App Annie, a San Francisco-based company that provides app developers and publishers with analytics about app sales, rankings and trends, aims to solve the problem by automating aggregation and analysis of ebook sales in the same way it has for apps. (In the app world, it’s become a leading provider of that type of analysis: The company says that over 300,000 app publishers, including 90 percent of the top 100 grossing iOS publishers, use its tools.)

App Annie plans to announce Tuesday that it’s expanding into ebook analytics. It will provide publishers with two free products: An Analytics tool that lets publishers track sales and download data from the Kindle Store and the iBookstore into one dashboard, and a “Store Stats” tool that lets them view ebook market trends across a database of about a million titles.

“We’ve spent the last few months with major book publishers and influential writers, asking them about how they understand their data,” Oliver Lo, App Annie’s VP of marketing, told me. In general, the company found, publishers download their data from ebook retailers and aggregate it in Excel. But analyzing the data correctly can require “some Excel genius in the company,” and even publishers who have such a person or team likely find the process time-consuming.

To start, publishers or self-published authors log into App Annie and connect their Kindle and iBookstore accounts. (Traditionally published authors, who don’t have access to their direct sales rankings through retailers, won’t be able to log into App Annie. Soon, though, App Annie is adding the ability for publishers to share analytics reports with authors and other people within the company.) App Annie then pulls the retailer’s sales data for each of its titles into a dashboard, so that publishers can view each title’s sales (and refunds), revenue, price, star ratings and retail store rankings over time. Because they can see exactly when a book’s price changed, they can also see the effects of a price promotion on sales both at the time of the promotion and afterwards.

These are all things that publishers can do themselves if they have the tools and time. But App Annie automates the process and makes it easier for publishers and authors that lack data-crunching skills to see how their books are performing over time.

I asked Lo if he fears that Amazon or Apple will cut off third-party access to the ebook data. He said the company isn’t worried about that because the retailers haven’t cut off access to app data, and “the technology involved [for ebooks] is exactly the same for apps.” In addition, “some of those platforms are our customers.”

That’s a reference to App Annie’s third product, a paid market data tool that counts Google and Microsoft among its subscribers. A premium product like that isn’t in the works for book publishers yet, but App Annie may roll it out at some point if the free tools gain enough users. In addition, the company says it will eventually expand to other ebook retail platforms like Barnes & Noble and Google.

“Publishers are starting to realize that for them to be successful in this space, they need to learn a lot from how app and game publishers have extended their businesses and their business models,” Lo said. “Analytics and data need to become a core part of [book publishers'] culture.”

Of the two, Lagardère provided more detail on digital results:

• Digital made up 11.3 percent of Lagardère Publishing’s net sales worldwide, compared to 8.4 percent a year ago.
• Ebooks now account for 34 percent of adult trade book sales in the U.S., compared to 27 percent last year, and 31 percent in the U.K., up from 22 percent last year.
• In France, digital sales are much smaller, though growing: Ebooks accounted for 3.2 percent of adult trade book sales there, up from 1 percent last year.

There’s less digital stuff from Bertelsmann. The company just noted that at Random House Germany, digital now accounts for 10 percent of revenues. Worldwide the figure is around 20 percent, company spokesman Stuart Applebaum told me.

Also of note at Bertelsmann: This was its last Penguin-less financial report, as Penguin and Random House have now merged to form the world’s largest book publisher. Penguin Random House CEO Markus Dohle wrote in a letter to employees:

“In our first weeks as a united company we’ve already enjoyed great attention for several of our early successes. In the U.S. we have had sleeper hits with the #1 bestselling ZEALOT by Reza Aslan and THIS TOWN by Mark Leibovich. John Williams’s STONER and I AM PILGRIM by Terry Hayes achieved sales breakthroughs in the UK, where Sylvia Day’s ENTWINED WITH YOU topped The Bookseller’s first-ever official eBook sales ranking. THE AUSTRALIAN MOMENT by George Megalogenis and John van de Ruit’s SPUD series were honored with major literary prizes in Australia and South Africa respectively. Substantial media coverage is boosting sales in New Zealand for books by Michael Van de Elzen and Lynley Dodd. Random House India published its first enhanced eBook, and Penguin India’s AN UNCERTAIN GLORY by Jean Drèze and Amartya Sen has created a national debate.”

