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It’s not often that contract negotiations between book publishers and book sellers attract public attention. But that’s exactly what has happened as the largest book seller in the world, Amazon, hammers out a new deal with one of the biggest publishers, Hachette. At issue is the model that will be used for e-book pricing and a resolution is not expected anytime soon. If that sounds mundane, observers of the book industry note the outcome has serious implications for book buyers, the entire publishing industry and the role Amazon plays in it. Diane and her guests discuss the dispute between Amazon and publishers over e-book pricing.
- Mark Cooper director of research for the Consumer Federation of America
- Lynn Neary NPR correspondent covering books and publishing.
- Jeremy Greenfield editorial director of F+W Media's Digital Book World.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Amazon, the world's largest book seller, is locked in a standoff with the book publisher Hachette over the prices of e-books. Normally, these negotiations would take place out of sight of consumers, but this dispute has become public. One reason, say industry observers, is the stakes. How this is resolved could have implications for the entire publishing world.
MS. DIANE REHMHere to discuss the standoff at Amazon over e-book pricing: Lynn Neary of NPR, Mark Cooper of the Consumer Federation of America. Joining us from the studios of NPR in New York City, Jeremy Greenfield of Digital Book World. I'm sure many of you will want to be part of the conversation, so give us a call, 800-433-8850. Send us an email to firstname.lastname@example.org. Follow us on Facebook or Twitter. Thank you all for joining us.
MS. LYNN NEARYGreat to be here.
MR. MARK COOPERThank you.
MR. JEREMY GREENFIELDThanks, Diane.
REHMAnd, Jeremy Greenfield, let me start with you. Explain to us exactly what's being negotiate here and why it's such a big deal.
GREENFIELDWhile we're not privy to the exact negotiations because of nondisclosure agreements on both sides, it is widely believed that the major issues at stake are control over the pricing and discounting of e-books and the amount of money that Hachette pays Amazon to market its books on Amazon's platform, which is known in the publishing industry as co-op.
GREENFIELDSo with the pricing of e-books several years ago, the Department of Justice sued the five of the six largest publishers in the world and Apple for colluding to fix the prices of e-books. Hachette was among the publishers who settled with the Department of Justice and had to renegotiate its contracts with Amazon and other retailers, giving Amazon the power to discount e-books fairly deeply.
GREENFIELDIn fact, last November, you could've gotten Donna Tartt's "The Goldfinch" for $1.79 as an e-book if you were watching closely. What Hachette likely wants is, in the coming year or two, to go back to a system when it can set the price of e-books and not Amazon. And it wants to do this probably for two reasons, one, to protect the value of books. It's not really in Hachette's interest for people only to be paying a couple of dollars for a book, even if Hachette makes a lot of money off of it.
GREENFIELDAnd, two, to protect other retailers like Barnes & Noble or Kobo, which is an e-book retailer, which needs to make money on selling books, unlike Amazon which can make money selling other things as well. And the co-op issue is really about who makes money on books. It's about Hachette's profit margin versus Amazon's. Amazon wants more of it, and Hachette doesn't want to give that profit margin up.
REHMJeremy Greenfield, editorial director of Digital Book World. Lynn Neary, you've just come back from the Book Expo America, the big annual publishing event. Talk about what they're saying about this.
NEARYWell, it was -- you could hear people talking about it throughout the giant hallways of the giant showroom in New York City.
REHMI'm sure. I'm sure.
NEARYThis was the big, big buzz of that convention, I think. And, you know, I was talking to people ranging from book sellers -- if you talk to book sellers, for example, of course, they have been kind of fighting Amazon's power for a long time, so they were saying two things, one, continuing to sort of -- I think they kind of demonize Amazon in a way, I mean, saying Amazon is a bully, and they're so happy that Hachette is...
REHMStanding up against them.
NEARY...standing up and fighting and fighting them and calling Hachette heroic for those reasons. I spoke with a literary agent who talked about the fact that this issue of profits and who's going to make the profits in terms of the book publisher and authors, that could mean lower advances for authors because if they're giving more of their profits to Amazon, then there could be lower advances for authors. That's going to hurt not only authors but literary agents.
REHMHow much profits do or does Amazon make, given, say, a book that costs 20 bucks?
NEARYI'm not sure I know the answer to that question.
REHMYeah. I think it's a fascinating part of this whole problem to me, and I wonder how you see it, Mark Cooper.
