MASTER PROJECT E- market Recent developments and competitive concerns

June, 2011

Rocío Prieto Julieta Schiro

Master in Competition and Market Regulation

2010/2011

E- MARKET

Recent developments and competitive concerns

by Rocío Prieto and Julieta Schiro

Abstract

The e-book market is starting to take off in the EU and several competition concerns are arising. Due to the novelty of this market and the lack of information and studies on the topic, it is worth analyzing the main patterns, players, and strategies that have been observed so far, both in the US, where the market is more developed, and in the EU, where the market is still in an initial phase. In both cases, a main feature is the pricing arrangement in place between publishers and retailers (i.e. wholesale model vs. agency model). Each of these models implies different competition concerns (predation vs. collusion, respectively) but a common aspect is that, to be able to deal with these behaviors from a European standpoint, a higher degree of harmonization in countries’ policies is necessary.

Contents

1. Introduction ...... 1 2. Background...... 1 2.1. Brief characterization of e-books ...... 1 2.2. Development over time ...... 2 2.3. Devices: e-readers...... 4 3. Main players in the e-book market...... 7 3.1. Publishers (wholesale market)...... 7 3.2. Retailers...... 7 4. Pricing models: Wholesale versus Agency model ...... 8 4.1. The wholesale model...... 9 4.2. The agency model...... 9 5. Competitive Concerns ...... 11 5.1. The wholesale model...... 11 5.2. The agency model...... 12 5.3. International experience ...... 14 5.3.1. US ...... 14 5.3.2. EU...... 16 6. Concluding remarks...... 17 7. References ...... 19 8. Appendix ...... 23 A.1: Main e-readers ...... 23 A.2: Main publishers ...... 24 A.3: Main retailers...... 25

1. Introduction

This project is aimed at providing a descriptive analysis of the newly developed e-book market and, in particular, at describing the main sources of competitive concerns that may arise within it. Indeed, one of the motivations of this study comes from the fact that investigations by the European Commission (EC, hereafter) and several National Competition Authorities are being carried out concerning price fixing on the part of e- books’ publishers after the adoption/undertaking of the agency pricing model.

The report is organized as follows: in Section 2, a brief description of the e-book, of its development over time, and of the supporting devices is provided. Section 3 analyses the main players in the industry -publishers and retailers. Sections 4 and 5 deal with the pricing models more generally applied in the e-book market -wholesale model and agency model- and the competitive concerns arising from them. Finally, concluding remarks are provided in Section 6.

2. Background 2.1. Brief characterization of e-books

Following Gardiner, Eileen and Ronald G. Musto, an e-book is a book-length publication in digital form, consisting of text, images, or both, and produced on, published through, and readable on computers or other electronic devices 1. It must be noticed that some books are born digital , i.e. there is no equivalent printed version.

E-books are often read on specialized hardware devices called e-readers or e-book devices. Additionally, personal computers and some mobile phones can also be used to read e- books.

1 Gardiner, Eileen and Ronald G. Musto. “The Electronic Book.” In Suarez, Michael Felix, and H. R. Woudhuysen. The Oxford Companion to the Book. Oxford: Oxford University Press, 2010, p. 164.

1

There are over 25 different e-books formats, differing in many features, such as the content they support (only text, images, tables, colors, sound, interactivity, etc.) and the devices in which they can be read (supporting hardware).

2.2. Development over time

The origin of e-books can be traced to the beginning of the 70´s, when Michael S. Hart, a student in the University of Illinois, started the with the objective of making works of literature available in electronic format for free. Project Gutenberg grew and became an organization that, nowadays, offers over 36.000 2 free e-books that can be read in many devices.

In accordance to the limited use of the , and even computers, early e-books were generally written for specialty areas and a limited audience (i.e. technical manuals for hardware, manufacturing techniques, etc).

The general availability of the Internet in the early 90´s made transferring electronic files much easier, including e-books. As a result, many e-book formats emerged and proliferated, some supported by major companies such as Adobe with its PDF format, and others supported by independent and open-source programmers. These formats gave rise to the development of multiple devices, most of them specializing in only one format, and thereby fragmenting the e-book market.

How this market has evolved around the world is, by no means, equivalent. In the United States, the success of e-books started mainly in public libraries, which began providing them for free in 1998 through their and associated services, though they were not downloadable. Later on, in 2003, libraries began offering free downloadable popular fiction and non-fiction e-books to the public. This trend has continuously grown over time, with 66% of public libraries offering this service nowadays in that country.

2 http://www.gutenberg.org/wiki/Main_Page.

2

The use of e-books has extended widely ever since, ranking as the top selling format among all categories of trade in February 2011. During that month, e-book sales totaled $90.3 million, expanding 202 percent compared to the same period last year.

The story has been different in Europe, where even today “selling e-books can be a challenge”, as was stated by Cristina Mussinelli, a digital publishing consultant at the Italian Publishers Association. Europeans consumers apparently have been slower than their American counterparts to adopt e-readers. In 2010, Europe experienced a 20% growth in e-commerce book sales, but in some continental countries the e-book share of the market is still only 1%. The recently growing adoption of the iPad is expected to foster e-books penetration. In any case, until recently, e-books seemed to be mostly ground of early adopters.

A fundamental problem faced when assessing the state of an European-level e-books market is the fact that there is no central entity collecting information in an organized way, and how the different countries collect data may not be comparable.

In the rest of the world, with the noticeable exception of Japan, the scope and penetration of e-books is really limited.

The most fundamental milestones that took place in the e-books industry are shown in the following table.