Photo courtesy of Shutterstock / Thomas Bethge

Nearly four years and 3,000 titles later (with an additional 1,000 titles under contract), the company is still focused around acquiring and marketing backlist titles. Open Road has raised $15 million so far, from Kohlberg Ventures, Golden Seeds and Azure. (The company would not disclose revenues or whether it is profitable.) It still does not pay advances and still splits revenues 50-50 (after recouping some digitization costs) with authors, but it has also expanded its focus. It is publishing print books, expanding to new verticals like romance and the Vietnam War, signing up a limited number of original manuscripts, and handling digital distribution and marketing for both U.S. and international publishers.

These changes reflect Open Road’s adaptability to a changing market, but are also evidence of the fact that, in 2013, it faces more competition from other publishers than it did four years ago. The backlist — which covers books that have been out for a least a year and that in some cases are decades old — is estimated to make up around 40 percent of the trade book market, and many publishers are seeking to mine those rights. HarperCollins is currently suing Open Road over the digital rights to Jean Craighead George’s Julie of the Wolves; the case hasn’t yet gone to trial. Amazon has bought up the backlists of several small publishers and plans to release those titles as ebooks for the first time.

Arthur Klebanoff is the CEO of RosettaBooks, which led the way in 2001 as a company focused on marketing the backlist in digital formats. Rosetta and Open Road are often described as competitors, and they are, but, Klebanoff noted, “I think any ebook-only publisher really has to say its primary competition is each of the print publishers of any size. Those print publishers, for the better part of 10 years, have been trying to license back the digital rights to everything in their backlist.” One reason they don’t always succeed — allowing publishers like Rosetta and Open Road to get the rights instead — is that they almost always still only offer a 25 percent royalty (rather than a cut of the sales) and they are more focused on new titles than on the backlist.

In those areas and others, Open Road hopes to stay ahead. Here are some of the things it’s doing.

Always be marketing

Open Road has always been centered around marketing. The company has over 40 in-house employees, and more than half hold marketing roles.

Open Road describes its marketing strategy — a combination of publicity, promotion, online merchandising and social media — as proprietary technology. Chief marketing officer Rachel Chou told me that it is a custom-built software platform that lets “all parts of the company look at the same material at the same time” and integrates product management, asset management and campaign management into one system — whereas at a traditional publisher, editorial departments and marketing departments might all work on different platforms for the same book.

Open Road develops a marketing plan for each book, each quarter. If a particular campaign doesn’t work, Open Road tries a different one. That separates it from traditional publishers, which have to “cut their losses” a few months after a book hits the market, cofounder and CEO Friedman said. She tells agents and authors that “the first quarter means nothing…if in that first quarter a significant milestone related to that title hasn’t happened, then it’s the second quarter where it might happen, and where everything starts to grow. We’re selling more of our authors’ works year-in and year-out.”

Forget selling direct…at least for now

Conventional wisdom says that publishers have to start selling books directly to customers. Open Road disagrees. “We’re not going to have a storefront,” Friedman said. Instead, the company relies on retailers to sell its books, and offers them campaign ideas for promotions.

“I have always been very supportive of the retailer,” Friedman said. “The retailers are doing a very good job, and I don’t think we can do better.”

One caveat is that Open Road wants to run special sales involving promotional codes — to give a reader 10 percent off a title, for instance. Friedman said that with the exception of Sony, the retailers don’t support these yet, and so Open Road might run a limited number of promotions itself in the future.

Video doesn’t mean book trailers

Video is a key component of Open Road’s marketing initiatives. Luke Parker Bowles, the executive director of production, oversees creation of video content and describes video as Open Road’s “special sauce” — but said the videos shouldn’t be confused with book trailers. “The author is the brand. The title is not the brand.” Open Road aims to sit down and film video with each of its authors, or with the estate or family members if an author has died. The company has a chief researcher, Galen Glaze, who spends every day doing research to find out new things to ask the company’s authors.

The unique content is key because Open Road doesn’t consider its own site a destination for video content. Rather, the company pushes the content out to sites like the Huffington Post, Daily Beast and Fox News. A click-to-buy button appears at the end of each video so that users can buy either a single book or a number of books from different authors on one theme, and Open Road tracks how the videos convert to sales.