COOPERWell, from the consumer point of view, this is a really simple problem before the lawyers and the economists get a hold of it, right? Consumers love low prices, but they hate poor quality. And when you get a middle man -- and that is what Amazon is here. They're a middle man.
REHMA middle man.
COOPERThey're a middle man. They're buying product at wholesale from their suppliers, Hachette being one of them, and selling them at retail to their customers, which is, of course, how most things work in America. If the middle man gets so big that they can drive down the price of that product so low, and they say in the interest of getting consumers low prices, we love that. If they drive the price so low they take the incentive away and the ability away to produce high quality products, then the consumer is worse off.
REHMBut how does that follow? Wouldn't a writer continue to write high quality books?
COOPERWell, we've always believed in America that you need to have an economic incentive to write, and that's what the copyright laws do. We give authors a monopoly over their work to provide an incentive to create. But the copyright law has always been balanced. Ultimately, we worry about the public interest and the system that produces progress. It's the progress clause in the Constitution. We put it in our constitution. That's how important it is. So we really want to have a balance between consumers getting lots of choice and low prices but also creators having an incentive to produce high quality content.
REHMMark Cooper, he's director of research for the Consumer Federation of America. So, Jeremy Greenfield, put in that context that you've just heard from Mark Cooper, how do you see that balance being undermined by what's happening with Amazon and the fight by Hachette?
GREENFIELDWell, if I could channel folks at Amazon, I would imagine that they would say that they aren't really disrupting authors writ large, that authors are free to continue to produce high quality works and sell them themselves directly through Amazon and actually reap a much percentage of the profits. Authors who use Amazon to sell directly to readers without a publisher take 70 percent of the cover price of the book.
GREENFIELDMost of those books that are sold directly by authors that are self-published are e-books. But publishers would say that they are adding a lot of value to the books that they produce by authors like Stephen Colbert and Malcolm Gladwell and James Patterson who prefer to work with them because of the editorial input, because of the packaging input, because of the way publishers can market books and improve their quality.
GREENFIELDSo what Amazon is doing is exactly right, what Mark said, is driving down the price of the books and taking away some of the incentive from the publisher to produce it. And ultimately, that might mean the publisher might take fewer risks on books, might want to just publish books that are sure things or closer to sure things instead of books that may not do as well. And a lot of those books that may not do as well are very important nonfiction books that drive thinking in America.
REHMSo what you're saying is the cheaper the price, the more incentive Amazon may have to market it, to put it out there, and that could mean that quality in the long run suffers. Is that what you're saying, Jeremy?
GREENFIELDI think that if you look in the distant future and imagine an Amazon that controls, rather than 40 or 50 percent of bookselling in the U.S., closer to 70 or 80 percent in the U.S., you could imagine a scenario where Amazon is incentivized to push those non-risky books to readers, and we end up where we're all reading "50 Shades of Gray" and "The Hunger Games" instead of the slightly more diverse reading environment we have now.
REHMLynn Neary, is that how you see it?
NEARYWell, I think that's a place that the conversation is going that's very interesting, which is is this only a business story or is this a story about culture and who controls the culture.
NEARYAnd I heard a lot of people at Book Expo talking about that and having concerns about that, that if Amazon so dominates the book market that it can, in fact, dominate the culture with the choices that it makes. And I think it's no accident that the CEO of Hachette is Michael Pietsch who comes from an editorial background. I think it's very interesting.
NEARYYou know, he's edited people like David Foster Wallace. And in the statements that he's issued, he has said, you know, Amazon is treating this as if books are just like any other product, and books are not. So I think that's where book people are coming from when they start discussing this. They love books, and they don't want to see a business like Amazon taking over the culture of books.
REHMAnd isn't there another element here, Mark Cooper, that Amazon wants to sell books at low price, and that draws people to the Amazon site to buy other things?
COOPERWell, the important point here is that there is an immense improvement in the efficiency of the marketplace with the new digital technology and this new mass distribution. There's a revolution going on here across every industry with digital technology, so the cost of producing and delivering a book has declined dramatically. And I understand the independent bookstores are under tremendous pressure, but their economic model doesn't work very well in the new world. They have much higher costs. And so the question -- and this question of culture, right? So we should support culture. Well, who decides? How should I subsidize that culture?