Table 1 1971 • Michael S. Hart launches Project Gutenberg • Digital Book, the first software to read digital books, is patented. First digital book is published 1993 • Digital Book, Inc. offers the first 50 digital books in floppy disk with Digital Book Format (DBF) • Bibliobytes, a project of free digital books online in Internet 1995 • starts to sell physical books on the Internet • First e-book readers: Rocket and SoftBook 1998 • / Cybook Gen1 (by French Cytale until 2003, then by ) • Websites selling e-books in English, like eReader.com and eReads.com • American publishing opens up - of science 1999 fiction and fantasy • Webscriptions (a web services company) starts selling unencrypted (without DRM) e-books 2000 • Reader with ClearType technology (Microsoft program for the reading of e-books)

3

2001 • Todoebook.com, the first selling e-books in Spanish 2002 • Random House and HarperCollins start to sell digital versions of their titles in English 2004 • Librie with e-ink • with e-ink 2006 • BooksOnBoard opens and sells e-books and in six different formats • Amazon launches Kindle in US 2007 • Bookeen launched Cybook Gen3 in Europe • Adobe and Sony agreed to share their technologies (Reader and DRM) 2008 • Sony sells the Sony Reader PRS-505 in UK and France • BooksOnBoard is first to sell e-books for iPhones • Bookeen releases the Cybook Opus in the US and in Europe • Sony releases the Reader Pocket Edition and Reader Touch Edition 2009 • Amazon releases the Kindle 2 and Kindle DX in the US • Barnes & Noble releases the Nook in the US • Amazon releases the Kindle DX International Edition worldwide • Bookeen reveals the Cybook Orizon at CES • TurboSquid Magazine announces first magazine publication using Apple's iTunes LP format • Apple releases the iPad with an e-book application called iBooks (from April to October, it sells 7 million units) • Kobo Inc. releases its Kobo e-reader to be sold at Indigo/Chapters in Canada and Borders in the US 2010 • Amazon.com e-book sales outnumbered sales of hardcover books during the 2nd quarter of 2010 • Amazon releases the third generation kindle, available in +Wi-Fi and Wi-Fi versions • Kobo Inc. releases an updated Kobo e-reader which now includes Wi-Fi • Barnes & Noble releases the new NOOKcolor • Sony releases its second generation Daily Edition PRS-950 • PocketBook expands its successful line of e-readers in the ever-growing market • Google launches Google e-books • Barnes & Noble releases the new Nook - The Simple Touch Reader 2011 • Amazon.com announces in May that its e-book sales now exceed all of its printed book sale

2.3. Devices: e-readers

An e-reader is a portable electronic device that is designed primarily for the purpose of reading digital books and periodicals. E-readers differ among them according to several features. Apart from the formats that the device may support, e-readers vary depending on different attributes such as those related to the screen (type, size, pixels, touch screen, and shades), weight, , and other characteristics associated to the functionality of the device (connectivity, text-to-speech, dictionary integration and/or organization, internal storage, card reader slot, replaceable battery, web browser, library compatibility, USB peripherals and user controls).

4

Nevertheless, there is an essential feature that buyers tend to take into consideration when deciding which device they may acquire and it relates to the number of authors or genres they will be able to read. In short, the number of titles the e-reader will be able to include. This way, competing e-readers manufacturers (such as Sony, Barnes & Noble, Amazon, etc) try to attract buyers emphasizing the large number of titles in their e-book collection. For instance, Amazon’s Kindle Book store currently boasts over 865,000 e-books available for download, while Sony e-book reader product boast over 2 million titles in its reader Store.

Regarding the timeline of these devices, it is important to point out the fact that the appearance of the electronic ink (e-ink) was a milestone. Before the e-ink, one could find the following devices: Rocket eBook (NuvoMedia, 1996), SoftBook reader (SoftBook Press, 1998), Millennium reader (Librius, 1998), Everybook (1999), LunchBook (1999), Franklin Ebookman (2000) and Cytale (2000). The e-ink, which enables reading in bright sunlight and a lower battery consumption, brought about a number of devices incorporating new features such as USB peripherals, card reader slots, touch screens or WiFi connectivity. Among this group of e-readers one can find iLiad (Philips, 2006), Reader (Sony, 2006), HanLin (JinKe Electronic Company), STAReBOOK (2007), Cybook Gen3 (Booken, 2009), FLEPia (, 2009) and Kindle 3 (Amazon, 2007).

In addition to e-readers, there are several devices that are able to display text on a screen. In this sense, apart from tablet computers, some portable multimedia players and include a text viewer, which enables to turn them into suitable e-book viewers (Cowon D2, Omnia, etc.). Furthermore, there are certain operating systems that make cell phones useable for reading e-books (e.g. PalmOS based devices and phones). Regarding tablet computers, Apple’s iPad (as well as iPhone and iPod Touch) is increasingly acquiring an e-reader status through a large variety of e-reader applications. However, compared to tablet computers, e-readers are characterized by a better readability of their screens, especially in bright sunlight, and a longer battery life, which is achieved by using

3 More detailed information about e-readers can be found in the Appendix (A.1).

5

technology to display content. Therefore, any device that is able to display text on a screen can act as an e-book reader, but without the advantages of the e-paper technology.

An important issue in this report regards competition between Amazon and Apple. Amazon is an e-book retailer and an e-reader manufacturer (Kindle) and it has a strong presence in the market for digital books. On the other hand, one of the Apple’s products is becoming a tough competitor for Kindle though not being an e-reader itself: iPad. Due to this fact, a comparison between the two devices is worthy. The main difference that must be noticed is that iPad is a multi-purpose device while Kindle is a dedicated e-reader, aimed at displaying e-books for their reading. Thus, prices of both devices differ, being Kindle cheaper than iPad. As regards the latter, it offers a wide range of applications: movies (including HD), TV, pictures, web browsing, games, among others. Additionally, its screen, which is touchable, is larger than Kindle’s and some of their functions include , WiFi and 3G. With reference to Kindle, it is focused on reading, it is more compact, thinner and lighter than iPad, it has a life battery of 2 weeks with wireless off and 1 week with wireless on (as opposed to iPad, that offers a battery life of 10 hours), it is readable in direct sunlight, and it also includes WiFi and 3G.

