What the DOJ e-book lawsuit means for readers now

Last week the Department of Justice sued Apple (s AAPL) and five book publishers for allegedly colluding to set e-book prices. (Here is everything you need to know about that in one post.) What does the suit mean for readers today and in coming weeks?
No changes until June at the earliest
Simon & Schuster, Hachette and HarperCollins agreed to settle with Justice. If the settlement is approved — following a 60-day comment period — those three publishers must terminate existing agreements with Apple’s iBookstore within seven days. In addition, as the Competitive Impact Statement on the settlement explains, the three settling publishers must terminate contracts with other retailers (like Amazon (s AMZN) and Barnes & Noble (s BKS)) that contain any “restrictions on an e-book retailer’s ability to set the retail price of any e-book” and any most favored nation clauses. Those MFN clauses — which can be found in all agency publishers’ contracts with retailers, not just the contracts with Apple — state that no other retailer can charge a lower e-book price.
Publishers must terminate the contracts with retailers other than Apple “as soon as each contract permits” — i.e., when the contract expires — but the retailers also have the option to terminate the contracts “on just 30 days notice.” After the original contracts are terminated, the settling publishers may enter into new agreements with retailers (including Apple).
Under those new agreements, for the next two years, retailers may set, change or lower e-book prices and may offer discounts and other promotions “to encourage consumers to purchase one or more e-books.”
After two years, the settling publishers may once again enter into agency pricing agreements that restrict retailers from setting, changing, or lowering e-book prices. However, price MFN clauses are prohibited for five years.
OK, I just want to know what it means for e-book prices
Readers are likely to see lower prices on e-books published by HarperCollins, Hachette and Simon & Schuster — at least at Amazon, which expressed its glee over the settlement. But you won’t see those lower e-book prices until at least June — remember there’s that 60-day waiting period, and then publishers and retailers have to enter into new contracts. It’s in Amazon’s best interest to enact the new contracts as quickly as possible so that it can start discounting the settling publishers’ e-books, as it has said it plans to do. Other e-book retailers, like Barnes & Noble and Kobo, are likely to want to enter into new contracts quickly as well so that they are on a more even playing field with Amazon. They may not be able to afford to discount a wide range of e-books as deeply as Amazon can, but they will want that option.
As soon as the new contracts are in place (and Justice will be holding onto a copy of each of those contracts), let the discounting begin. Forrester analyst James McQuivey told Digital Book World last week that he expects Amazon to discount e-books slowly and strategically, starting with bestsellers. Publishing industry consultant Mike Shatzkin, on the other hand, believes Amazon “will do the splashiest discounting they possibly can, making the point as loudly as possible that they deliver the lowest prices to the consumer and daring their competiton to match them.”
McQuivey and Shatzkin may both be right. Amazon may not deeply discount all of the titles it carries from HarperCollins, Simon & Schuster and Hachette, but I wouldn’t be surprised to see some shockingly cheap bestsellers from those publishers — think massive summer promotions where big titles by authors like James Patterson, Jodi Picoult and Nicholas Sparks are $1.99.
Bundles, buy-one-get-one-free and more stuff you haven’t seen before
Justice notes that agency pricing “prevented e-book retailers from experimenting with innovative pricing strategies…such as offering e-books under an ‘all-you-can-read’ subscription model where consumers would pay a flat monthly fee,” bundles or buy-one-get-one-free promotions. The settlement opens the door for those types of promotions on Hachette, HarperCollins and Simon & Schuster titles.
For example, retailers could bundle frontlist and backlist titles from those publishers for a flat fee. They could offer a free e-book with the purchase of a print book. They could offer, say, romance or mystery bundles with titles from multiple publishers. They could even give e-books away for free. And, presumably, Amazon can start including Hachette, HarperCollins and Simon & Schuster titles in the Kindle Owners’ Lending Library for Amazon Prime members — if it does what it did with titles from some other publishers and pays the wholesale price each time an e-book is borrowed. (In other words, the three settling publishers wouldn’t have to agree to offer their books in the KOLL. Amazon can now just go ahead and do it.)
What about Apple’s iBookstore?
Apple’s iBookstore launched with agency pricing in effect, and it does not sell e-books from non-agency publishers. (That’s why, for instance, you still can’t find The Hunger Games — published by non-agency publisher Scholastic — in the iBookstore.) So it will be very interesting to see how Apple responds to the settlement. If it simply removes Simon & Schuster, Hachette and HarperCollins titles from its shelves without negotiating new contracts — yes, this would mean Walter Isaacson’s Steve Jobs biography, published by Simon & Schuster, would no longer be available through iTunes — it will be losing a large part of its catalog.