REHMMark Cooper, he's with the Consumer Federation of America. We'll take a short break. I'd like to hear from you as well. Join us, 800-433-8850.
REHMAnd welcome back. We're talking about the contractual dispute going on between Amazon and Hachette for exactly how much consumers will pay for e-books on the. And here is a fascinating email from Patience who says, "What is to stop publishers from just setting up their own online marketplace? Clearly Amazon has an advantage as a one-stop shop entity, but the Internet and social media, being what it is, seems book customers could be fairly easily redirected toward different online marketplaces," Jeff (sic) Greenfield.
GREENFIELDIt's a great question, and publishers have been thinking about it for years. They have set up a joint venture to create their own online bookstore called Bookish. Three of the largest publishers in the world did this. It was basically a failure for a variety of reasons. One, its prices weren't as low as some of the other book sellers. Two, it's very difficult to set up an online retail operation. It's harder than it looks on a large scale. Books are very complicated.
GREENFIELDAnd, three, Amazon does a fantastic job selling books and e-books. It's really easy. It's really convenient. There's this device called the Kindle where you can very simply buy the next e-book you want to read probably at the lowest price and have it over free 3G connectivity almost instantly. So Amazon is a really, really tough competitor, a really good competitor. But what a lot of publishers are doing now, they're selling books and e-books directly through their own websites, through subsidiary websites they set up, through branded subsidiary websites.
GREENFIELDLike, Pottermore is where you can buy Harry Potter e-books. You can buy Narnia e-books at narnia.com. And publishers are also seeking alternative business models to distribute their e-books, like subscription e-book services like Oyster or Script. So publishers are furiously going after other distribution channels just so they won't be beholden to just one.
REHMSo what if I were to go to RandomHouse.com? Can I purchase my e-book directly from Random House at the same price that I could get it from Amazon?
COOPERLet's be clear. The challenge is that they can't match the economics of this tremendously powerful mass marketing entity. And so, in a certain sense, people get the culture they're willing to pay for. If you want to support an independent bookstore, you can go in and pay a much higher price for it. But by and large what they'll do is they'll thumb through the book in the independent bookstore and buy it online because it's much more expensive.
COOPERYou have to be able to match the economics, and we saw this in music with Apple and the iPod. We see it in books with Amazon. We see it across the board is that the economics of reducing distribution costs are very, very powerful. The challenges to make sure that when those middlemen get so big, it's perfectly legal in America to win a monopoly. People don't understand that. It's legal to win a monopoly in America. It's illegal to abuse that monopoly having won it. And that's where the razor's edge is for antitrust.
NEARYWell, that's such an interesting point that you just made. And I don't think most people really understand that at all. And I wonder if you can just expand on it a little bit because I'd like to hear a little bit more about what you mean by that.
REHMBut they're now calling this a monopsony and not a monopoly.
COOPERWell, I've had a lot of reporters tell me to never use the word monopsony in public. So -- but let me -- so I use the word...
REHMI don't even know what it means.
COOPERI use -- we have buyer market power and seller market power. Everyone thinks they understand seller market power, monopoly power. When there's only one person who's willing to sell you something, that's a monopoly. It turns out, when I look at middlemen, they have market power because if they're the only buyer of a product, they can set the price for that product. If Hachette did not have all these alternatives, Amazon would be able to set the price. So that's -- Amazon, as a buyer, has market power.
COOPERUnfortunately, the economists call it monopsony power which no one has ever heard of, so it's buyer market power and seller market power. But it is perfectly legal, if you are a terrific business person, to get a 100 percent market share as long as you earn that legally. And once you've got that, then you're going to get the attention of the antitrust authorities who will look at your business practices and say, did you win the monopoly and then raise prices? That will get you in trouble.
REHMAll right. Here's an email from Grant who says, "Amazon has shaken up big publishing. And for independent authors and niche publishers who were locked out by big New York houses like me," he says, "we say good riddance. Amazon's openness to all comers has leveled the playing field and cut out middle people who added little value." Lynn Neary.
NEARYWell, that is another voice in this discussion. When I was at Book Expo wandering around trying to talk to people, at a certain point, I thought, god, everybody I've talked to is anti-Amazon. I need to find somebody who can plea their -- give me their case. And I happened upon the Kindle Direct Publishing booth. And there were people who said, this is just a case of the traditional publishing world not wanting to deal with the fact that everything is changing. They want things to stay the same. They want to have the same power that they've always had. And one guy said to me, as long as the Internet is free, no one's ever going to have a monopoly on book publishing.