Regarding e-books main sources for these devices, it should be said that iPad’s iBooks Store, the website where e-books for iPad can be purchased, is partnered with Penguin, HarperCollins, Simon & Schuster, MacMillan, and Hachette, some of the most important e-book publishers. With respect to , it has cheaper prices on e-books from non-agency model publishers, whereas the same price as in iPad’s iBooks Store will be found when books belong to publishers on the agency model. In other words, Kindle has lower prices (except for agency model books, for which it has the same price as iPad). In addition, Kindle Store has almost 900,000 titles whilst iBooks has around 200,000.

6

3. Main players in the e-book market

In the market for e-books there are two main players on which this report will focus: publishers (upstream market) and retailers (downstream market). In the following lines a description of the main activities that these agents carry out will be made.

3.1. Publishers (wholesale market)

Publishers’ main activity used to be the distribution of printed works (books, newspapers, magazines, etc.) as a way of disseminating culture/literature or information. Nevertheless, the Internet and the advent of digital information systems have expanded the scope of their business. Indeed, apart from the distribution of printed stuff, publishers have included in their supply electronic resources such as e-books and electronic versions of periodicals as well as micropublishing 4, among others.

Publishing involves different stages that are previous to the mere distribution of the work. Firstly, there is a development phase which is followed by acquisition, in which books, newspapers, magazines and other kinds of works are purchased by the publisher. At the next stage, works are copyedited and graphically designed. After this process, work production and printing are carried out. Finally, marketing strategies are designed in order to distribute the final product 5.

3.2. Retailers

Retailers are those in charge of supplying digital books to final consumers. Among them, we can find commercial booksellers and e-book websites intended to sell content for

4 Micropublishing is when an individual or group use efficient publishing and distribution techniques to publish a work intended for a specific micromarket. Typically, these works are not considered by conventional publishers because of their low economy of scale and mass appeal and the difficulties that would arise in their marketing. 5 More detailed information about publishers can be found in the Appendix (A.2).

7

particular devices. On the other hand, retailers are also those who publish free content or who archive copies of out-of-copyright works.

Apart from supplying e-books, some retailers established another business: the manufacturing and sale of e-readers devices, which allowed them to offer a set of complement products. Originally, some of the retailers that supplied both e-books and an e- reader sold the former so as to be read only at their own device. By this technological tying , Amazon, for instance, used to sell e-books that would only be read at its Kindle e- reader (no other e-reader supported its specific format 6). Nevertheless, this has changed in some sense. Indeed, some of these retailers/manufacturers have made available a set of applications which allow displaying their e-books in devices that are different from their own ones and which did not previously support the format in question 7. This is the case of Amazon, which has launched several free applications that enable Apple’s iPod, iPhone and iPad, Android devices, Blackberry and PCs to display the same e-books as Kindle does therefore allowing Amazon to sell electronic books to a wider range of devices’ users. However, an important point that has to be borne in mind here is that these applications cover devices that do not directly compete with e-readers, that is, devices that are not e- readers themselves. This strategy has been used by some other e-books and e-readers providers such as Barnes & Noble and Sony 8, who also offer free applications for mobile phones as well as for other intended e-readers (iPad, Android and PCs) 9.

4. Pricing models: Wholesale versus Agency model

In the e-book industry, there are two broadly used pricing models: the wholesale model and the agency model . These differ mainly in who sets the final price (retailer or publisher), and more broadly the scope that each participant enjoys to decide on strategic

6 Amazon is the proprietary of the format .azw, which was supported only by Kindle. 7 Amazon launched applications for iPhone and iPod Touch (08/09), Windows PC (2009) and Phone 7 (01/11), Mac (2010), Blackberry (02/10), iPad (04/10) and Android (06/10). Barnes & Noble launched applications for iPad (05/10), iPhone (08/10), PC, Blackberry and Android (06/10). 8 Sony offers e-books just for its Reader and for Android. 9 More detailed information about retailers can be found in the Appendix (A.3).

8

marketing variables (discounts, bundling, etc.). These differential features have implications in the strategic behavior of the agents involved and, consequently, different competition concerns arise.

It must also be stressed that the particular pricing model comes up from direct negotiations between the retailer and each publisher.

4.1. The wholesale model

Traditionally, paper books have been priced under the wholesale model, so, when e-books emerged, they were priced with this mechanism as well. It must be noticed that this model had also been applied to other digital contents, such as songs. The wholesale model mainly consists in the publisher selling the e-book to the retailer at a Recommended Retail Price (RRP) or list price (of which the author is entitled with a given percentage, say, 25%, as a royalty) minus a discount. The retailer has complete power to decide over final price for the e-book, as well as over other marketing strategic variables such as bundling, discount policies, etc. Along with the higher degree of control over the product’s sales conditions, this model implies inventory risk for the retailer, though when it comes to digital content, inventory risk is not very relevant.

4.2. The agency model

On the other hand, under the agency model, retailers become agents through which publishers sell books directly to consumers. Publishers set prices and retailers simply “pass” books to consumers, receiving a commission on sales, and not being allowed to make any sort of discount apart from the previously agreed with the publisher (typically 5%) and in a given period of time.

As it can be seen, the nature of the upstream-downstream relationship (between publisher and retailer) changes completely with the two pricing models.