If Apple agrees to negotiate new contracts that don’t require agency pricing, it could also make agreements with the many publishers who have not been able to sell their books in the iBookstore before. That would mean a much wider book selection for iBookstore shoppers.
What will I see at Kobo, Barnes & Noble and other non-Amazon e-book retailers?
Barnes & Noble, Kobo and other e-book retailers will be under immense pressure to discount Hachette, HarperCollins and Simon & Schuster e-books to the same prices that Amazon offers. Keep in mind, though, that these stores have survived so far without always matching Amazon’s prices on titles from non-agency publishers. The settlement puts more titles from big bestselling authors in play, but Kobo and B&N do not necessarily have to match on every price in order to stand some ground against Amazon. (That said, the settlement makes their lives harder, not easier.)
I’d expect to see B&N and Kobo rolling out increased loyalty programs and other perks to try to keep readers shopping with them. For instance, Barnes & Noble could offer two free titles to anyone who buys a new Nook. They could start other membership, loyalty or subscription programs. Barnes & Noble already has the ability to bundle e-books with print transactions from its in-store cash registers and might start offering more e-book specials to in-store shoppers.
Barnes & Noble and Kobo could also turn their attention to the titles that Amazon is paying less attention to — say a HarperCollins backlist book. They could run special promotions or reading groups around those books. (Amazon could do this, too, of course.)
Retailers could have been doing many of these things all along, but non-Amazon players are going to feel the pressure to innovate quickly. They may get added support from the settling publishers (in terms of promotion, marketing suggestions, etc.) to the extent that that is not forbidden by the settlement.
Will DRM go away?
Many — including Ruth Curry and Emily Gould of Emily Books, here on paidContent — are arguing that publishers’ best tool against Amazon is to drop DRM on their titles. Science fiction author Charlie Stross, in a much-read post, writes, “If the major publishers switch to selling ebooks without DRM, then they can enable customers to buy books from a variety of outlets and move away from the walled garden of the Kindle store.” As GigaOM’s Mathew Ingram has argued, publishers see a feasible model for removing DRM in Pottermore.
I wouldn’t be at all surprised if at least one big-six publisher announces plans to drop DRM this year — Hachette’s Maja Thomas hinted at it recently — but the actual implementation of the new policy could take awhile as it would likely require negotiations with literary agents as well as the implementation of more robust direct sales systems from publishers’ own sites.
What doesn’t change
Agency pricing itself has not been declared illegal. Publishers who enacted agency pricing later — namely, Random House — can keep using the model. They don’t have to enter into new contracts. In addition, Macmillan and Penguin are fighting the lawsuit and can continue selling e-books under the agency model until a settlement or decision is reached (unless a judge explicitly forbids them to use the model before that).
Random House could, of course, renegotiate its contracts and remove agency pricing if it thinks that its titles will be at a disadvantage against cheaper non-agency titles from HarperCollins, Simon & Schuster and HarperCollins. But since agency pricing leaves it in Random House’s power to discount books across retailers, we might simply see deeper and more discounts coming from Random House itself.
And if Random House doesn’t deeply discount big titles from bestselling authors — but those titles stay at or near the top of bestseller lists anyway — that will support the belief that readers are willing to pay a premium for books by certain authors.
Some limits
Amazon cannot now, for example, make every single HarperCollins title it carries free (even if it were inclined to do so). When it comes time for Simon & Schuster, HarperCollins and Hachette to negotiate their new contracts, the settlement allows them to “negotiate a commitment from an e-book retailer that a retailer’s aggregate expenditure on discounts and promotions of the Settling Defendant’s e-books will not exceed the retailer’s aggregate commission under an agency agreement in which the publisher sets the e-book price and the retailer is compensated through a commission.” The settling publishers can also negotiate one-year contracts that “prevent e-book retailers from cumulatively selling that Settling Defendant’s e-books at a loss over the period of the contract.”
In other words, under that type of contract, Amazon (or any other retailer who agrees to the contract) could discount certain titles as much as it wants, or give them away for free. But it could not sell a publisher’s “entire catalogue at a sustained loss.” So if Amazon and a settling publisher sign a contract that gives Amazon a 30 percent commission on each title sold, Amazon cannot discount that publisher’s entire catalogue by more than the total amount of the commission it receives.
Bestselling author Richard Russo, Forrester’s James McQuivey and Barnes & Noble’s Jonathan Shar will be among those discussing the future of e-books at paidContent 2012, May 23 at the TimesCenter in New York, NY. Register here.