REHMJeremy, I want to come back to you to a point that Mark made earlier. Do you expect the Justice Department to actually intervene here?
GREENFIELDNo. And we -- I've spoken to a couple antitrust experts and read reports of others who have, and this is not going to be an anti-trust issue. The Department of Justice has looked at book publishing as any other industry. I don't think they believe that book publishing is special as publishers might say. And they think that this is a common retailer, supplier business dispute. In fact, if there's any antitrust activity around this from the Justice Department, it's investigating the publishers to make sure they are not getting together and colluding in this negotiation against Amazon.
NEARYThe DOJ sent letters to Hachette, Simon and Shuster and Harper Collins, which were the three first publishers to settle, basically to inquire whether they were behaving properly as this Hachette negotiation is ongoing.
REHMBut, Lynn, I gather that Amazon has reacted in this whole dispute by making it more difficult to buy Hachette books from them?
NEARYWell, what it's done is it has made it more difficult to purchase a book through a preorder -- their preorder button. For instance, the J.K. Rowling book which...
NEARYYeah, "The Silkworm." At this point, you would have to preorder it. You can't do that now, so you have to wait until it's actually (unintelligible) sale.
REHMAnd is that sort of a direct action against Hachette?
NEARYOh, yeah, that's a direct action. And also they're slowing down deliveries of the books. And in some cases, you know, Amazon sells hardcover books at a discount. It's selling some of the Hachette books at the full price. It won't -- it's not discounting them. So a consumer will go and see that a book is $25 on Amazon, whereas they can get it at a discount if prices were...
COOPERWell, but the interesting thing is that, remember, so they're just a middleman and so they've got shelf space. They've got margins that they want to maintain. And they're having this dispute. And so they basically said, look, we're not going to devote our stock to your product. So that's why it's taking longer because they're not putting it on the shelves. Just like the supermarket won't put something on the shelves if it doesn't give them an adequate profit margin. And so...
GREENFIELDBut, Mark, if I could break in there though...
GREENFIELD...that, I think, is something that Amazon can very fairly say. And a lot of independent authors have backed up Amazon as -- you know, they don't -- Amazon doesn't take preorders from independent authors. But if you read "The Everything Store" about Amazon by Brad Stone, you'll know that this is very against Amazon's practices. Amazon has been 150 percent for the consumer at all times and has been ruthless over its history about keeping in stock everything it can. It built a business and won a hard one -- a reputation for having everything any time you want it within one day.
GREENFIELDSo this is clearly not a normal business decision that Amazon can say that it's making. It's very against what Amazon usually does. And this preorders issue is actually a lot bigger for Hachette than anyone realizes. I'd call this Amazon's new clear option because preorders determine best sellers. And best sellers make or break publishing companies.
GREENFIELDWe're going to see, the week after June 19 when this J.K. Rowling book comes out, whether Amazon's taking away the preorder button prevents it from hitting number one or getting high up on the Best Seller list. And if that happens, then we will see Amazon's true power.
NEARYAnd I've seen some articles indicating that some of Hachette's bestselling books are starting to drop on the Best Seller list. Now I don't know yet -- maybe you know Jeremy, but I don't know yet whether you can completely attribute that to what's going on or whether that's just sort of natural attrition of these books having been on the Best Seller list for a while. But a couple of articles have pointed out that some of Hachette's best sellers are dropping down on the Best Seller list.
COOPERThis is a special occasion here. And Jeremy's right. This is different for Amazon. But remember, this is the first contractual negotiation after the humongous antitrust case. Did you think they were going to roll over? No. They're going to drive a hard bargain in order to -- and they want to get rid of the pricing model. They clearly want power for pricing. So, on the one hand, you're right. It's very rare for Amazon to do this. On the other hand, this is a very unique situation, and they've decided to fight about it.
REHMBut how different are books when you look at how everything has been made different by digital technology? How different are books from everything else, Lynn?
NEARYWell, I keep comparing it to our own business, Diane...
NEARY...where we are -- the publishers have to maintain -- they have to move into the digital age at the same time that they are publishing in the traditional way. In the old way, they're publishing print with all the costs involved with that. And it's a very gawky old-fashioned kind of business. I mean, there's this system of returns that a lot of people don't realize, which is that when a publisher -- when a bookstore buys books from a publisher, if they don't sell all the books they've bought, they give them back to the publisher...
