Class Action Suit: Amazon & Publishers Face Price Collusion

Attorney's Sperling & Slater acting on behalf of three eBook buying plaintiffs are suing Amazon and the "big 5" publishers (Hachette, Macmillan, Penguin Random House, Simon & Schuster, Harpercollins) for eBook price collusion in the Southern District Court in Manhattan.  These plaintiffs are deemed representative of the following class:  

All persons who, on or after January 14, 2017, purchased in the United States one or more eBooks sold by the Big Five Publishers through any other retail e-commerce channel in the United States other than the Amazon.com platform.

The filing alleges that Amazon.com employs anticompetitive restraints to immunize its platform from the negative effects of the Big Five’s inflated eBook prices and that these 'inflated prices' are a result of the imposition by publishers of the agency pricing model.

There are several exhibits in this filing including the following:

As the following chart shows,15 the Big Five’s eBook prices decreased substantially from 2013-2014, as long as the consent decrees prevented the Big Five from interfering with retailer discounts, but they immediately increased their prices again in 2015 after renegotiating their agency agreements with Amazon and have continued to maintain supracompetitive prices

What the above chart seems to be suggesting is that eBook prices from the big five are now at a level comparable to the 2014-15 time period which is when they were lowest.

In their argument the attorneys focus on the use of 'most favored' pricing models which Amazon requires of its vendors. Basically no other vendor (including the publisher) can offer better prices to consumers. Due to this according to the suit, Amazon removes any opportunity for price competition and therefore perpetuates higher (anticompetitive) pricing of eBooks. As follows:

27. Amazon’s and the Big Five’s continued anticompetitive use of MFNs in the United States is astonishingly brazen, given the DOJ’s high-profile enforcement against Apple and the Big Five in 2012 and the EU’s own proceedings against the Big Five and Apple in 2011 and subsequently against Amazon in 2015 for its own use of anticompetitive MFNs in eBook sales. Despite multiple investigations and censure, Amazon and the Big Five have engaged and continue to engage in a conspiracy to fix the retail price of eBooks in violation of Section 1 of the Sherman Act.

28. Amazon’s agreement with its Co-conspirators is an unreasonable restraint of trade that prevents competitive pricing and causes Plaintiffs and other consumers to overpay when they purchase eBooks from the Big Five through an eBook retailer that competes with Amazon. That harm persists and will not abate unless Amazon and the Big Five are stopped; Plaintiffs seek a nation-wide injunction under the Clayton Act to enjoin Amazon and the Big Five from enforcing this price restraint.

29.Amazon’s conduct also violates Section 2. Amazon has obtained monopoly power in the U.S. retail trade eBook market, where it accounts for 90% of all eBook sales. Through its conspiracy with the Big Five Co-conspirators, Defendant Amazon has willfully acquired its monopoly power in the U.S. retail trade eBook through anticompetitive conduct, fixing the retail price of trade eBooks and causing supracompetitive prices for eBooks sold by or through Amazon’s eBook retailer rivals. Such conduct is an abuse of monopoly power in violation of Section 2 of the Sherman Act.

In stating thie case, the attorneys believe that Amazon and its co-conspirators (Big 5 publishers) did not act unilaterally or independently, or in their own economic interests, when entering into these agreements, which substantially, unreasonably, and unduly restrain trade in the relevant market, and harmed Plaintiffs and the Class thereby.

They seek damages in the case due to the higher costs of eBooks purchased.

MediaWeek Report (Vol 13, No 2): ViaNOT - Simon & Schuster Nolonger a Fit at ViacomCBS

Almost apologetically, ViacomCBS Chief Executive Bob Bakish announced that Simon and Schuster (S&S) wasn’t a real fit for his media company, this despite the fact that S&S has been part of the family for 25 years give or take. That said, he did confirm what many in the industry have seen for a while, that ViacomCBS has been interested in off-loading S&S for a while. It’s pretty unfair on S&S too: The company has a strong backlist and stable of reputable authors, has avoided some of the bigger controversies such as library lending and Amazon conflicts and has managed to produce decent operating margins in a trade publishing business that historically struggled to achieve 10% profit margins.

Left unsaid in Bakish’s admission is that a strategic buyer may not be on the cards. For HarperCollins, Macmillan, Penguin Random House and Hachette that deal has been but a phone call away for the past 3-4 years, but no deal is in the offering. Bakish has been forced to announce publicly the chance to purchase one of publishing’s most iconic publishers to gin up some interest. Perhaps if this effort doesn’t produce a buyer then VIacomCBS may moderate their price expectations to make a deal with another publisher more likely. While efficiencies are likely in a combination with another publisher cost savings may not be as significant at first glance. Publishing has been running lean since the financial crisis (not the current one).

S&S had revenues of $814 in 2019 according to industry sources which was slightly lower than those in 2018. Profit is likely to be around 10-15% which may broadly imply a valuation in the $500mm range. With market power of both Amazon Publishing and Penguin Random House potential buyers would be wise to be cautious in overpaying for an expanding and growing market opportunity which simply isn’t there.

