The ongoing conversation regarding the DOJ suit against five of the Big 6 publishers and Apple has at times been even more interesting than the case itself in what it says about the publishing industry and those who have a stake in it. I won’t deny for a moment that I’m a fan of the Kindle or that I regularly enjoy many facets of Amazon’s business, so feel free to call me out for being biased, but I think that there are a few strange assumptions being made in some of the more popular Pro-Publisher arguments lately that need to be addressed.
The most popular justification of the Agency Model by far seems to be that without it Amazon would simply have too much control over prices and undermine competition since they could use books as loss-leaders to sell other products. The underlying assumption here is that there was literally no other option available to prevent Amazon from offhandedly destroying a whole industry. This ignores the process that allowed the Agency Model to be imposed on the Kindle Store in the first place, of course.
In early 2010, the publishers dictated their terms to Amazon and a brief conflict ensued. When Amazon resisted raising their prices, Macmillan pulled their titles. It worked, and Amazon caved. Publishers are not, in this case, the helpless bystanders trying to scrape by that they make themselves out to be. They have the choice to leave at any time, and allow Amazon to find their own way to fill Kindles with eBooks. This is exactly what happened recently when IPG was unwilling to agree to Amazon’s contract renewal terms.
The problem is that publishers don’t want Amazon out of the game. Amazon does exactly what they want a retailer to do. The store makes suggestions, up-sells, promotes, and opens the doors to customers anywhere. The problem wasn’t the potential for anti-competitive control; it was that publishers were unwilling to lose access to the channel. It is also why the collusion was necessary. Without that collusion, Amazon could presumably have done without any member of the Big 6 and they would have been left with only comparably inferior vendors to sell their books through.
The other really fun argument is the devaluation of eBooks. Basically that by selling Kindle Editions cheaply, Amazon is making customers expect affordable books and publishers will make less money. This is often tied to the idea that Amazon is trying to sell cheaply enough to get a monopoly, after which they will screw their customers and raise prices. Personally, I see the arguments as contradictory.
If Amazon’s whole Kindle sales model is designed to lower customer expectations in terms of pricing, publishers retail the previously mentioned option of removing their content. Unlike with paper books, there is no possibility of a secondary market. To me this is basically an assertion that the content offered by these publishers is less important to customers than the fact that they can get it on a Kindle. If that is so, then the need for publisher as gatekeeper is a thing of the past anyway.
Let’s assume that Amazon does accomplish lowering expectations, though. How would raising prices on eBooks after driving out the competition work to their advantage? We are talking about digital products, presumably now in a publisher-free world since Amazon ruined them all. In what way would self-publishing authors have trouble selling outside of the Kindle Store? And if that were an option, why would customers pay Amazon’s presumably higher prices after having been acclimated to cheap eBooks over the course of years? I’m not one to say that the free market will solve all your problems, but what incentive does Amazon have to dominate a market and immediately destroy their most profitable approach to it?
Basically, I can’t help but feel that redirecting the issue of Agency Model price fixing to make it appear as if the DOJ is out to appoint Amazon king of publishing is a sign that people know something illegal was done and are now out to justify it. The Kindle may be the best eReading platform out there, but it is far from the only one. Publishers had other options they could have gone with; they simply couldn’t see a legal way to get the higher profits they wanted without losing access to customers who love their Kindles.
The first major change in eBook pricing to come about since the launch of the iPad is at hand. The U.S. Department of Justice has already negotiated settlements with three of the six major publishing houses implicated in a DOJ price fixing investigation only shortly after the filing of the lawsuit. Kindle owners can expect to see an almost immediate drop in many eBook prices, once the court has had a chance to approve the settlement terms. Amazon has already declared this a big win for consumers and announced plans to drop prices on affected titles.
For those who have not been keeping track, the early days of the Kindle brought significantly lower eBook prices than we are now used to. This was the result of Amazon being able to buy their stock wholesale and price things as low as they wanted from there. Publishers were rather unhappy with this arrangement since it meant that customers might well become used to seeing affordable prices on their reading material and cause paper copies of books to lose perceived value.
When Steve Jobs approached the Big 6 publishers with the idea of moving to the Agency Model, wherein publishers would set prices and retailers get a fixed percentage for each unit sold, they jumped on it. As soon as the iBooks store opened, Kindle Edition prices began to rise. There was some drama when Amazon attempted to hold out in protest and pull titles from their store, but without those publishers it is hard to operate a major bookstore.
Since then, prices have remained high and those involved in the Agency Model arrangement have come under investigation in both the US and EU. The biggest being raised by the DOJ, aside from alleged secret meetings and clandestine correspondence between heads of supposedly competing publishers in the days leading up to implementing the Agency Model, is the Most Favored Nation Clause. Apple managed to get this introduced in their agreement with every publisher.
Typically, a MFN is put in place to prevent favoritism from allowing a wholesaler to sell more cheaply to another retailer at a lower price. In this case, since publishers were setting the price, the DOJ is arguing that it was meant to “protect Apple from having to compete on price at all, while still maintaining Apple’s 30 percent margin.”