NEARY...and they get, you know, they get ruined. They get destroyed. They don't get sold. And that's a system that publishers hate. And when e-books first came out, I sort of thought, oh, this is great. They won't have to do this gawky return system anymore. Well, they've still got that return system, and they still have to deal with that. So they're still dealing with this very sort of old-fashioned legacy, I guess as we call it, business at the same time that they're moving into digital. And they have to have the money to do both.
REHMLynn Neary, NPR correspondent covering books and publishing, and you're listening to "The Diane Rehm Show." Let's go to the phones, see what our listeners have to say, first to Andrew here in Washington, D.C. Hi, you're on the air.
ANDREWDiane Rehm, thanks for the call.
ANDREWI -- one of your previous emails kind of touched on the same question I have. Mark said that, you know, Amazon is a middleman. And it seems to me -- I totally agree, but it seems to me that the publishers in the past were the middleman between the authors and the consumers. And now it looks like Amazon is. You know, if they do, they're just pushing out the publishers. They're not adding -- like, currently they're adding a middleman, but they're trying to push out the publishers to just own that middleman spot.
ANDREWAnd you said later, you know, that the book -- like, any kind of bookstores are, you know, work in the economic model. And I think Amazon -- which I totally agree with -- I think Amazon is just kind of showing that publishers are kind of a bulky old model of getting artists' work to consumers, and Amazon is kind of the new way of pushing them out and taking over. So while I think they're a middleman, I just think they're not -- the publishers are just trying to take it to the courts and prevent them from pushing them out entirely.
REHMWhat do you think about that, Mark?
COOPERWell, I actually have a word worse than monopsony for that. I call it digital disintermediation, and it's a very common word in the academic literature. So the intermediaries between the artist and the consumer are being squeezed and changing in their role. Publishers used to have a very, very big role. But now if I don't need to manage physical books, brick and mortar, then my value to the system gets shrunk. And therefore my profits should shrink, and they don't like that, right.
COOPERAnd so in music, we see it as the canary and the coalmine. It was the first industry totally scrambled by digital delivery. And that's why books and music are different. That is, everything -- every product you buy has been affected by the digital revolution. It's made it easier to distribute. But those products that can be fully digitized -- so a book or a record does not have to be fixed in a physical place -- the revolution is even bigger. And so part of the problem is you have the gap between it doesn't cost you -- it costs you very little to produce a copy of a book and a lot to produce a physical copy.
REHMBut then you get to the question of quality, and that's what we were talking about earlier. Jeremy, is there great concern here that with this digitizing you really are going to lose quality in the process?
GREENFIELDIf I could channel publishers for a second, I think that they would probably say they do add a lot of value to the process beyond the distribution of physical books, which is one of their primary functions a decade or more ago, that they help select better authors and better books, that they help bring them to market in a way that will make sure they get a wider readership.
GREENFIELDAnd, you know, frankly, one of the big publisher's ace cards right now is physical distribution. Self-publishing authors, indie authors that make a lot of their money through Amazon and Barnes and Noble and others sell very, very few print books. And their books are not hitting bookstore shelves the way Hachette authors' books are hitting bookstores shelves. So those are all big issues.
GREENFIELDBut I'd like to point out also that there were roughly 300,000 professionally-published books in the U.S. last year. I dare you to try reading them all. Probably most of them aren't worth reading unfortunately. And there were something like 350,000 indie published books last year. And I'm sure very much the same is true, that most of them are not really worth reading for most of us. But some of them are great.
GREENFIELDSo I actually think that we're seeing a renaissance in publishing, and there's room for everyone. There's room for the old model of editors working painstakingly on a manuscript and bringing it to market in a very sophisticated way and indie authors who may have been shut out of that system or maybe just want to put something interesting out into the world and they are going direct to readers and getting it out there.
REHMJeremy Greenfield, he's editorial director of Digital Book World. We'll take a short break here. When we come back, more of your calls, your comments. I look forward to speaking with you.
REHMAnd welcome back. We're talking about the ongoing contractual dispute between Amazon and Hachette over the pricing of e-books and how the entire publishing world, the world of consumers who read, the world of writers who write and the bookstores, the physical bookstores, how everyone is somehow going to be impacted. I want to go now to Northport, N.Y. Hi there, Lynn, you're on the air.