Brands to Publish - Repost

It's Friday which means another regurgitation from several years back. This one originally published on January 13, 2007:

Nancy Drew has always held a fascination for me, not because I clamor for a good girlie mystery but because of how The Nancy Drew series evolved. Established by Edward Stratemeyer, The Drew books were written by a number of ‘house’ writers (Mildred Benson) and the books were never dependent upon one author for their success. While the publisher of the titles was little recognized, the Drew series grew to become a strong branded product line and, as such, represents a model today's publishers may want to emulate. Corporate branding exercises little impact in the publishing world: We all know this and, while some publishers have tried to create brand strength (i.e., Paramount Publishing), success has been sparse and probably – in truth - not aggressively sought after.

There are exceptions. I used to start my Intro to Publishing courses at Price Waterhouse by asking the group to name a publisher. I stopped doing this when a partner once popped up and said HARLEQUIN! While some consumers might be able to identify Harlequin or Hungry Minds or Fodors, they would be hard-pressed to cite HarperCollins or Simon & Schuster with any relevance. Consumers have little emotive connection with publishing trademarks (a fundamental facet of brand awareness) and publishers are unlikely to ever achieve this connection with consumers. So, in an age in which the author transcends the publisher (Patterson, Grisham, Ludlum, Courtnay) what is a publisher to do? Investing in a branding campaign would be expensive and ultimately pointless, but embarking on a strategy similar to that which produced the Drew books might be more constructive.

My extrapolation of the Drew example led me to wonder why publishers don’t establish their own character-based brands. More publishers will do what Nelson has done and drop imprints, but will they also start to develop their own character-based franchises? Clearly, it is hard to ‘bottle’ what makes John Grisham a popular writer, but there are examples where existing characters have been extended in new ways. For example, there is a cottage industry of TV soap-opera lovers who create stories, novelizations and back-stories for the characters that appear in the TV soap operas. George Macdonald Frasier took a minor character out of Tom Brown’s School Days and created The Flashman series of satirical historical novels. The book packager Alloy Entertainment (which got caught up in a plagiarism charge last year) also operates a Nancy Drew model. There must be many others.

Publishers don’t have to look far to see how powerful character-based publishing could be. The comic book industry has been doing this for 50 years. In this industry the corporate brands (Marvel, DC Comics, etc.) have benefited from some of the reflected brand indentity that characters such as Superman, Spiderman, Aquaman and others have created in the minds and behavior of consumers. In book publishing, the opportunities to create character franchises are there for the asking. James Patterson has embarked on developing an author/character franchise and, if publishers were smart, they would be thinking about creating contracts that gave them the ability to broadly leverage the characters that authors create. This would include (with the author's permission) ghost-written books and stories of both the main characters and development of derivative story lines out of the books (as in the Flashman example). The opportunity to expand the content output and publish to a ‘template’ would generate higher revenues for publisher and author, stable consistent output and content consumers could enjoy.

The above scenario still accords some level of risk for publishers that the ‘powerful’ author may go off on his or her own. Given the examples in the music industry of late, some have suggested that major authors will do what Radiohead has done and walk away from the traditional publishing model. Some may, but it will hardly be an avalanche and this threat is no worse for a publisher than losing an established author to a rival house. The bigger question is how publishers can maintain a consistent funnel of marketable branded content. I believe publishers should be attempting to develop their own proprietary content franchises by building character properties in the same way the Nancy Drew series was created. There are several ways to develop this: Firstly, publishers can simply buy out an authors work so that they own it in total and can leverage it anyway they want. Secondly, they can license characters from other media: Who wouldn’t want to read a hard-boiled procedural featuring Law & Order’s Lennie Brisco, for example? As publishers begin to travel down this road, they could evolve into character based enterprises similar to Disney and Marvel. This, in turn, would make them less susceptible to the whims of authors and the corresponding limitations of their contracts.

Harpercollins is owned by NewsCorp which owns Fox. Assume that Fox owns the character "Dr. House"; why don’t you see a series of House mysteries written to a formula by ‘house’ (sorry) authors whose job it is to churn these out every two weeks? And there is no need to limit the books to Dr House; any of the characters in the show should be fair game. Publishers who focus on their publishing brands have things backwards: They should see things from the consumer's point of view and that view is more than likely focused on either an author or a character. Build the product pipeline up with a character based publishing approach and the publisher may grow in the ascendancy.

Obviously, authors are a critical component to a publishing house’s viability but as distribution flattens, barriers to entry drop and generally the industry changes. Publishers need to reassess their content-acquisition strategies to ensure they have access to revenue-producing assets that will remain with them for an extended period of time. Perhaps the Drew model will become more widespread.

MediaWeek (Vol 2, No 45): Money Issue

Several publishers reported earnings this week.

