Safety In Numbers? by Nathan Lowell

We've all heard the aphorism, there's safety in numbers. Where one person might face a hardship or be overwhelmed by a risk when acting alone, that hardship and risk can be mitigated if groups band together.

But there's a catch.

Sometimes, the act of banding together creates the risk.

Last week some interesting news splashed around the pub-o-sphere about the US Dept of Justice warning a collection of publishers about a pending suit. The crux of the matter is the appearance of collusion. The Passive Guy has the nuts and bolts of it in a post on The Passive Voice. Over the last few days, I've heard a lot of people spinning "chicken little" scenarios based on that news and very little of it seems to make any sense.

Here's the thing. I'm not a lawyer. I didn't play one on TV and I didn't spend the night in a Day's Inn.

But I was around in the 70s when the text book publishing field went through a similar scenario. In the early 70s college bookstore discount margin on texts was 20%. Bookstore operations needed to cover costs of operation on that very narrow margin, and even with a captive audience, breaking even often depended more on t-shirt sales than textbooks. With limited returns, low margins, and overly optimistic enrollment numbers, one bad buy could kill a whole year's profitability. The net result was that a lot of college book operations folded up. Colleges and universities were contracting in greater numbers with operations like Follet and Barnes and Noble to run their text operations. About that time, the National Association of College Stores put their heads together to see what they could do about it.

The Justice Department sent a strongly worded warning to the organization -- and to the publishers that served them. The DoJ warned that the kinds of collective action that just a few years before would have been fine, now fell into the new Racketeer Influenced and Corrupt Organizations Act -- RICO, for short -- in that the NASC could face racketeering charges on the grounds of price fixing. Furthermore, the publishing industry was put on notice that companies that organized a systematic effort at price fixing were also liable under RICO. The rationale in this instance was that, since the publishers were considering a mass shift in generally accepted practice (moving to a 23% instead of 20% margin), the extra costs would be added to the prices of the textbooks. The argument followed that the increases in price constituted a prohibited action under the anti-racketeering laws because an "enterprise" -- that is the publishing groups -- were in collusion to set prices by controlling the market availability of a product. That the product was textbooks and not - say - garbage collection fees, didn't matter.

Here's the thing that applied then, and I think applies now.

If I have a publishing business, and I decide to raise (or lower) my discount margin, that's perfectly legal. It's my business, I can do what I want. If I want to sell hardcovers first to siphon off the cream from a market, then sell paperbacks to get the next layer, and finally ebooks for sweeping up the last of the money on the table, that's perfectly legal. I can follow any pricing strategy I want, including the practice called "windowing."

What I can't do is get together with a few hundred of my friends and have us all decide to follow the same practice. The discussions on ebook pricing that so many are having in so many different fora are perfectly legal -- until and unless some group of us decides, we're all going to charge $7.99 for novels because the race to the bottom on pricing has to stop. That's price fixing. Even if it's not effective, even if only a few people do it, you're now open to RICO charges, because price fixing is considered part of racketeering and it's been illegal in the US since at least 1970.

Which brings us to last week's announcement that the DoJ has warned some big publishers they are about to be sued for the activities that led to the practice commonly known as "Agency Pricing." Along the way, the DoJ has some idea that a subset of publishers were in collusion back in 2009 to add ebooks to the common industry practice of "windowing." While it's understandable that companies faced with a new reality in their market place (ebooks) might look to each other for guidance, an agreement to prop up paper-based sales by delaying publication of ebooks constitutes collusion in restraint of trade, and that's what the publishing industry lost sight of.

So, we indie publishers, the small press/self-pub people, need to take a lesson from this. It's okay to talk about what a response to some market change might be, but when we start laying out plans on what we should all do together in response, we shouldn't be surprised when the DoJ comes knocking.

Go ahead and make the business decisions that make sense to your operation, just don't ask me to go along with you. In this case, there's no safety in numbers.

Image courtesy of Alistair Knock's Flickr Photostream