LYNNHi, Diane. Thank you for taking my call.
LYNNI had a combination toy store/bookstore going on for about 19 years. And I have noticed in the last years how much Amazon had affected my business. And the reason I retired was because of that. Now, I look -- I want to make a comparison between what went on with China and how they have hurt us as a whole country and what's going on with big online companies like Amazon, probably Amazon being the biggest that affected my company.
LYNNAnd I would just really like to put out to the public that they need to take a close look at what is going on and how, you know, their purchasing directly from Amazon, instead of supporting the little stores, is really going to have a big effect. And it's going to get larger and larger down the line. And…
REHMInteresting that she compares that to China, Lynn Neary.
NEARYWell, this is something I just wanted to raise in the discussion, which is, what is the consumer going to do here?
NEARYI mean, the consumer has a role here. And I have wondered, are people really going to give up the convenience, you know, and pricing of Amazon…
NEARY…in order to lend support to other booksellers, both small indies, as well as even some of the big…
REHMYeah, but you know Mark started this conversation by saying that people love low prices.
COOPERIf you don't have an economic model, then the question is -- and you talked about culture, right? The question is, so then you need to -- you want a subsidy. And how do we decide which bookstore we're going to subsidize? And I have this list of Tower Records, Circuit City, Blockbuster, Borders, CompUSA, all big name marketers, all gone. Which one of those would you have saved? And how would you have done it?
NEARYBut, you know, something interesting that's happening with some of the other booksellers, Walmart, for instance, I think is discounting Hachette books right now, I think, by 40 percent. So they are trying to push…
NEARYThey are trying to say, well, you can get your…
NEARY…Hachette books here.
NEARYBoth the indies and the big ones.
REHMJeremy, you want to weigh in on that China comparison?
GREENFIELDYou know, I'd rather talk about what consumers are going to do.
GREENFIELDAnd I do think it informs what they do with made-in-China goods as well. You know, price is hugely important. And if you look at the Amazon marketplace, pricing is so competitive, by the penny between third-party sellers often. But there are other things, when it comes to books, that consumers value. So, for instance, Stephen Colbert did a roughly five-minute segment last night on Amazon and brought on author Sherman Alexie.
GREENFIELDAnd really slammed the retailer, calling Jeff Bezos Bezomort, comparing him to the villain from J.K. Rowling's "Harry Potter" series. And he's just the largest and latest author to pile on Amazon and implore people to go elsewhere for their books, even if they have to pay a small premium. He even introduced on his website a set of stickers that folks can print out and put on their books saying, "I didn't buy this on Amazon."
REHMBut how likely do you think people are going to follow that?
GREENFIELDFrankly, not that likely.
GREENFIELDPeople really, as Mark said, love low prices. But there are other considerations. And I think Amazon -- this is the big danger for Amazon -- that people like Stephen Colbert, John Green, who's not even a Hachette author, Malcolm Gladwell, James Patterson, slamming the company. And these are some people's heroes. And it may influence behavior, although price is extremely powerful.
REHMOkay. But let's step back a minute. How might Amazon compromise to hold its place with the consumer and yet still be that good soldier in between the writer, the publishing house and the consumer? What could they do, Jeremy?
GREENFIELDUnfortunately, that might be beyond me. On the co-op issue there is definite possible compromise. You want 3 percent, I want 4 percent, let's meet somewhere in the middle. But on the issue of who controls pricing and who controls discounting, I don't think that there is a good compromise. And I think that the folks at Amazon and the folks at Hachette agree, because they are willing to risk and lose so much to win this battle. This is the first time that I can recall in Amazon's history that it hasn't actually put the customer first, at least in the short term.
GREENFIELDAnd for Hachette, Hachette is losing millions of dollars, and also it's rising its reputation among authors as a place to do business with that can get your books sold and sold effectively everywhere. So there's so much at stake.
NEARYWell, and I'd like to hear Jeremy respond to this because it was an idea that somebody threw out to me at Book Expo, which is Hachette is the first of the big publishers who were involved in the DOJ lawsuit to be renegotiating with Amazon. The other ones are going to be coming down.
NEARYI don't actually know the exact schedule. But somebody suggested to me if Hachette really holds out and they're at an impasse, when the next negotiation comes up and the one after that and the one after that, are those publishers going to do the same thing? And if they do the same thing, will Amazon, number one, would they be violating the settlement that they've reached with the DOJ?