9

The agency arrangement is pretty similar to the one that is in place in many European countries for print books (the so called Fix Book Price Agreements or Fix Book Price Laws – FBPA or FBPL, respectively). This, basically, is a retail price maintenance clause, aimed at promoting non-price competition between booksellers in order to foster the sale of little-known, difficult or otherwise culturally interesting books rather than catering only to blockbuster readers. This vertical restriction, by protecting retailers’ margins, provides booksellers incentives to embark in pre-sale efforts, to carry larger inventories, etc. Under the EU competition law, RPM clauses are considered as hardcore restrictions, nonetheless, agency agreements are a priori excluded.

To clarify how these models work out, an example is given in the following lines.

THE WHOLESALE MODEL

Publishers sell books to retailers at a RRP less a discount (e.g. $30 PUBLISHERS and 50%)

RETAILERS Retailer determines the final selling price to consumers

Retailer buys the e-book from the publisher and pays $15 (of which a given percentage, say 25%, $3.75 goes to the author as royalties). The retailer may well choose to sell the e-book for less than $15 (i.e. at a loss).

THE AGENCY MODEL

PUBLISHERS Publishers set the price

Retailers act as agents. They take a 30% commission and pass the RETAILERS remaining 70% to publishers

10

The publisher set the e-book price at $15. Under a 70/30 scheme, the publisher gets $10.50 (the author is credited with $2.625) and the retailer gets $4.50, which is less than what they would earn under the alternative model. However, the retailer would have to sell the e-book for the set price (or with a maximum discount of 5%).

5. Competitive Concerns 5.1. The wholesale model

As it was mentioned before, the wholesale model implies a complete control over decision variables in the hands of the retailer. The main competitive concern that arises under this model is that it gives room to use the price of the e-book as a strategic variable to promote the sale of the related device. In this way, by pricing e-books below cost, retailers foster the consumption of their e-readers. The problem with this cross subsidies becomes clear when one takes into account the existence of retailers who do not manufacture e-readers, and hence, cannot afford to follow this strategy as they cannot recoup the losses made by the e- book sales. Eventually, this would lead to the marginalization and exclusion of smaller retailers, which need not be less efficient. Indeed, this could result in a reduction of consumers’ choice since these small retailers are often focused on specific niches, not commonly covered by large booksellers (though elasticity of demand in this segment may be lower).

Moreover, this strategy can have effects on competitors in the e-reader manufacturing sector, specifically on those who also provide e-books (retailers/manufacturers). In this sense, a sort of technological tying is typically present since those retailers who also supply devices only offer e-books that can be displayed on their own e-readers. Since potential consumers take into account this technological restriction when making purchasing decisions, prices in the aftermarket of e-books will be a fundamental factor in order to determine the device choice. Therefore, if e-books offered by one retailer/manufacturer are priced below costs, this would affect the market for competing

11

devices, potentially excluding others retailers/manufacturers and limiting consumers’ choice.

A potential advantage of this model is that, by centralizing pricing decisions, the retailer is able to better internalize the effect that each publisher imposes to its competitors when setting wholesale prices. This kind of effect becomes more relevant in markets like this one, where indirect network effects are present. In this context, indirect network effects relate to the fact that the more users of specific e-readers, say Kindle, the more publishers will be willing to deal with that retailer/manufacturer (Amazon). The importance of these effects is related to the degree of substitutability between both, two different titles in the same format and a given title in two different formats.

5.2. The agency model

The agency model basically consists in a Resale Price Maintenance (RPM) clause by which a minimum retail price is set by the publisher and through which the retailer becomes an agent entailed to receive a certain commission (computed as a percentage of the price and typically based on a 30/70 scheme). Consequently, price decisions are completely controlled by publishers. Apparently in the e-book market, these kinds of agreements are accompanied by Most Favoured Customer (MFC) clauses, i.e. when settling an agreement with a given retailer the publisher commits not to set lower prices for contracts with other retailers. It must be stressed that the main publishers use common agents to sell their e-books.

This pricing scheme, together with the MFC clause, removes all intra -brand price competition in the downstream market. Additionally, these two clauses solve the commitment problem of the publishers, which are “monopolists” in the titles they offer.

Nevertheless, before concluding that this type of vertical restraint will certainly lead to consumer harm, possible efficiencies need to be assessed. In general, the most commonly alleged efficiencies when it comes to restraining intra-brand competition, is to avoid free-

12

riding between retailers regarding pre-sales services, to give incentives to retailers to carry larger inventories, and to solve the double marginalization problem. With reference to the first two arguments, they would not be completely relevant in this context because (i) pre- sales services are not significant (in the e-books case, an important pre-sale service could be the provision of information about title, author, ISBN, review, genre, etc. but all these data come from publishers) and (ii) retailers are not space-constrained, so they can carry large inventories (and have the incentives to) without the need for a vertical restraint. With respect to the double marginalization problem, it is not really clear that the retailers will have the incentives to apply high margins. The demand for e-books that a retailer/manufacturer faces comes from two main sources: those consumers owning the e- reader manufactured by himself and those consumers that do not own an e-reader (but a , PC, tablet, etc.). So if the retailer/manufacturer was to increase the e-book price, then he would not only lose the second group of consumers but he would also probably lose potential demand for its e-reader. That is, the retailer/manufacturer does not only sell e-books but also a complementary product. Therefore, double marginalization problem, in principle, shall not be severe in this market.

Also, in this setting, the concern that immediately arises is related to the possibility that publishers collude on prices given that they are fully aware of rivals’ pricing strategies.

As regards this concern, there are additional factors that could enhance the likelihood of collusive agreements in this market. Among structural factors, concentration in the market is one of the elements that facilitate collusion; as it will be shown in the next section, this is the case in the publishing industry. In addition, publishing sector is characterized by multi- market contacts since there is a wide range of products supplied by publishers (such as educational books, collections, magazines, etc.), which would help collusion. Moreover, publishers interact constantly in the market and an increasing trend in demand is expected.