The result of all this has been artificially inflated eBook prices meant to turn customers away from things like the Kindle. That last point is more fact than opinion, as any look at publisher comments regarding the “troublesome” convenience of eBook borrowing at libraries that has gone along with Penguin dropping out of the library system altogether.
So far we know of settlements with HarperCollins, Hachette, and Simon & Schuster. These will prevent use of the Agency Model for a number of years and create various other consumer protections. Apple, Macmillan, and Penguin are all still denying wrongdoing at the moment, but it remains to be seen how well they can hold out. Even if all three remaining defendents get off somehow, Kindle pricing will be completely altered for the indefinite future. The Agency Model could only be forced on Amazon through solidarity across every major player in the publishing industry. With that gone thanks to these settlements, things can’t help but improve.
Since the rise of the Agency Model that Apple made possible for publishers in a partnership surrounding the release of the iBooks application and store for the original iPad (a partnership now awaiting trial in an anti-trust case), there has been serious talk about how Amazon has set out on a crusade to utterly destroy traditional publishing with the Kindle. This isn’t news, exactly, but it has become an important and popular topic after the recent contract dispute that the company had with the Independent Publishers Group that has resulted in the ongoing absence of IPG titles from the Kindle Store.
There can be no question that Amazon is acting like a bully in this dispute. They want a lot and are in a position to demand rather than ask or negotiate. What has risen up in response to this anti-Amazon sentiment has been shocking to say the least, however. Scattered around popular blogs, we can now see any number of authors and publishers coming out against Amazon and claiming that publishers were somehow right to have engaged in price fixing and that even if it was technically illegal they should be allowed a pass because otherwise Amazon will win.
On the one hand, it is understandable sentiment. Thanks to the Kindle, Amazon controls around 75% of the eBook market already. Without their platform, the rise of eReading as we now know it would slow to a crawl. Nobody else has the resources, or seemingly the interest in customer satisfaction, that Amazon is willing to put into keeping such a platform going.
On the other hand, this is insane. Publishers were unhappy with how poorly the old business model applies to new media and so their potentially illegal activities should be excused. It makes no sense to me, somehow.
This is made to seem like it is a one-sided arrangement. I believe that to be a mischaracterization. If publishers lacked power, they could not have compelled the adoption of the Agency Model in the first place. They were just too concerned at the time with short term profits to be willing to take a stand and risk losing Amazon as a storefront. It was a move that only made sense for every individual company if they knew that none of the competition would be capitalizing on their threatened withdrawal.
Amazon’s acting like a bully aside (because in the matter of the Agency Model and its potential legal implications that that does not apply) they have built the simplest and most usable way for readers everywhere to access eBooks. Nobody else has come close, despite competing efforts from Barnes & Noble’s Nook line, the Kobo, and more. This does not mean that anybody has been compelled to use it.
There would be no case against them if the Big 6 Publishers had come out with their own Kindle competitor and started offering all of their titles through it. The Kindle would still be there attracting self publishers and generally making itself useful in various ways, but it wouldn’t have the content to be so important.
These publishers don’t want to have to deal with building new distribution channels, though. They also don’t want to have to adapt when other people build them. The fact that there is a power disparity is undeniable, but that doesn’t mean that these publishers were ever powerless. Nobody compels them to use the Kindle platform. To say that they should be able to get away with their own anti-competitive and manipulative actions because otherwise the Kindle line will make people start seeing books as more affordable and ruin their profits is just ridiculous.
By now Kindle users have become familiar with the idea of sponsored screen savers on their eReaders when the devices are on standby. They are generally unobtrusive, don’t get in the way of the reading experience, and can even offer some decent deals from time to time when you get lucky. Not many people argue against them anymore, especially since Amazon now allows users to pay the price difference between a Kindle with ads and a Kindle without ads to have the whole mechanism disabled entirely. Unfortunately, the idle screen’s ads have opened Amazon up to a claim of patent infringement from one of the biggest “Patent Trolls” in operation.
The company making the accusation, Network Presentations Solutions, is a shell company operated by Acacia Research Group. Acacia Research Group, as some might remember from last October, has taken on Amazon before with regard to Kindle devices. Last time it was a variety of issues regarding the Kindle Fire. This time around, they have acquired the rights to a patent for any personal computing device that shows ads on a screen after a certain designated period of idling. Naturally this would include all recent Kindle offerings, in addition to other companies such as Kobo that have followed in Amazon’s footsteps, one would think.
What are they hoping to accomplish with this suit? The requested ruling would require Amazon to pay a substantial penalty, recall and destroy every Kindle device ever sold with the Special Offers screen savers, issue a copy of the court ruling along with an admission of wrongdoing to everybody who has ever owned a Kindle, and generally appear contrite and humbled. More realistically, Acacia is hoping for a substantial payday when Amazon settles to avoid the potentially huge ramifications of losing. Patent Trolls are not held in particularly high regard at the moment, but that doesn’t mean they always lose in court. Amazon isn’t exactly the most beloved company around at the moment either, after all.