NEARYBut if -- how would Amazon respond to that? Because then something like 50 percent of the books that Amazon sells come from those five big publishers. So what if they all do the same thing one after another? I don't know if that's likely or not.
GREENFIELDThat's a really good question. And I think it would certainly raise the attention of the Department of Justice. I'm not sure whether it'd be legal or now, but these publishers cannot legally negotiate agency pricing contracts for about another six months -- the first ones. And Hachette is among those. So that's a really good question.
GREENFIELDAnd if Macmillan piles on and HarperCollins piles on -- and I think Penguin Random House is the biggest and as big as the next four combined and the last one -- that would raise a big issue for Amazon because right now Amazon isn't the everything store. You can't get everything as cheaply and as conveniently as you can in some other places because of Hachette. And it becomes less and less…
GREENFIELD…the everything store if Macmillan and Simon & Schuster and the others are involved as well.
COOPERIf you look at the music space, Apple had the same policy of one price. And the record labels hated it. And the end point was a bit of flexibility in negotiations. And the question was how do we resolve this? Amazon may step back and say, okay, you can have two or three tiers, categories of prices, and then -- and that was the deal the record labels cut with Apple. Whether the book publishers would accept that remains to be seen. But there's space here about how to share control of pricing.
REHMAll right. Let's go to Patrick, in Lansing, Mich. Hi, you're on the air.
PATRICKThank you, Diane. And thanks for this great show.
PATRICKI wanted to make a point about a very big picture of the failure to enforce the anti-trust laws. Dean Patasky (sp?) of Georgetown Law School said that Democrats used to enforce the anti-trust laws and Republicans didn't. And that held true all the way through President Clinton, who then went after the music industry and he also went after Microsoft. Now, the United States did not break up Microsoft's monopoly on the browser market.
PATRICKThe European Union had to do that. And when they did we got competitiveness. In the Clinton administration they found a $6 per CD criminal conspiracy. People should have gone to jail. They broke it up, but it was 8 or 10 years too late. And this is a pattern that has been across many industries. You did a great show, Diane, with Susan Crawford and her "Captive Audience." You talked about how we're all paying too much cell phone service. We've gone from eight companies to four companies.
PATRICKSo isn't the big question here whether or not we've been sold a bill of goods that the market life is the good life. And we've allowed a monopsony, which Justice Sotomayor said is the mere image of a monopoly. It's just look in the mirror, it's the same thing, they're selling at a loss. On $13 e-book, they sell it at a $3.01 per e-book loss. Okay. And it's all over with. They've got 65 percent of all digital units, 41 percent of all new books, and 90 percent of all e-books sold. It's all over. And they won it illegally. And we're not catching up. We're not catching up because the anti-trust enforcement is too slow.
PATRICKThey haven't gone it aggressively, and the courts haven't enforced the idea. So…
REHMAll right. I'm going to stop you right there. Go ahead, Mark.
COOPERIt's easy to say you're violating the anti-trust laws and hard to prove it. And so you gave me the perfect example of Microsoft. The first time the Federal Trade Commission started looking at Microsoft was 1990. And the court case wasn't resolved until 2002. Who is -- if there was anti-trust case against Amazon, they would have brought it. It's not so easy to find that anti-trust case. The price fixing from the publishers was a slam dunk. This dispute between Amazon and Hachette, is it just rough elbows that we love in competition or is it brass knuckles that break the law? That's not such an easy call.
REHMJeremy, any comment?
GREENFIELDYeah, I agree with Mark completely. It's very hard to prove predatory pricing in particular. And publishers and observers love to point out that Amazon has a monopoly, potentially. And that Amazon's violating anti-trust. The Department of Justice doesn't see it that way. And part of it is about harm to consumers. Amazon, throughout its history, just kept on lowering prices to consumers. So I don't see it going in that direction any time soon.
REHMAll right. To Vanceboro, N.C. Hi, Van, you're on the air.
VANHi, Diane. Thanks for taking my call.
VANI got -- I'm a reader for decades. I love books. But I have switched over to the e-books because, for years, publishers gouged the consumer. They liked the existing model simply because they can charge pretty much whatever they wanted and get it. But with e-books, it gives us, the consumer, a choice. The biggest problem the publishers are having is, like the dinosaur, they didn't know their time was up until the meteor hit.