With reference to other factors, there is almost full transparency and observability of prices (agency model + MFC clause); there are also associations of publishers that meet regularly and where “executives from publishing houses come together annually for a daylong

13

national conference, produced by AAP, to explore industry trends and exchange ideas with colleagues in an informal setting” in the case of the Association of American Publishers.

5.3. International experience

In what follows, a brief characterization of the main facts that took place in both US and EU is given. In conducting the analysis, it must be borne in mind that it is hard to make a European-wide analysis because there is still no harmonization of policies related to the book industry, neither print nor digital. In some countries the aforementioned Fixed Book Price Agreements or Laws are in place, so that the introduction of the agency model does not mean a completely different approach. Nevertheless, these agreements/laws cover both printed and electronic books only in some countries (Spain and recently France), while in others the latter are not explicitly included (Portugal). Therefore the agency model would make a difference in those countries where e-books fall outside the agreements/laws.

Another factor that distinguishes the European market is the fact that the VAT charged to print books differs considerably from the one applicable to e-books, and this duality varies widely across countries. The general pattern is, however, that the VAT charged on e-books is greater since they are considered as a form of electronic service , as opposed to the VAT for printed books (considered as cultural items), which in certain countries, such as UK, is zero. This would, in principle, contribute to less disparity between the prices of printed books and e-books.

5.3.1. US

Though there existed e-books and e-readers (iLiad, 2006; Sony Reader PRS-500, 2006), this market really took off in the U.S. in 2009. The main player in the market was Amazon, which already had developed its Kindle, and set prices under the wholesale model. Most retail prices were set equal to $9.99, regardless the novelty or genre of the e-book. As publishers noticed in many occasions, this strategy implied losses for Amazon in many titles. A justification of this tactic carried out by Amazon is the fact that being aggressive in

14

the e-book market would enhance the demand of Kindles. This can be seen as part of a more comprehensive business strategy, by which Amazon intended to build a strong position in this growing market. In this sense, it is worth mentioned that during 2009 Amazon developed several free applications that allow other devices (not e-readers themselves) to display its titles, which formerly could only be read on Kindles (see footnote 6).

It must also be noted that discomfort among publishers was arising because of the effect on e-books’ perceived image by consumers, whose valuation and willingness to pay for e- books was being damaged. This is particularly dangerous when a product is being established in the market since it would probably set “precedents” of a low cost/value good.

This scenario completely changed when Apple started setting the terms for e-books for its forthcoming iPad (the closest non-e-reader competitor of Kindle) in early 2010. From the very beginning, Apple negotiated with the main publishers in U.S. a wholly different pricing model to supply e-books to iPad users through the iBookstore, the agency model. Macmillan was the first publisher with whom Apple reached an agreement, which led to retaliation of Amazon, who temporally removed the “buy” buttons for Macmillan’s titles from its website. The main publishers agreed with Apple into the agency model (the Agency Five: Macmillan, Simon & Schuster, HarperCollins, Penguin, and Hachette; later on, in March 2011, Random House also switched to the agency model) and pressure Amazon into undertaking the same arrangement, who finally succumbed in February 2010. It needs to be stressed that this contract model, which implied prices of $12.99 to $14.99 for most fiction and non-fiction titles (including best-sellers), yielded lower revenues for publishers, who received a 70% of the final price. This “sacrifice” was supposedly accepted by publishers to prevent Amazon from gaining a stronger position and more bargaining power and to preserve e-book value.

This agreement extended to the commercial relationships between the main publishers and retailers, provoking a great similarity in prices for different titles (and, of course, for the same title in different retailers as a consequence of the aforementioned MFC clause),

15

thereby raising competitive concerns. Indeed, from the very beginning, both the attorney general of Texas and of Connecticut were cautious about this prices agreements and initiated investigations that are still in course. A potential aggravating factor in this sense is the level of concentration in the market. In fact, five of the six publishers involved held around 60% of the overall sales in the market in 2009 according to different sources.

5.3.2. EU

In Europe, the adoption of the agency model took place earlier in the path of the European e-book market development. This is probably so because it was simultaneous to the introduction of iPad and its associated agency model.

In early 2011, this model gave rise to competitive concerns among Office of Fair Trading (OFT, hereafter) officers, who started an investigation working closely with the EC. The concern was related to the suspicion of e-books price fixing among publishers in UK, given that e-books were found to be priced as much as twice their printed versions. This fact triggered a European wide investigation in which the EC is working with the national competition authorities, though the specific publishers raided are unknown. The involvement of the EC does not necessarily mean that a pan-European cartel is being suspected (among publishers present in several countries), but the fact that e-books are sold across borders.

In this sense, the parallelism with the case of U.S. is not straightforward. There are several elements that differentiate the European e-book market, making the analysis more difficult.

As regards intra-brand competition, it must be noticed that, as it was mentioned before, there are countries in which prices of books, or even books and e-books, are allowed to be fixed by law (e.g. France and Spain), which means that price fixing, and thus the agency model, is legal. Of course, this does not imply that coordinating on prices among publishers is permitted but it is just simpler to reach. On the other hand, in some countries in which

16

such laws are not in place, the agency model is also present (e.g. UK). The potential anti- competitive effects of these agreements are aggravated by the existence of MFC clauses.

This limited, or null, downstream competition enhances the likelihood of a collusive agreement among publishers.

With respect to upstream competition, a common practice among publishers is the establishment of platforms through which an individual publisher, or even a group, sells books directly to final consumers or retailers. This, together with the existence of associations of publishers, increases transparency and observability in the market, leading to fast detection of deviations from the agreement and to a timely punishment.

