue pie for publishers and authors – along the lines of what happened in the music business? That outcome is not certain – but it would have massive impact. There are significant differences in the two businesses, even though they both obviously involve sale of copies or files embodying copyrighted content. Moreover the effect of piracy and swapping of files is not the same in the two copyright industries. The digital revolution will disrupt and restructure the book publishing industry even further – including what publishers charge for books and how much we pay for them. That’s for certain.

In February 2015, our colleague and friend, partner Mark Fischer, passed away. We have made his blog posts available in honor of both his nuanced and wide-ranging knowledge of intellectual property, new media and entertainment law and of his entertaining style. Please read our tribute to Mark in the firm’s Alumni Spotlight publication and his obituary in the Boston Globe.