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The e-book industry is dominated by a handful of powerful technology and publishing companies. U.S. and European anti-trust regulators are investigating Apple and five major publishing companies for illegally colluding to raise e-book prices. We explore how e-books are priced, and the shifting centers of power within the publishing industry.
- Thomas Catan Reporter, Wall Street Journal
MR. MATT MCCLESKEYFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your community with the world. I'm Matt McCleskey, your local host of Morning Edition from WAMU 88.5, sitting in today for Kojo. Later in the broadcast, learning from the octopus, using insights from nature to deal with crises and uncertainty. But first, price fixing in the e-book industry.
MR. MATT MCCLESKEYThe price spike seemed to come out of nowhere. One day, e-book fans could buy any book title from Amazon.com for $9.99. Then the next day, that same title could cost $14.99, a 50 percent spike. This particular increase had nothing to do with Amazon. It was triggered by a new deal between five publishing powerhouses and a newcomer to the e-book world -- Apple. U.S. and European anti-trust regulators are investigating whether those companies illegally colluded to raise e-book prices.
MR. MATT MCCLESKEYAnd today, The Wall Street Journal is reporting they may be close to a deal that could once again lower prices. Joining me now is one of the reporters who broke that story. It's Tom Catan. He's with The Wall Street Journal, covers anti-trust and technology issues. Thanks for being here.
MR. THOMAS CATANThanks for having me.
MCCLESKEYNow, back in 2010, Amazon was the undisputed dominant player in the e-book industry. It had the Kindle e-reader and also had a huge selection of books all priced at a maximum of $9.99. But the publishers of those books were always uncomfortable with that pricing arrangement. So they cut an interesting deal with Apple. What exactly did they agree to?
CATANWell, you know, traditionally, publishers have sold to booksellers on what they call the wholesale model. That means that they would basically hand over the books for about 50 percent of the cover price. And then the retailers, the booksellers could sell it, really, for whatever price they wanted. And some of them discounted very heavily. Amazon was selling a lot of new best-sellers at about $9.99, really in a bid to sell a lot of Kindles.
CATANAnd, you know, that was working very nicely for Amazon. They were taking a loss on those books because a lot of the time they were selling it -- them below cost. And, you know, the publishers hated this system because they felt that it was devaluing their product. It made it harder for them to sell, you know, $25 hardcover books, you know, that weren't e-books. And also, they were just fearful that Amazon becomes so powerful that they wouldn't have any bargaining clout.
MCCLESKEYSo the idea for Amazon was to sell perhaps a bit under cost but then to sell more of the Kindle e-readers to make up.
CATANThat's right. And, you know, when they first introduced, they had about 90 percent of the e-book market. You know, fast-forward to 2010. Apple is coming on the scene with its new iPad and trying to negotiate with the biggest six publishers in the U.S. to sell them e-books, but they don't have any intention of losing money on each book, so they say to the publishers, look, you know, let's do a deal.
CATANYou know, let's go to what they call the agency model. That means that you guys set the price, not, you know, us or Amazon, and we'll just take a 30 percent cut. But crucially, you can't sell to my rival more cheaply. And that effectively made discounting really disappear overnight.
MCCLESKEYAnd we see those prices go up on Amazon. Now, how did the Justice Department get involved and why?
CATANWell, both the Justice Department and the European Union started looking into this because they felt that, you know, it was a little bit suspicious that Apple had suddenly sort of presided over this industry-wide price rise, right? Now, a lot of the publishers said, look, you know, the agency model really saved us. It saved the industry because, you know, now, just instead of having Amazon, you have Barnes & Noble.
CATANYou have Apple. You know, in some ways, it's, you know, been pro-competitive. I think the Justice Department, from my sources, what they understand is that their point is, well, how can they be competitive if prices have gone up? You can't all, you know, agree to set a price, which is what they believe happened. It -- that's just against anti-trust laws, illegal.
MCCLESKEYHave you tried comparison shopping for e-books, and have you had any luck? Give us a call, 800-433-8850. You can also email your comments to email@example.com. Now, Tom Catan, you've reported this week that the Justice Department may be closing in on a deal with some of the publishers. What do we know about that?