Change it up

At the beginning, Open Road was focused on literary fiction, but it has since expanded into genres like mystery, romance and science fiction — the areas that are “just exploding in e,” publisher Tina Pohlman said. The company is also publishing around 12 new titles a year. This fall, for instance, it will release The Salinger Contract by Adam Langer, who was previously published by Riverhead and Spiegel & Grau.

“Our acquiring of content has become more scientific, for lack of a better word,” Friedman said, because it is now purposely harnessing areas that are seeing the greatest digital growth.

Sometimes you need print…

While most of Open Road’s titles are still only available as ebooks, the company does make a sliver of its titles available through print-on-demand (90 titles so far) or through short traditional print runs (70 titles so far).

“There are certain books that really need to be in a physical bookstore,” Chou said at the Making Information Pay conference recently. “They deserve that table up front.” Open Road starts print runs at 500 copies, and the largest print run they have done is 15,000 copies. “If we’ve done a print run and we find that it’s really taking awhile to get through the inventory,” Chou said, “we can switch it back” to POD.

…and sometimes you just need to get lucky

One title that Open Road will be making available in print is a never-published, forty-year-old manuscript by the author Pearl Buck. Buck wrote The Eternal Wonder shortly before her death in 1973, and it remained unseen until a woman in Texas came across it in a storage locker that she found at auction. The woman got in touch with Pearl Buck’s son through the Pearl Buck International foundation, and he bought it from her for a small fee. He then got in touch with Open Road, which had published Buck’s other titles as ebooks. The company will publish The Eternal Wonder as an ebook and a paperback this October.

The discovery of The Eternal Wonder is a reminder that, even in a data-driven age, a publisher needs luck. So far, one of Open Road’s greatest assets has been timing. The fact that Friedman built her company before ebooks had really taken off helped it get its footing and get ahold of digital rights that big publishers hadn’t yet focused on. Nearly four years in, it can build from that base.

“The speed of what’s happened has been staggering,” Friedman said. “I think this isn’t about the Big Six at all. We’re living in a very exciting time for publishing, for independent publishing, for new kinds of publishing. This is the golden age…It’s not about the giants. It’s about the small guys.”

A previous version of this article referred to Open Road’s researcher as Galen Blaze. His name is Galen Glaze. I apologize for the error.

Photos by Rani Molla

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Once Hiptype’s plugin is added to an ebook, it provides insights like reader demographics, reading behavior (where people start or stop reading; what they skip), conversion patterns (who buys an ebook after reading a free sample); and sharing and highlighting behavior (which passages readers highlight or take notes on). Publishers then log into their Hiptype accounts to see a dashboard with visualizations of the data. Hiptype also helps publishers run Facebook campaigns and target readers with personalized recommendations.

Hiptype launches in beta this week and is working with a limited number of publishers, whom 26-year-old founder and CEO James Levy (cofounder is 19-year-old Sohail Prasad) would not name — though a sample book profile for 50 Shades of Grey suggests Random House might be one early client. Other publishers — as well as self-published authors — can request access on Hiptype’s website and will be invited to join in waves. The first book is free. After that, Hiptype will charge $19 per month per book for a basic package (including data from up to 1,000 readers and basic insights and trends) or $99 per month per book for a pro package (including data from up to 500,000 readers, detailed insights and trends, ad management and personalized backlist recommendations for readers).

One possible concern is privacy. “We don’t want to discourage the conversation about privacy,” Levy said, noting that while all of the data Hiptype collects is anonymous, users can opt out completely. The company is also looking for ways it can improve its service for readers. In beta, end users have requested that Hiptype make its data available to them. For example, Levy said, a teacher could track how students are interacting with the books they’ve been assigned to read.

It doesn’t work everywhere yet

Hiptype’s largest limitation is that it doesn’t work on every platform. The plugin only works on platforms that support HTML5 and allow Javascript to be embedded within a book. Apple, which supports EPUB3 and HTML5, is in. But e-ink devices, like Kindle and Nook e-readers, web-based readers like Kindle Cloud, and desktop e-reading platforms are out.

Apple is estimated to have about 10 percent of the ebook market, with Kindle at 55 to 60 percent and Nook around 25 percent. In the case of Kindle and Nook, we don’t know how much of their usage comes from devices versus mobile apps, but for now Hiptype is missing a large portion of the ebook market.