Also, the existence of multi-market contacts, given that publishers may meet in several countries and regarding several products, enhances the likelihood of collusion. Nevertheless, the existence of differences in VAT among countries for printed and electronic books may obscure the final prices set by publishers, making coordination more difficult, from a pan-European perspective.

On the overall, it seems highly plausible for publishers to reach collusive agreements on prices of e-books, calling for a deep investigation in this matter.

6. Concluding remarks

The development of the e-book market in the EU needs to be cautiously monitored. International experience, particularly in the US, has shown that both pricing models give room for different strategic anti-competitive behaviors and hence, competition concerns. Specifically, the wholesale model has been used to predate in the e-book retail market, cross-subsidizing the losses with the sales of e-readers (which could be done ought to the existence of a technological tying). As regards the agency model, the main competitive concern is that it facilitates collusive agreements among publishers.

17

These issues are even more complicated in the EU since countries have different policies regarding pricing and taxing books in general and e-books in particular. A higher degree of harmonization is necessary in order to prevent potential arbitrage and to promote market integration.

It needs to be stressed that this is a quite new market and the available information is very scarce. Therefore, this is a gap that should be filled if further research in the topic is carried out.

18

7. References

 Adams, D.; The Agency Model. Not a bad idea, only illegal (in Australia) in The Digital Reader - 03/04/11 (http://www.the-digital-reader.com/2011/03/04/the-agency-model-not-a- bad-idea-only-illegal-in-australia/)  Allen, K.L.; The Agency Model Redux: An Analysis After Six Months in the Diesel eBook Store Blog - 11/02/10 (http://blog.diesel-ebooks.com/?p=704)  Angier, M.; Top Ten Reasons Why Are Better than Printed Books in Power Home Biz - 10/15/03 (http://www.powerhomebiz.com/vol127/ebooks.htm)  Basten, A.; More raids in price-fixing probe. Publishers “explain” high ebook pricing in TeleRead – 03/04/11 (http://www.teleread.com/paul-biba/more-raids-in-price-fixing-probe- publishers-explain-high-ebook-pricing/)  Bradbeer, M.; Why the agency model is flawed in FutureBook - 09/21/10 (http://www.futurebook.net/content/why-agency-model-flawed)  Casassus, B.; E-book price-fixing law passed in France in The Bookseller.com – 05/18/11 (http://www.thebookseller.com/news/e-book-price-fixing-law-passed-france.html)  Crowe, A.; Amazon.com caves in to higher e-book prices, consumers lose in Wallet Pop - 02/02/10 (http://www.walletpop.com/2010/02/02/amazon-com-caves-in-to-higher-e- book-prices-consumers-lose/)  Cyran, R.; E-book market will be hot, flat and crowded in Reuters Brakingviews 06/25/10 (http://blogs.reuters.com/columns/2010/06/25/e-book-market-will-be-hot-flat-and- crowded/)  Darnton, R.; Google & the Future of Books in The New York Review of Books - 02/12/09 (http://www.nybooks.com/articles/archives/2009/feb/12/google-the-future-of-books/)  De Rocket e-book a Kindle: dispositivos e-book in ddg.com - 01/02/08 (http://despuesdeg.com/2008/01/02/de-rocket-ebook-a-kindle-dispositivos-e-book/)  E-books and the agency model in The Society of Authors - 11/24 (http://www.societyofauthors.org/soa-news/e-books-and-agency-model)  El 'ebook' dobla su presencia en España hasta el 3% de la facturación del libro in El Mundo - 04/13/11 (http://www.elmundo.es/elmundo/2011/04/13/cultura/1302709536.html)  EU probes allegations of price-fixing in e-books in EU Business – 03/02/11 (http://www.eubusiness.com/news-eu/competition-digital.8ua/)  Forelle, C.; EU Officials Raid Book Publishers in The Wall Street Journal – Europe Technology - 03/03/11 (http://online.wsj.com/article/SB10001424052748703559604576176032102691822.html? mod=WSJ_hp_LEFTWhatsNewsCollection)  Gans, J.; The $9.99 E-Book in CoRE economics – 02/05/10 (http://economics.com.au/?p=5065)  Hagiu, A., 2007; Merchant or Two-sided Platform? in Review of Networks Economics. Vol.6, Issue 2, June 2007  Hobson, A and Smith, S.; E-book pricing: the clash between copyright and competition law in Media Bulletin from Reynolds Porter Chamberlain LLP – April 2011