While there seems to have been no word as to what, if any, progress has been made on the last Acacia vs Amazon lawsuit, it is a fair assumption that Amazon is not in the habit of quietly accepting this sort of thing. They have placed a great deal of faith in the Kindle line, both eReader and Tablet offerings, and such vaguely applicable patents have questionable standing when held up to scrutiny. Remember that a software patent holder needs to be able to prove that its patent involves a non-obvious solution to a problem. It is hard to say whether or not advertisements in place of screen savers would really qualify in the eyes of the court.
Chances are good that this is not the last time we’ll be seeing Amazon hit with patent litigation. Patent Trolling is huge money and there is a lot of profit to be made in anything somebody can make stick to the Kindle. With the next generation of Kindle Fire just around the corner and the possibility of a Kindle Phone being whispered about in vague rumors about the distant future, Amazon is just going to be even more open to these things. Hopefully the added expense of an occasional settlement or legal dispute won’t be enough to scare them off of ongoing hardware development.
Up until now, Amazon has done a fairly good job of avoiding patent lawsuits. Sure, they’ve run into a few over search technology and such, but overall they’ve been small and unsuccessful. With the release of the Kindle Fire, though, they may have entered into the murky world of mobile computing litigation. What this means for the future of the company’s hardware development line remains to be seen, but there are a few things that we can be quite sure of over the next several months. One of these is that Amazon will rise to the challenge.
In 2011 alone already Amazon has been hit with 11 lawsuits over 30 alleged patent infringements, two of which have been dismissed completely. The majority of them have been in relation to the technology being put in place to pave the way for the launch of the Kindle Fire. This includes cloud computing (admittedly even more useful in other areas, but vital for things like the Kindle Fire’s Silk web browser), streaming services, site personalization, and a number of things that relate to other Kindles as well. Last year, they didn’t face a third so much attention over patents.
As the 15th of Nov. rolls around, whole new areas of vulnerability open up. Android has thus far been a highly disputed OS. Apple has been particularly active in using legal tactics to beat down any potentially successful competing tablets, both in the US and abroad, but they are not the only ones. Microsoft has managed to convince Samsung to pay royalties over supposed Android related patents, for example, though MS has not as yet brought any major action against the source. It’s possible that Google is too big to attack at the moment? That says nothing of the increasingly common “patent troll” crowd that exists for no reason other than to acquire intellectual property and make money suing people over it. The mobile device market is their favorite playground.
While there is a great deal of criticism of the patent system floating about at the moment, chances are good that any reform of that system is a long way off. For the time being this is the environment we are stuck with no matter how much it would seem doomed to stifle any form of innovation in technology.
We’ll see where things go in the next year. Some have predicted Amazon acquiring HP’s WebOS and the associated intellectual properties as a way to bolster their position in the event of extended legal battles. Google made a similar move in acquiring Motorola’s mobile division, so there’s certainly precedent for such a move. Whether or not that happens, though, Amazon has expressed an intent to defend themselves against all comers. This could be enough to scare off potential complaints. Nobody interested in repeating lawsuits for income wants such a high profile case setting precedent against them. The Kindle Fire isn’t likely to be blocked as easily as some other tablets and cell phones have been before now.
The success of any Tablet PC is pretty much going to depend on the usefulness of the associated application offerings. It would be hard to argue that this is anything but a major factor in the success of Apple’s iPad. Naturally, with the Kindle Tablet in mind for the future, Amazon was depending on its App Store to make it big and have all sorts of fun stuff ready when the hardware launches. The money to be made is not really in the hardware anymore for either of these companies, so it is no wonder that Apple is trying to corner the market on anything they can manage with regard to Apps.
So far, not much luck along those lines in the US. While Apple is trying legal channels to prevent Amazon from calling its app store an app store, the judge asked to provide a preliminary injunction against Amazon’s use didn’t see them having much chance of success and turned down the request. It seems like a lot of the argument Apple is making is based on their assumption that Amazon will be happy to host viruses, malware, and porn, which would keep potential customers from trusting anything labeled with the same name. Hard to see that going very far, in the long run, but time will tell. The trial is set to start in October of 2012.
Just because their case does not seem to be going well so far in the US, however, doesn’t mean that it is dead in the water. Germany’s response to the same lawsuit has resulted in Amazon being forced to close the door to new submissions for the time being. Amazon is, of course, going to be spending a great deal of effort trying to defend their interests wherever they can, but for the time being there is no word and little room to speculate on when that situation might change.
On the one hand, it really doesn’t matter how it comes out one way or another. If the name has to be changed to Amazon’s Android Emporium or something else ridiculous, it will only increase the potential for name recognition if they play it right and the functionality won’t be changing a bit. Even in the unlikely event that Apple can pull this off, everybody else is going to do just fine. On the other hand, anything that lets Amazon directly equate their new Kindles and Kindle Tablets to the iPad in peoples’ minds will work to their advantage as they push for maximum dispersal of the hardware. Yes, the important part will be the device integration which won’t rely much on names anyway, but why not make it as clear as possible?
What will happen in the meantime as we lead up to the rulings in various locations, pretty much the only thing that we can be sure of is that nobody with a Tablet is going to want to go without apps. It just wouldn’t really work. Hopefully that will be an option for everybody who wants to when the Kindle joins that marketplace.