Levy says Hiptype works on most iOS and Android e-reading apps, but wouldn’t clarify what those are beyond “some of the most popular e-reader apps on the most popular operating systems.” He says Hiptype is in discussions with ebook retailers and it’s “paramount to our success that we have an open line of communication.”

When publishers do see the data on their books, “it can be a little bit depressing,” Levy said. Publishers testing Hiptype in beta, for instance, were surprised by “how low conversion rates are” — early data suggests that only three to four percent of people who download a free ebook sample go on to buy the book — and how few people who do buy a book finish reading it. “It can be a bit of a bummer,” Levy said. “But as soon as you start measuring, you can do tests and see what moves the needle. We’re already doing research on the data we’re collecting. As data hackers, we think there are underlying patterns here even if they’re not apparent at first.”

BookStats 2012 collects data from 1,977 book publishers in four sectors (trade/consumer, school/K-12, higher ed, and professional/scholarly). Some top-level findings:

• Ebooks made up 15 percent of trade publishers’ net sales revenues, or $2.074 billion, in 2011, compared to just 6 percent ($869 million) in 2010. Ebooks also account for 15.5 percent of trade publishers’ unit sales, with 388 million units sold — up from 5 percent (125 million units sold) in 2010. (Note: “Ebooks” here is defined as “all primary e-formats: ebooks, enhanced ebooks and paid mobile apps.”)

• Trade book sales are relatively flat. Trade publishers pulled in a total of $13.97 billion in revenues in 2011, compared to $13.90 in 2010 — a 0.5 percent increase.
• The total U.S. book market decreased slightly. Revenues from all book publishers were $27.2 billion in 2011, compared to $27.9 billion in 2010.
• Publishers are selling more books, though. While revenues were down slightly, unit sales were up 3.4 percent, to 2.77 billion books sold in 2011. (One reason for that could be more cheap ebooks.)
• Children’s/young adult books saw the highest growth of any category. Sales increased 12 percent in 2011, to $2.78 billion. The growth was driven largely by popular YA series like “The Hunger Games.”
• Bricks-and-mortar bookstores are still publishers’ primary sales channel. Physical bookstores accounted for 31.5 percent of publishers’ total net dollar sales in 2011 — but that was down 12.6 percent from 2010.

• Publishers’ direct-to-consumer sales nearly doubled, with revenue from direct sales hitting $1.1 billion in 2011 — up from $702 million in 2010, an increase of 58 percent. The AAP tells me that most of those direct sales were concentrated in the trade and higher education sectors.

Notes: BookStats is published jointly by the Association of American Publishers and the Book Industry Study Group. (In the past, the groups conducted separate annual surveys.) The report is the most comprehensive look at the U.S. book publishing industry to date, incorporating net sales revenue and unit data reported 1,977 U.S. publishers. The report tracks sales and units by format (physical, digital, bundles); category; and channel. The full BookStats 2012 report is available for purchase here.

The charts illustrating this post were created by me, not by BookStats.

Photo courtesy of Shutterstock / Borys Shevchuk

“You’re going to end up having choice control from a server farm in Washington state,” Barnes & Noble’s general counsel Gene DeFelice told me, referring to Amazon.

“In essence, the proposed settlement substitutes one alleged cartel for a new cartel on the industry, albeit one run by the [DOJ],” B&N says. The bookstore chain’s complaint joins others sent to the DOJ during the settlement commenting period, which ends on June 25.

The proposed settlement, B&N says in a brief filed by its in-house counsel and law firm Boies, Schiller & Flexner, “warrants an exacting review because of its potential impact on the national economy and culture, including the future of copyrighted expression and bookselling in general, not only electronic books.” And “many millions of Americans, as well as all levels of the distribution chain for books (from authors to publishers to distributors, and especially brick-and-mortar stores), stand to be affected by this case’s resolution.”

B&N argues that the proposed settlement is a government action “analogous to a cartel imposing a detailed business model on publishers.” It would transform the DOJ “into a regulator” and would “injure innocent third parties, including Barnes & Noble, independent bookstores, authors, and non-defendant publishers; hurt competition in an emerging industry; and ultimately harm consumers.”