CATANWell, there's been some very tense, you know, wheeling and dealing between the parties to try and head off an anti-trust lawsuit by the Justice Department, could come as early as next week, I understand. About three of the publishers, which are Simon & Schuster, HarperCollins and Hachette, seem to be leaning towards accepting some sort of deal. Then you have three players that are holding out, Apple itself -- and let me see if I can remember the other two.
CATANAnd the remaining, you know, publishers, they're -- MacMillan and Penguin are the other two, in fact. So, you know, we don't know. Maybe some of them will settle, and some of them will go to court. You know, it could be a messy situation.
MCCLESKEYWell, we tend to think often of anti-trust in terms of breaking up monopolies or firms that can unfairly dominate markets. In this case, though, both sides are huge companies that could potentially unfairly dominate the market. Where do consumers fit in, and what's the government interest? How does that all work?
CATANWell, you know, it's a really interesting case, isn't it? Because, on the one hand, you have the government saying, you know, you, the five big publishers, plus Apple, can't all collude. That's just, you know, an automatic violation of anti-trust laws. And then, on the other hand, you have publishers saying, well, you know, how come you guys are stepping in to protect a monopolist with 90 percent of the market? I mean, it doesn't have 90 percent now, but only because they believe -- only because they switched to an agency model. So it's a strange situation.
MCCLESKEYNow, if we're looking at the overall price of e-books, it seems like, without having to print the books, you don't have to pay for paper, you don't have to distribute the books all over the country or the world, why is the cost, I suppose, as high as it is if it's $9.99 or if it's $14.99? Is that fairly priced?
CATANWell, I mean, the digital distribution has been, you know, a blessing and a curse for, you know, anyone that produces content, you know. And record companies went through this, you know, movies as well, and books now have been through it in the last five years. And a lot of the traditional publishers are just very, very concerned about what will happen. You know, customers began to expect a lot, you know, cheaper books.
CATANYou know, you don't have to print them. You don't have to ship them around. Why shouldn't this be cheaper? But the publishers would say, well, first of all, our cost is still pretty high. We still have to give people advances, you know. And, secondly, you know, the cost is really what people were willing to pay for.
CATANAnd in some ways, you can make the argument that an e-book is actually better than the old hardback or paperback book because, you know, you can search it. You get it immediately. You can take it around to do this -- there's a lot of convenience there. So they don't believe it should be cheaper.
MCCLESKEYDo you download e-books? Have they changed the way you consume books and media? Again, give us a call, 800-433-8850. The phones are open. You can also send an email to firstname.lastname@example.org. I want to go to the phones now. We're going to hear from our first caller. It's Steve in Alexandria, Va. Steve, thanks so much for calling "The Kojo Nnamdi Show."
STEVEHi. Thanks for the -- looking into this. The -- you know, I'm just been reading -- both reading the book and also listening to it -- "The Great A&P" story, which is about the struggle of -- it's the struggle of small business in America. And it was interesting because the regulators went after A&P for precisely the opposite reason. That is, they accused A&P of setting prices too low for Americans in terms of the price of food and were trying to effectively knock some of the competitors out.
STEVENow, this seems to be exactly the opposite. The regulators are coming in and saying, oh, no, the problem here is you're setting prices too high. And I'm wondering, really, what gives them the audacity -- the regulators -- to actually determine what is the proper price for something?
MCCLESKEYTom Catan, is it a fair comparison to look at something like food versus e-books?
CATANWell, I mean, this case, I think what the government would say is, you know, we're not determining the price. The market should determine the price. But, you know, they can't determine the price if all of them are getting together effectively and deciding what the price should be. So what you want is to, you know, get rid of any improper collusion so that they can all, you know, go at each other for our business and offer the lowest prices to consumers.
MCCLESKEYAll right. Steve, well, thanks very much for your call. Let's go to another call now, Andrew in Washington, D.C. Andrew, you're up next on the air. Thanks for calling.
ANDREWHey. How is it going? I just want to make the point nowadays we have a situation in place where we have e-books -- you can make an infinite amount of copies of an e-book. You can make an infinite amount of copies of any digital media in any way, shape or form. And the thing here is that, you know, it doesn't cost anything to make that extra copy. The rules of supply and demand just do not have any of the same weight in the current electronic markets as they used to.
ANDREWI mean, that's the biggest reason I think we have a big problem with piracy. And no one that I have seen so far has really come up with a good balance, you know, a new business model, new profit model for actually, you know, just making sure that everything can actually be fair and people can still make money.