Simon & Schuster (CBS)

Publishing revenues for the third quarter of 2009 increased 2% to $230.4 million from $225.0 million for the same prior-year period reflecting the timing of the release of titles. Best-selling titles in the third quarter of 2009 included Arguing with Idiots by Glenn Beck and Her Fearful Symmetry by Audrey Niffenegger. In constant dollars, Publishing revenues increased 4% over the same prior-year period.

OIBDA for the third quarter of 2009 increased 10% to $28.4 million from $25.8 million for the same quarter last year and operating income increased 14% to $26.6 million from $23.4 million for the same prior-year period primarily due to revenue growth, partially offset by higher write-offs of advances for author royalties.

Hachette (Reuters) and The Bookseller:

Publishing revenues for the nine months to end September 2009 were €1,694m, up 8.3% on a reported basis and 8.8% on a like-for-like basis. Sales grew again in the third quarter of 2009, rising by 5.1% on a like-for-like basis. Other "main growth drivers" in the US included True Compass by Edward Kennedy, Say You're One of Them by Uwem Akpan, Lies My Mother Never Told Me by Kaylie Jones and Malcolm Gladwell's Outliers.

There was further sales growth in the United Kingdom but Spain reported a slight dip, mainly due to lower sales in education, Lagardère said. Lagardère said its publishing business faced "a particularly challenging fourth-quarter comparative", as the success of the Stephenie Meyer saga drove like-for-like sales growth to 6% in the fourth quarter of 2008.

ThomsonReuters (Press Release):

Glocer commented that 'the worse may be over'
Revenues from ongoing businesses were $3.2 billion, a decrease of 2% before currency and 4% after currency. IFRS revenues were down 4% after currency against the prior year period.

Underlying operating profit was up 3% to $711 million, with the related margin up 140 basis points, driven by the benefit of currency, integration-related savings and a continued commitment to strong cost management.

Adjusted earnings per share were $0.43 compared with $0.47 in the third quarter of 2008. The decline was due to higher integration-related spending, which is included in adjusted earnings but not underlying operating profit.

Borders announced that they would close the remaining mall stores by early 2010 (PR):

As part of Borders Group's ongoing strategy to right-size its Waldenbooks Specialty Retail segment and emerge with a smaller, more profitable mall chain in fiscal 2010, the retailer will close approximately 200 mall stores in January, leaving approximately 130 mall-based locations open. The list {of closures} is not final and is subject to change pending finalization of agreements over the coming weeks. Importantly, today's announcement regarding the mall business does not include Borders superstores or the company's seasonal mall kiosk business, which includes over 500 Day by Day Calendar Co. units, among other mall-based retail concepts.

Newscorp reported their results including improved results at Harpercollins (PR):

HarperCollins operating income of $20 million increased $17 million versus the same period a year ago due to higher sales at the Children's and General Books divisions, as well as reduced operating expenses from restructuring efforts in the prior year. First quarter results included strong sales of Where the Wild Things Are by Maurice Sendak, The Vampire Diaries by L.J. Smith and the paperback edition of The Story of Edgar Sawtelle by David Wroblewski. During the quarter, HarperCollins had 47 books on The New York Times bestseller list, including four books that reached the number 1 spot.

Torstar the parent of Harlequin reported (PR):

Book Publishing operating profit was $22.9 million in the third quarter of 2009, up $4.2 million from $18.7 million in the third quarter of 2008, including $2.0 million from the impact of foreign exchange. Year to date, Book Publishing operating profit was $63.1 million, up $9.9 million from $53.2 million in the first nine months of 2008, including $5.1 million from the favourable impact of foreign exchange. Underlying results were up in North America Direct-To-Consumer and down in North America Retail for both the third quarter and year to date. Overseas was down in the quarter but up year to date.

Simon & Schuster And Torstar Report

Simon & Schuster
The new Viacom division CBS corporation which was created earlier this year reported for the first time this week and the financial results for Simon & Schuster were separated out. It is a the first time these results have been segmented for a number of years because Viacom used to combine them with other revenues. S&S revenues for the half year period were $357mm up 7% versus last year. Operating income of $12mm was up 35% versus 2005. The improvement was due to increases in distribution but how much this impacted the full six months versus the recent quarter.

Torstar Still Having Problems.
Torstar, which owns under leveraged (my opinion) Harlequin Enterprises, revenues "slumped" according to Reuters for the quarter ended September 30th. Revenues for the book division apparently lead the decline. S0me of the decline at Harlequin was due to a supplier bankruptcy which disrupted a mailing campaign. Operating profit for Harlequin was off 30% ($3.7mm) which was ascribed to "underlying operations." The US direct to consumer operation accounted for $2.4mm of this variance. No mention was made whether they would recover this income although they have completed the mailing via in-housing the operations. Full year 2005 revenues were $526mm down 2.5% from the prior year. Operating income was down by a similar percentage. This business is crying for web applications but in a recent presentation by Harlequin I have seen they are incredibly conservative in spite of the resounding success of their tests (look for the presentations on the right of the page under "Connected Mobile Presentations"). Think about what Harlequin could do with the type of web initiatives that Harpercollins announced yesterday.