The punishment doesn’t fit the crime

B&N says “the Government has responded to purported price-fixing by implementing government controls of the market, rather than punishing the alleged colluders.” B&N argues that the course of action outlined by the settlement doesn’t fit with the DOJ’s accusations, writing, “if the aim here is to end collusion, the proposed settlement should enjoin collusion and punish the purported colluders” rather than requiring them “to terminate their current agency agreements and then forbidding those same parties from entering legal agency agreements” for two years. The proposed settlement “punishes only third parties and consumers” and “seeks to substitute regulation for market forces.”

“The national economy, our nation’s culture, and the future of copyrighted expression”

The Tunney Act “requires a court to reject a proposed final judgment that is not in the ‘public interest,’” the brief says, and “requires that the Government present some factual basis for the proposed settlement remedies.” The DOJ has failed to do so, B&N alleges, and so it “is asking is that this Court not, through the adoption of the regulatory provisions of the proposed settlement, prevent Barnes & Noble from agreeing with individual publishers on a business model that is the product of bilateral good faith negotiations that both parties agree are in their best interests.

Pre-agency, “Barnes & Noble was losing substantial money”

Barnes & Noble says that before publishers enacted agency pricing, it could not compete against Amazon: “[a]s a result of Amazon’s pricing (which priced most bestselling books sold by Barnes & Noble below Barnes & Noble’s, and Amazon’s, direct costs), Barnes & Noble was losing substantial money in an effort to compete with Amazon’s pricing, and was unable to gain significant market share.”

E-book prices and hardcover prices fell

Under agency, “publishers have engaged in vigorous competition on price, which, contrary to the superficial pricing analysis in the complaints before the Court, has resulted in lower e-book prices,” B&N says, presenting a chart that shows “average e-book price (weighed by units sold)” between August 2009 and February 2012. Barnes & Noble previously shared this data with the DOJ but is revealing it to the public for the first time.

Furthermore, Barnes & Noble says that “hardback retail prices” have also declined under agency.

Under agency, “innovation has flourished.” Without it, competition dies

“Agency has encouraged new participants to invest in e-books,” B&N says, noting it “has introduced multiple versions” of the Nook” and launched “a self-publishing platform, PubIt!; and lending and Read-in-Store programs.” Competition “led to Amazon responding with improved e-readers of its own.”

The proposed settlement would “harm Barnes & Noble and other brick-and-mortar e-book distributors by leaving them where they were two years ago:  a dominant player will set uncompetitive prices that all other potential competitors must meet to compete,” B&N says. “Unable to compete with below-cost pricing, e-book distributors will drop from the e-book space,” and consumers will be left with “limited choice in where they buy their books: online retailers such as Amazon or large, multipurpose brick-and-mortar stores such as Costco, Wal-Mart, and Target, which offer only mass-market selections.”

See also

Everything you need to know about the DOJ lawsuit in one post

What the DOJ lawsuit means for readers now

Penguin, Macmillan respond to DOJ in e-book pricing suit

Apple digs in on e-book lawsuits, says Jobs’ quotes “will speak for themselves”

Letters to the DOJ: Public speaks out on e-book pricing case

What is agency pricing, anyway?

Agency pricing is at the heart of the lawsuits but the legality of the model itself does not appear to be in question. Agency pricing allows book publishers to set the prices of their e-books, while the retailer (the “agent”) takes a commission. Under the agency model, the publisher is the only party that can discount e-books, and an e-book’s price must be the same across all retailers (i.e., an e-book can’t go on sale at just one retailer). The agency model is different from the wholesale model, in which publishers set a book’s suggested retail price and retailers can discount the books to any price they want.

In early 2010, Apple negotiated with the big-six publishers — Penguin, Macmillan, Hachette, Simon & Schuster, HarperCollins and Random House — to make their e-books available on its then-forthcoming tablet, the iPad, through the then-forthcoming iBookstore. All of those publishers except Random House adopted the agency model at around the time of those negotiations.

Amazon turned off Macmillan’s “buy” button in protest over Macmillan’s switch to the agency model, but the retailer eventually capitulated and restored Macmillan’s books.

About a year later, Random House became the last big-six publisher to adopt the agency pricing model.

Background reading: “Price-fixing makes comeback after Supreme Court ruling” by Joseph Pereira (WSJ, 8/18/08) | “Big six negotiate with Apple, ready new business model for e-books” by Michael Cader (1/19/10) | “Most dramatic publishing event of 2010? Introducing agency pricing!” by Mike Shatzkin (11/30/10)

Who is suing over publishers’ adoption of agency pricing?