19

 Hoffelder, N.; Amazon will never monopolize the e-book market in The Digital Reader - 02/18/11 (http://www.the-digital-reader.com/2011/02/18/amazon-will-never-monopolize- the-ebook-market/)  Jesslyn; Revisiting the Agency model , in My Kindle Stuff - 6/10 (http://www.knuckleheadnetwork.com/2011/02/revisiting-the-agency-model/)  Jones, P. and Casassus, B.; European publishers offices raided by EC inspectors in The Bookseller.com – 03/02/11 (http://www.thebookseller.com/news/european-publishers- offices-raided-ec-inspectors.html)  Jones, P.; Ten things about the agency model in the UK in FutureBook - 09/23/10 (http://www.futurebook.net/content/ten-things-about-agency-model-uk)  Jordison, S.; EU anger over ebook deal suggests hard times ahead for publishers in The Guardian - 03/16/11 (http://www.guardian.co.uk/books/booksblog/2011/mar/16/hard- times-publishers-eu-raids-ebooks)  Kindle claims 45% of eReader market, Sony claims 30% in the Best Tablet Review - 09/01/09 (http://besttabletreview.com/kindle-claims-45-percent-of-ereader-market-sony- claims-30-percent/)  Kindle vs. iPad Review in the iReader Review -01/27/10 (http://ireaderreview.com/2010/01/27/kindle-vs-ipad-review/)  Koleva, G.; Apple , Amazon targets of eBook price fixing probe in Wallet Pop – 08/04/2010 (http://www.walletpop.com/2010/08/04/apple-amazon-targets-of-ebook-price-fixing-probe)  Kunhardt, J.; eBook Pricing Deals May Violate Antitrust Laws; CT Attorney General Launches Investigation in HuffPost – Books – 03/08/10 (http://www.huffingtonpost.com/2010/08/03/ebook-pricing-deals-may-v_n_667919.html)  LeCharles Gonzalez, G .; eBook Market Needs Transparency, and Fast in the Digital Book World - 06/09/10 (http://www.digitalbookworld.com/2010/ebook-market-needs- transparency-and-fast/)  Lowe, S.; The Advantage of an Ebook Agency Model in Publishing Bits - 06/03/10 (http://publishingbits.com/ebook-strategy/30-advantage-of-an-ebook-agency-model.html)  Manne, G.; An update on the evolving e-book market: Kindle edition (pun intended) in Truth on the Market – 03/01/11 (http://truthonthemarket.com/2011/03/01/an-update-on-the- evolving-e-book-market-kindle-edition-pun-intended/)  Manne. G.; Amazon vs. Macmillan: It's all about control in Truth on the Market - 02/07/2010 (http://truthonthemarket.com/2010/02/07/amazon-vs-macmillan-its-all-about- control/)  Miller, L.; Kindle killer in Salon- 02/01/10 (http://www.salon.com/books/laura_miller/2010/02/01/macmillan_vs_amazon)  Murray, L.; eBook Sales Models: Wholesale vs. Agency in the ljinteractive.com - 04/05/11 (http://www.ljinteractive.com/index.php/ebook-sales-models-wholesale-vs-agency/)  Neate, R.; EU raids publishers in ebook price-fixing probe in The Telegraph – Finance - 06/22/11 (http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/83 57983/EU-raids-publishers-in-ebook-price-fixing-probe.html)  Nielsen, T.; The agency model as I understand it in Making Light - 02/05/10 (http://nielsenhayden.com/makinglight/archives/012168.html)

20

 Oder, N.; Macmillan CEO Explains “Agency Model” for Selling Ebooks in the Library Journal - 03/03/10 (http://www.libraryjournal.com/article/CA6721294.html)  O'Reilly, T.; Competition in the eBook Market in O’Reilly Radar - 01/25/09 (http://radar.oreilly.com/2009/01/competition-in-the-ebook-marke.html)  Page, B. and Phillips, L.; EU raids ebook publishers in price fixing investigation in guardian.co.uk – 03/04/11 (http://www.guardian.co.uk/books/2011/mar/04/ebooks- publishing)  Pearlstein, S.; The Amazon-Macmillan book saga heralds publishing's progress in The Washington Post - 02/03/10 (http://www.washingtonpost.com/wp- dyn/content/article/2010/02/02/AR2010020203910_pf.html)  Petrou, A.; Apple and Amazon called in over antitrust deals in TechEYE.net – 08/03/10 (http://www.techeye.net/business/apple-and-amazon-called-in-over-antitrust-deals)  Postrel, V.; Amazon vs. Apple: What Should E-Book Prices Be? In The Atlantic – Business - 02/02/10 (http://www.theatlantic.com/business/archive/2010/02/amazon-vs- apple-what-should-e-book-prices-be/35131)  Roberts, A.; EU raids ebook publishers in price fixin investigation in Andy Roberts DARnet - 03/05/11 (http://distributedresearch.net/blog/2011/03/05/eu-raids-ebook- publishers-in-price-fixing-investigation)  Sammy; Survey of Kindle, Nook, iPad, Sony and OverDrive eBook Store Collection Size in th eBook Reader Guide - 04/08/11 (http://www.ebookreaderguide.com/2011/03/13/kindle- nookcolor-ipad2-sony-overdrive-which-ebookstore-has-most-ebook-titles/)  Sargent, J. (Macmillan CEO); On the agency model, availability and price in the Macmillan blog - 03/02/10 (http://blog.macmillanspeaks.com/macmillan-ceo-john-sargent- on-the-agency-model-availability-and-price/)  Shartzkin, M.; The Agency Model and its effect on e-book pricing in the Association of Independent Authors (AiA) - 03/06/11 (http://www.independent- authors.org/forums/posts.asp?group=&topic=206861&DGPCrPg=1&hhSearchTerms=The +Agency+Model+and+its+effect+on+e-book+pricing&#Post206861)  Shatzkin, M.; Agency vs. Wholesale Model: Apple’s disruption of the e-book market has nothing to do with the tablet in Digital Publishing Trends-Semantic Press - 01/23/10 (http://publishingtrends.posterous.com/agency-vs-wholesale-model-apples-disruption-o)  Stone, B. and Rich, M.; Amazon Removes Macmillan Books in The New York Times – Technology – 01/31/10 (http://www.nytimes.com/2010/01/30/technology/30amazon.html)  Stone, B. and Rich, M.; Amazon Threatens Publishers as Apple Looms in The New York Times – Technology – 03/17/10 (http://www.nytimes.com/2010/03/18/technology/internet/18amazon.html)  Trachtenberg, J. and Bray, C.; Pricing of E-Books Draws Increased Antitrust Scrutiny in The Wall Street Journal – Technology - 08/03/10 (http://online.wsj.com/article/SB10001424052748704271804575405181858061108.html)  Trachtenberg, J.A. and Fowler, G.A.; Amazon saca la bandera blanca en la primera batalla de los libros electronicos in La Nacion - 02/01/10 (http://www.lanacion.com.ar/1228297-amazon-saca-la-bandera-blanca-en-la-primera- batalla-de-los-libros-electronicos)

