Monday, June 4, 2012

Book Publishers Lose Two (sort of)

In the last couple of months, consortia of major book publishers have experienced some legal setbacks - first with the settlement of the DOJ Antitrust suit against Apple and a group of print houses, and more recently with a ruling in a major "fair use" copyright case against Georgia Tech.

E-Book Pricing

  In April, the U.S. Dept. of Justice filed an Anti-Trust suit against Apple and five major publishing houses (Hachette, HarperCollins, MacMillan, Penquin, and Simon & Schuster), arguing that they colluded in developing a pricing model for ebooks that set prices above market level and prohibited retailer discounting and price competition.  Such actions are clearly in violation of U.S. antitrust law, and when a memo from Steve Jobs surfaced that essentially laid out the model as described, and commented that “the customer pays a little more, but that’s what you [publishers] want anyway”, it was clear that this was going to be a difficult one for Apple and the publishing industry to win.
According to the suit, filed in the Southern District of New York, the five publishers “feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid.” It also speaks of “deflating hardcover prices” and charges that the “Publisher Defendants were especially concerned that Amazon was well positioned to enter the digital publishing business and thereby supplant publishers as intermediaries between authors and consumers.”  
After unilateral efforts to pressure Amazon’s discounting of e-books failed, the publishers “thereafter conspired to raise retail e-book prices and to otherwise limit competition in the sale of e-books.
“This change in business model would not have occurred without the conspiracy among the Defendants,” the Justice Department’s suit charges. What’s more, it alleges a direct horizontalconspiracy between the publishers — not only, as had been suggested, a “hub-and-spoke” conspiracy, with Apple acting as the message-bearer between the publishers.
One other interesting allegation in the suit was the claim that Apple had looked into approaching Amazon about conspiring to divide the spoils of the online content market, with Amazon to be the monopoly provider of ebooks, and Apple to be the monopoly provider of audio and video.  But with Amazon's aggressive moves in streaming audio and video content, Apple decided to pursue a price-fixing strategy with book publishers, one that would also prevent Amazon from engaging in price competition in the ebook market.

  Still, it was a bit of a surprise when almost immediately after filing the suit, the DOJ announced that it had reached a settlement with three of the publishing houses (Apple and the other publishers did not accept those terms at that time).  The terms of the settlement essentially require the publishers to terminate its existing deals with Apple, and any other contracts with distributors or retailers that limit their ability to discount or change prices for e-books.  It also prohibits any arrangements stipulating that the publishers would not provide books to other retailers at lower prices (a key component of the Apple deals).
In particular, the proposed settlement states: “These provisions do not dictate a particular business model, such as agency or wholesale, but prohibit Settling Defendants from forbidding a retailer from competing on price and using some of its commission to offer consumers a better value, either through a promotion or a discount.” Discounts, promotions, and some control over retail pricing must all be at least partially under the retailers’ control, even if the agreement is technically an agency-commission model, rather than a wholesale one.
The settlement does not require or preclude any particular pricing model, or require publishers to abandon the "agency" pricing model (or prices) that publishers sought to impose on e-books, although it does dictate that publishers can't collude to force every potential eBook retailer to accept identical terms or prevent retailer discounting.  Under the agency model, the publisher sets book prices and the contract stipulates that the online retailer pay the publisher a set percentage of that price.  This replaced the old wholesale pricing model of the physical book market, where the publishers set a price for wholesalers (and a recommended retail price), but the retailer is free to set their own price.
  Amazon greeted the settlement positively, indicating that it hoped to return to the old pricing models ($9.99 for most new releases vs. $12.99), and the ability to discount some titles as marketing opportunities presented themselves.

"Fair Use" in Academia

Four years ago, a group of academic publishers sued Georgia State University over their practices in using copyrighted materials in its electronic reserve service.  Academic libraries have long provided reserve services, where a professor would place materials for a class "on reserve" and students could go to the library to read those materials.  As the old reserve system used legal library or instructor copies of works, it was considered to be the equivalent of a very short term loan of materials.

In their lawsuit, the academic publishers argued that Georgia State violated copyright by making electronic copies of materials, and that the ways those copies were made and distributed fell outside of traditional "fair use" exemptions for educational purposes.  In fact, the suit listed 99 specific practices that it considered to be serious violations.  After lengthy litigation, the judge in the case issued a lengthy ruling (350 pages) last month that addressed each of the allegations individually.  The judge found that of the 99 practices, only five were considered to fall outside of fair use.