Apple and the first five of the “big-six” publishers to adopt agency pricing — all of them except Random House, I’ll call them the “big five” here — are the defendants in a number of lawsuits.

The largest is the suit from the U.S. Department of Justice, filed today after weeks of investigations and buildup. In addition, 16 states sued Apple and the big-five today, claiming that agency pricing cost consumers $100 million. These lawsuits come on top of over a dozen class-action lawsuits, the first of which was filed last August, and a formal antitrust investigation by the European Commission.

Why are they suing?

The lawsuits accuse Apple and the big-five of colluding to raise e-book prices. The suits do not allege that agency pricing itself is illegal; rather, they allege that the big-five and Apple illegally conspired to adopt the model all at once in order to retaliate against Amazon’s discounting. Our legal reporter Jeff John Roberts explored the logic behind the suits here, here and here.

Publishers Marketplace took a deep dive into today’s DOJ filing and notes it revolves around two separate alleged conspiracies — one regarding a possible joint venture to sell e-books together (in conversations starting in 2008) and one to replace the wholesale model with the agency model. The DOJ charges that the publishers and Apple “shared their business information, plans, and strategies in order to formulate ways to raise retail e-book prices.”

Background reading: “Bigger than agency, bigger than e-books: The case against Apple and publishers” by Tim Carmody (Wired, 3/28/12)

Why do book publishers support agency pricing?

Book publishers’ general argument for agency pricing is that it ensures a more competitive marketplace because no one retailer — i.e., Amazon — is able to deeply discount e-books and thus gain a monopolistic position. Publishers argue that in the time since agency pricing was adopted, the e-book market has become more vibrant because smaller retailers are able to sell e-books at the same price as Amazon.

Background reading: I support agency pricing and debated the model with my colleague Mathew Ingram here – in that post you’ll see both pro- and anti-agency pricing arguments. | See also Mathew’s post today, “The e-book wars: Who is less evil, Amazon or book publishers?“

How have the publishers and Apple responded?

Three of the big-five — HarperCollins, Simon & Schuster and Hachette — agreed to settle the case with the DOJ. In statements released today, Hachette and HarperCollins admitted to no wrongdoing and said they settled reluctantly, in order to avoid protracted legal battles and high court costs that, in the words of Hachette, would be “too disruptive to our business.” Simon & Schuster did not release a statement. (Here’s more on how the proposed settlement would work.)

Meanwhile, Macmillan CEO John Sargent announced that Macmillan will fight the lawsuit. The company “felt the settlement the DOJ wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents,” Sargent wrote in an open letter to the publishing community.

Penguin CEO John Makinson announced Penguin, too, will fight the suit. “We understood that the shift to agency would be very costly to Penguin and its shareholders in the short term, but we reasoned that the prevention of a monopoly in the supply of e-books had to be in the best interests, not just of Penguin, but of consumers, authors and booksellers as well,” Makinson said in a statement. The DOJ’s filing “contains a number of material misstatements and omissions, which we look forward to having the opportunity to correct in court.”

Apple released a statement saying, “The DOJ’s accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry. Since then customers have benefited from eBooks that are more interactive and engaging. Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.”

How have retailers responded?

Amazon is happy. If agency pricing goes away, the company will be able to discount e-books the way it discounts print books and can likely return to its pre-agency pricing tactic of pricing New York Times bestsellers at $9.99. The company released the following statement on the three publishers’ settlement: “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books.” Amazon stock went up the afternoon of the DOJ filing.

Barnes & Noble had no comment, but the DOJ lawsuit and following publisher settlements are not good news for the nation’s largest bookstore chain. Agency pricing prevents Amazon from undercutting B&N on big-six publishers’ e-book prices and B&N has said that agency pricing “expands [its] gross margins.” Barnes & Noble stock went down the afternoon of the DOJ filing.

What happens with the investigations abroad?

The European Commission received proposals from Apple, Simon & Schuster, HarperCollins, Hachette and Holtzbrinck (Macmillan’s parent company) to bring the antitrust investigations to a close. (Penguin, the fifth company under investigation in the EU, did not send such a proposal.)

Will readers notice any changes right away?

Readers should not expect changes in e-book pricing until June at the earliest. Here’s more on what the lawsuit means for readers.