MCCLESKEYWell, Tom Catan, do the original ideas of supply and demand fit when you're dealing with e-commerce or particularly e-media?
CATANWell, you know, I mean, it has been a tremendous upheaval for, you know, business -- after business and, you know, books is only the latest one, right? You know, the caller is right. There's no shortage of supply, right? It's infinite, potentially. And so, you know, you're going to a model where, you know, essentially the cost of the thing is going to be whatever people are willing to pay for it because there's no restriction on how many copies you can make of the same thing.
CATANBut it also -- you know, it's hard to retain control of people making copies of it. And that's the real thing that once you lost control over the ability to, you know, people to copy your work, then how do you expect to charge people for it?
MCCLESKEYWell, you cover the legal and technology beat for The Wall Street Journal. It seems like Washington is sometimes playing catch-up or perhaps often playing catch-up when it comes to technology questions and how to regulate them. Is that the case here? I mean, this was 2010, and now, here two years later, we're seeing the -- these potential allegations.
CATANYeah. I mean, it's always an issue that, you know, if you look back to the Microsoft case, you know, it wound its way through the courts, and they were, you know, arguing about, you know, Windows 98 sort of in 2001, you know, when it ceased to be relevant. So, you know, law and technology move at two different paces. That's difficult. It's something that the anti-trust authorities have, you know, tried to keep up with. But, you know, the legal system is what it is. You can't take shortcuts.
MCCLESKEYLet's go back to the phones. We go to Kevin, calling from Annapolis in Maryland with a question about e-books and libraries. Good afternoon, Kevin. Thanks for joining us.
KEVINHi. How are you guys doing? My question was regarding the content your caller or your guest had mentioned, that the content, I guess, is the same price for, I guess, print versus e-book. But I tried to, like, donate my materials, my e-books to libraries, and I've been told that it's the license to use. And I'm not able to do that. And I was curious what their question -- or what their comments were about being able to donate that content to the library.
MCCLESKEYWell, Tom Catan of The Wall Street Journal, what do you know about e-books and libraries?
CATANWell, you know, I've got to say I'm not an expert on this issue, but I mean, you know, it is -- it's a difficult subject, isn't it? Because, previously, for publishers, well -- OK, you know that you could go and you could buy the book from them or you could get it out of the library. But it was a little bit more difficult to get it from the library. You had to go down there. You had to -- you know, now, the idea is well, OK, you can, you know, buy an e-book from the publisher.
CATANOr you can just press a button and borrow it for free from the library, maybe even without going down there. I mean, that's a different proposition for them. So I think there's, you know, they're going to have to be struggling to work that out.
MCCLESKEYWhat's next in terms of these talks? What can we be looking for in the coming weeks?
CATANWell, you know, potentially it can be quite dramatic. I mean, you're going to have -- seems like at least some of them are going to sign on some sort of a settlement. What are they going to agree to? I mean, that's still a little bit in the mix, but it looks like they're going to have to drop some elements of the agency model that they so came to depend on. In the meanwhile, other ones -- maybe they're just talking tough now, and they'll also sign on dotted line when threatened with a lawsuit.
CATANBut if they don't, then, you know, those guys are going to be going to court. They're going to be trying to say, "Look, you know, we weren't colluding with other people when some of those other companies have already settled." So, you know, it's going to be an interesting show for everyone to watch.
MCCLESKEYWe'll have to leave this conversation here. No doubt we'll learn more once the final settlement is reached. And if you're interested in more discussion about how the e-book revolution is reshaping the publishing world and changing the way authors and readers interact, you can check out the publishing pinch, a very interesting "Kojo Show" from last November, and we've linked to it from the webpage for today's show at kojoshow.org. We're going to take a short break now.
MCCLESKEYAnd then when we return, we'll be welcoming marine biologist Rafe Sagarin to the studio. We'll be talking about what octopus and salmon are teaching human beings about adaptability and how to tackle some of our biggest problems. First, though, I want to thank Tom Catan of The Wall Street Journal. He covers anti-trust and technology issues. Thanks so much for joining us.
MCCLESKEYAnd we'll be back on the other side of break. I'm Matt McCleskey, the local host of "Morning Edition" here on WAMU 88.5, filling in today for Kojo. We'll be right back.
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