In good news for academia, the judge took the educational purpose of e-reserves seriously, rather than simply considering the market impact of copying.  The Judge dismissed many of the allegations on the basis that the plaintiffs had not adequately established their copyright stake in the material,  She dismissed their argument that the fair use guidelines in the 1976 Copyright Act automatically applied to e-reserves and online materials, and after examining publishers' balance sheets, concluded that they had not lost significant income due to the alleged infringing activities.  While not applying the specific "Fair Use" guidelines in the 1976 Copyright Act, she did apply the underlying four guiding factors - whether the use was commercial or noncommercial (educational), the nature of the copyrighted work, how much of the work was used, and what impact the use had on the potential market or value of the work.

While there were specific decisions for each of the alleged infringements, the ruling did not specifically address what e-reserve practices were allowable under fair use.  The judge suggested, but did not impose a basic 10% rule, but also indicated that that limit applied primarily for work available for digital license, and where there was the potential to make significant revenues through digital licensing.  One law professor gave his interpretation of the ruling for faculty and academic libraries -
"The operational bottom line for universities is that it's likely to be fair use to assign less than 10 percent of a book, to assign larger portions of a book that is not available for digital licensing, or to assign larger portions of a book that is available for digital licensing but doesn't make significant revenues through licensing."
I'd still propose adopting a couple of Fair Use guidelines I proposed in a 1999 paper, "Reinvigorating Fair Use: A Social Economics Approach."  In it, I suggested that a particular noncommercial usage of a copyrighted work would be considered to be a "Fair Use" if there was a clearly identifiable public or social value emerging from the use, and where either the portion of the work used is unlikely to negatively affect the whole work's value, or where that work is not readily available in the market (out of print, or otherwise not available for that use).

Thoughts

While the book publishing industry essentially "lost" in these two cases, I think that these cases will benefit the industry in the long run.  The book industry is a fairly late arrival to the emerging digital network economy.  They are at that early stage of wondering how these new uses and markets will impact their traditional business models, on the implications for their ability to print and sell physical books, and seeing how to apply legal actions (using copyright) and illegal actions (collusion) to limit new markets and uses, and push readers back into the physical copy world.
  They need to move quickly into the second stage of recognizing that rather than simply harming traditional markets, the digital network economy is creating whole new markets (ebooks, digital licensing) that can be substantial.  And then move on to the third stage, which is recognizing that the cost structures of these new markets are substantially different that those of the traditional markets, and that developing pricing models and strategies on those cost structures (rather than setting price strategies based on the pricing models of the traditional markets) can open up markets and demand substantially.  Specifically, this entails moving from pricing within an economics of scarcity, to pricing for an economics of abundance.
  If the publishing industry can take these losses to heart (rather than to appeals, or trying to figure out how to bypass requirements), this could make it easier for them to see and grasp the potential of new markets and outlets for its content.  The huge potential of ebooks (which is becoming apparent even with the traditional pricing models in place) and the likely smaller, but still significant, market for licensing academic works (in whole or in parts).  The industry reluctance to unbundle academic works (to theoretically protect the value of the whole work) is a major cause of these Fair Use fights.  Universities and academic libraries would likely be willing to license academic content (in toto or in pieces) rather than requiring students to purchase books.  In fact, a number of countries essentially do this by giving educators a compulsory license for copying and other e-reserve type services.
  Anyway, the sooner the book publishing industry gets around to considering how to adopt to the changing media environment, to recognizing that its not in the book business but in the (textual) content business, the sooner its likely to find ways to exploit emerging markets, distribution mechanisms, and information services.  And, quite frankly, the more likely they are to survive as the big publishing houses, rather than lose out to the emerging Amazon and Apple publishing empires.


Sources -  DOJ Files Antitrust Suit Against Apple and 5 Publishers Over E-book Pricing,  Wired.com
DOJ Announces Terms of Settlement With 3 Publishers in E-Book Lawsuit,  Wired.com
Long-Awaited Ruling in Copyright Case Mostly Favors Georgia State U.,  The Chronicle of Higher Education

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