What happens next?

If the settlement is approved, the three publishers who settled — HarperCollins, Hachette and Simon & Schuster — are required to end their current publishing contracts with Apple but may enter into new ones. Here’s more on the terms of the settlement.

Macmillan and Penguin are headed to court to fight the DOJ’s allegations.

Sixteen states also filed suit on April 11 seek “consumer restitution.” Hachette and HarperCollins reached settlements with the states and agreed to pay $52 million in damages. Simon & Schuster is close to settling with the states. Damages are calculated based on “based on the number of states participating and the number of e-books sold in each state.” Eventually all fifty states may join the e-book settlement.

The class-action lawsuit led by Seattle-based firm Hagens-Berman continue and also seek financial restitution. “While Attorney General Holder’s actions, if successful, will put an end to the anticompetitive actions, our class-action is designed to pry the ill-gotten profits from Apple and the publishers and return them to consumers,” lead counsel Steve Berman said. He added, “We are eager to move forward with our civil action against Apple and the publishers, and to show the court and the public the depth and breadth of the conspiracy they concocted at the expense of consumers.” However, as our legal reporter Jeff John Roberts explains, a settlement with the states would effectively trump the private class-action lawsuit.

Agency pricing does not go away. Random House is not involved in any of the investigations and is free to continue selling e-books under the agency model, as are any other publishers who adopted the model later. Macmillan and Penguin will continue to sell their e-books under the agency model.

This post is a work in progress. Do you have other questions, thoughts or concerns? Let me know in the comments.

We’ll be talking about e-books at paidContent 2012, May 23 in New York City.

Well, there’s been some debate on that question this week among our own ranks, with two of our writers taking opposite sides. So we decided to let them thrash it out on the site! Below, Mathew Ingram and Laura Owen debate the merits of the agency-pricing model.

Mathew Ingram [MI]: To me, the debate boils down to whether agency pricing is a justifiable and/or sensible approach by publishers to what is happening in their industry. In a nutshell, I would argue that while it might be understandable — in the sense that the Big Six are afraid of Amazon’s growing power in the book business, and want to protect their book margins as much as possible — it is neither justifiable nor (in the long term at least) sensible or advisable.

There’s no question that being a major player in a market that is in the process of being disrupted is not pleasant. Amazon is doing everything it can to not just drive down e-book prices but to disintermediate publishers in a number of other ways, including signing up authors to its own imprint. If you are a giant corporation that is used to controlling the marketplace to a large extent — both in terms of supply and in terms of pricing — then watching a new competitor wrest some of that control away from you is hard to do.

That said, I think agency pricing is unwise — and not just because it has attracted antitrust attention from the U.S. government and the European Union, among others, but because it isn’t in the long-term interests of either readers or (I would argue) of publishers themselves. There is a growing body of evidence that lower prices can boost sales of books by orders of magnitude — which suggests that publishers might actually be shooting themselves in the foot by trying to hang on to higher prices.

Laura Owen [LO]: I think agency pricing actually is in the interest of any reader who supports a vibrant book-buying marketplace that is not dominated by one company — i.e., Amazon.

You say that publishers are giant corporations, but Amazon is much, much larger than any single book publisher — or any other book retailer. Because of that, it can undercut chains like Barnes & Noble (NYSE: BKS) on price. It does so consistently on print books and on e-books that are not regulated by agency pricing. In fact, Barnes & Noble CEO William Lynch has said that Barnes & Noble has been able to remain competitive in the e-book game — the company currently has a 26 to 27 percent market share in the e-book market — because of agency pricing.

Some may say, “So what? I don’t feel any loyalty to Barnes & Noble.” With the closing of Borders, though, Barnes & Noble is the only remaining bookstore in many communities. Then there are the independent bookstores, which are definitely struggling as well. Through the American Booksellers Association’s partnership with the Google (NSDQ: GOOG) eBookstore, the indies can sell e-books through their websites. Because of agency pricing, they’re able to offer e-books from big-six publishers at the same price as Amazon. In this way, agency pricing can keep book spending within a community instead of sending it all to Amazon.

In addition, with the impending launch of sites like Bookish (which is quite delayed at the moment), book publishers are getting into selling direct to their customers — a move that will be incredibly good for the business. But efforts like that won’t go very far if Amazon is consistently undercutting them on price.