21

 Travisvs; Continuing Saga: The EBook Agency Model in the E-book Readers Resource - 02/11/10 (http://ebookreadersresource.com/ebook-readers-blog/ebooks-news/ebook- agency-model/)  Van Slooten, T.; The Ebook Agency Model - Why Are Publishers and Retailers at Odds Over It? in Ezine Articles - 02/12/10 (http://ezinearticles.com/?The-Ebook-Agency-Model- --Why-Are-Publishers-and-Retailers-at-Odds-Over-It?&id=3752112)  Vega, M.; El e-book no despega en España en El Mundo – Tecnología - 04/28/11 (http://www.elmundo.es/elmundo/2011/04/28/navegante/1303985933.html)  Walters, C.; Ebook prices in 2004 vs. 2011: what’s changed? in Tele Read - 03/09/11 (http://www.teleread.com/paul-biba/ebook-prices-in-2004-vs-2011-whats-changed/)  Weinman, S.; Apple's E-Book Pricing Prompts Antitrust Inquiry in DailyFinance - 06/02/10 (http://www.dailyfinance.com/2010/06/02/apples-e-book-pricing-prompts-anti-trust- inquiry/?icid=sphere_copyright)  Windwalker, S.; Is the Agency Model a Clear Case of Price-Fixing Collusion in the eBook Market in Seeking Alpha - 06/07/10 (http://seekingalpha.com/article/208722-is-the-agency- model-a-clear-case-of-price-fixing-collusion-in-the-ebook-market)  www.aglutinaeditores.com  www.fep-fee.be  www.libranda.com  www.publishers.org  www.wikipedia.org

22

8. Appendix

A.1: Main e-readers Manufacturer Model Introduction year Alutarek Libre Pro eBook reader 2009 Libre Color eBook reader 2010 Libre Touch eBook reader 2011 Libre Air eBook reader 2011 2007 Kindle DX 2009 Kindle 2 2009 Kindle 3 Wi-Fi 3G 2010 Kindle 3 Wi-Fi 2010 ASUS Eee reader DR900 Barnes & Noble Nook 2009 Nook WiFi 2010 2010 reader 2011 Bookeen Cybook Gen3 2007 Cybook Opus 2009 Cybook Orizon 2010 Condor Technology eGriver Touch 2010 eGriver IDEO 2010 EBS Technology Agebook eBook reader 2010 Ectaco jetBook 2008 Elonex eBook 2009 Endless Ideas BeBook Mini BeBook Neo BeBook One 2009 BeBook Club Entourage eDGe 2010 Pocket eDGe 2010 Fnac FnacBook 2010 Foxit Software eSlick 2009 Hanvon WISEreader N516 2009 WISEreader N518 2009 WISEreader N520 2009 WISEreader N526 ICARUS reader ICARUS reader Go 2010 ICARUS reader Sense 2010 Interead COOL-ER 2009 iPapyrus iPapyrus 6 2009 iRex Technologies iLiad 2006 Digital reader 1000 2008 Digital reader 800 2010

23

Manufacturer Model Introduction year Story 2009 italica GmbH Paperback 2010 Jinke Hanlin V2 2006 Hanlin V3 2007 Hanlin V5 2008 Kobo Kobo Wireless ereader Touch N647 2010 Kobo ereader N416 2010 Kobo ereader Touch 2011 Kogan Technologies Kogan eBook reader 2010 Kolporter eClicto 2007 Notion Ink Adam 2011 Onyx International Boox 60 2010 Boox M90 2011 PocketBook PocketBook Pro 602 2010 Samsung Papyrus 2009 E6 2010 Sony Librié 2004 Reader PRS-500 2006 Reader PRS-700 2008 Reader PRS-505 2008 Reader Daily Edition PRS-900 2009 Reader Touch Edition PRS-600 2009 Reader Pocket Edition PRS-300 2009 Reader Pocket Edition PRS-350 2010 Reader Touch Edition PRS-650 2010 Spring Designs Alex ereader 2010 Stereo International ES600 2009 Cruz Reader Cruz Tablet T103 Cruz Tablet T301 2010 Wolder Electronics Boox-S 2010 Zzbook ereader HD 2010

A.2: Main publishers • Albin Michel • Hachette Livre • Bloomsbury • HarperCollins • Simon & Schuster • La Martinière • Flammarion • Macmillan • Gallimard • Penguin • Hachette • Random House

24

A.3: Main retailers Retailer Website Amazon www.amazon.com Apple www.apple.com Barnes & Noble www.barnesandnoble.com Book Glutton www.bookglutton.com Books on Board www.booksonboard.com Borders www.borders.com Cokesbury www.cokesbury.com Diesel ebooks www.diesel-ebooks.com Direct ebooks www.directebooks.com Doc Stoc www.docstoc.com Ebook mall www.ebookmall.com Ebook shoppe www.ebookshoppe.com Ebooks www.ebooks.com Ebrary www.ebrary.com Electronic book seller www.electronicbookseller.com Ereader www.ereader.com www.feedbooks.com Fiction wise www.fictionwise.com www.fictionwise.com Google eBooks www.books.google.com/ebooks www.archive.org Lecturalia www.ebooks.lecturalia.com Library www.lybrary.com Manybooks www.manybooks.net Powell’s Books www.powells.com Project Gutenberg www.gutenberg.org Reader Library www.ebookstore.sony.com www.scribd.com Todoebooks www.todoebooks.com Txtr www.txtr.com Vook www.vook.com www.wikibooks.org

25