VANWell, Amazon is the meteorite, and it has really, really shook up things. But I applaud Amazon for what they're doing because there is no monopoly. You can go get your books elsewhere if you want (unintelligible) but Amazon gives people like me a choice. Personally, I had completely -- I live in a rural area. I have completely turned over to e-books and quit going to bookstores because of the convenience, the cost, and there's also a benefit to the natural resources. You're not using paper and the environment by going to e-books.
REHMVan, I'm glad you called.
COOPERLet me make a bigger point about this because it's really interesting. If you look at -- digital technology has been around for a while. So what triggers each of these revolutions? The thing that triggers it is that what we -- the consumer interface device. So in music we've got the MP3 player, and it was good enough for consumers. In books, the new e-readers are not good enough. The first ones were crummy.
COOPERThese are good enough for readers. And now we're getting tablets, which are good enough to watch a video on. And we're starting to see that revolution. So you've got all this technology. The minute you get a consumer internet device -- interface device that meets consumer's desire, boom, the revolution takes over.
REHMAnd you're listening to "The Diane Rehm Show."
NEARYDiane, I just have to say, that comment that Van made, I think -- I was thinking to myself, everything he said has to make publishers weep because…
NEARYBecause a lot of consumers feel that way.
REHMAnd in addition, he lives in a rural area…
NEARYA rural area, yeah.
REHM…where likely there are few books, so Amazon is his lifeline.
COOPERIt should make authors ecstatic because their ability to reach…
PATRICKI don't know about that, Mark.
NEARYYeah, I don't know about that either.
COOPER…to reach the public have been increased.
GREENFIELDBecause if you think that authors aren't next…
GREENFIELD…they have 70 percent margin…
REHMHere's an email from Beth. She says, "As a librarian who buys books from independent, self-published and New York City publishing houses, I want to stress that editors at large publishing houses work with authors to create the best possible book. Value is added, a lot of value, by going through the standard publishing model, especially in books." And as someone who has worked with a superb editor on numbers of books, I fully agree with that. How does that play into all this, Jeremy?
GREENFIELDWhat a lot of people fail to understand about the publishing model -- and I want to address that really interesting and fantastic call from the gentleman in the rural area -- is that the price of books isn't just about how much it costs to produce and distribute the one copy of the book you're reading. It has to do with supporting the venture capital system of book publishers. Book publishers are a lot like venture capitalists. They have a pool of money to invest in authors, in marketing, in editing.
GREENFIELDAnd they invest that money in the form of advances, in the form of editing and book packaging and opportunity costs. And most books are duds. For every "50 Shades of Gray," there are 50 or 60 failures that actually lose the company a lot of money. And so that is built into the pricing. And book publishers are big companies, but they don't have big profit margins. A really successful year for a really big book publisher is a 10 to 15 percent profit margin, which isn't huge. And in bad years, they do a lot worse. In fact, they often lose money.
GREENFIELDSo that is what the pricing model is. And it could be that that model is under attack, at the very least, and perhaps soon to go extinct. Although, I agree with the librarian, I wouldn't like to see that.
REHMWhere do you think, finally, all this is going, Lynn?
NEARYGosh, I wish I had a crystal ball to tell you. I'm not sure. But I -- well, I think it's going to be interesting to see what happens as the other publishers contracts with Amazon come up for negotiation. Whether Hachette has settled at that point. I think that's what everybody is looking for. If Hachette has settled, and if Hachette doesn't get a good deal, the other publishing companies probably aren't going to either.
NEARYAnd -- but if it hasn't settled, what are the other publishing companies going to do? Is there -- are they going to somehow band together, but in a non-collusive way that won't get the attention of the Justice Department to make the point that Jeremy just made, that we do add value to this publishing business.
REHMAll right. Lynn Neary of NPR, she gets the last word. Mark Cooper of the Consumer Federation of America, and Jeremy Greenfield, he's editorial director of Digital Book World. What a fascinating discussion. We'll watch this space. Thank you all.
REHMAnd thanks for listening. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Denise Couture, Susan Casey Nabors, Rebecca Kaufman, Lisa Dunn, Danielle Knight, and Alison Brody. The engineer is Erin Stamper. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts and podcasts. Call 202-885-1200 for more information. Our email address is email@example.com, and we're on Facebook and Twitter. This program comes to you from American University in Washington, D.C. This is NPR.
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