MI: That’s a great point, Laura. You are right that agency pricing does to some extent protect independent booksellers, or allow them to compete on more equal footing with Amazon, and I am as much in favor of a competitive bookselling marketplace as I think you are. I also recognize the fact that Amazon is a gigantic corporation — and perhaps even one that is using books as a loss leader for other products — and there are risks of having a lot of market power concentrated in the hands of single entity.

LO: Amazon is definitely using books as a loss leader. That’s why you’ll sometimes see print books priced lower than e-books: Agency pricing gives Amazon no control over e-book pricing, but it can still price print books at whatever it wants. People blame the publishers when they see hardcovers cost the same as or less than e-books, but that’s an image Amazon is able to manipulate behind the scenes because it’s willing to sell hardcovers below cost.

MI: True — but at the same time, the Big Six publishers are also owned by what in many cases are large international media conglomerates, and I don’t believe that their interests ultimately have anything to do with creating a more competitive bookselling marketplace, or a world that is ultimately better for book buyers and readers — or authors, for that matter. I think they saw agency pricing as a way of protecting their traditional profit margins, and they used Apple’s desperation to get into the book-selling business as a lever to get what they wanted.

Let’s talk about profit margins. Publishers’ desperate attempts to maintain their existing profit margins on print books could be preventing them from seeing the larger opportunity in e-books, just as a fear of Apple and digital music caused record companies to miss the boat when the MP3 revolution came along. I’d hate to see publishers make that same mistake — and I think agency pricing just encourages them to cling to the past instead of trying to adapt to the future.

LO: We’ll have to agree to disagree about the value of book publishers. I will have a soft spot for them as long as they are publishing the vast majority of the books and authors I want to read — the “no-substitute” books, as Seth Godin puts it.

MI: Yes, but do those profit margins they are trying to protect with agency pricing help authors and book buyers? In some ways, yes. Traditional publishers still serve a number of important purposes, including discovery and professional content curation (or editing, as we like to call it) — but I think they are also fighting a rear-guard action aimed at protecting their control over the distribution channels through which writers reach an audience, and it’s not clear to me that this is ultimately a good thing for anyone but the publishers themselves.

LO: It’s a good point that publishers have high profit margins with e-books. (That’s not to say that publishers have NO costs publishing and distributing e-books — they do.) It’s an issue that’s gotten more attention recently, as some book publishers report flat sales and increasing profits. I think the answer is higher digital royalties for authors.

Right now, most publishers are paying a royalty of 25 percent (net) on e-books. As you pointed out, Amazon pays self-published authors a 70 percent (gross) royalty on e-books priced at $2.99 and above. (On e-books below $2.99, Amazon pays just a 35 percent gross royalty.) I’d like to see traditional publishers pay a much higher royalty on e-books, with the industry standard at 50 percent. It’s a great way to engender goodwill, acknowledge that the costs of distributing books in digital formats are lower (though not zero) and reward authors for sticking around instead of going it alone (or with Amazon).

MI: And who has done the most to make it easy for new authors to reach an audience, traditional publishers or Amazon? I would argue that it is Amazon by a landslide, thanks to the Kindle platform and related features — many of which provide writers with a far greater share of the proceeds from their work than any traditional publisher has ever dreamed of paying.

If the profit margins that agency pricing provides are just used to shore up the walls that the Big Six maintain around the publishing process, how does that help authors or readers? I agree that a competitive book-selling marketplace is a positive thing, but there are other benefits that appear when a market is disrupted the way that the book industry is being disrupted.

LO: Does Amazon make it easier for new authors to reach an audience? Not if those authors want to reach print readers. Around 80 percent of book sales are still print; bricks-and-mortar bookstores are still a major source of discovery of new titles (the number-one source, in fact, for kids’ books.) In part because of its extremely poor relations with other booksellers, and in part because it’s not a priority, Amazon can’t do much to get its authors’ titles into those physical stores.

In a few cases, it’s working with Houghton Mifflin Harcourt to handle its print side, but many booksellers, including Barnes & Noble, have said they won’t stock those titles in their stores (at least as long as Amazon doesn’t offer them the e-books). Traditional book publishers do a much better job than Amazon does making titles available across a wide variety of platforms — not just online but also in stores and in libraries.

MI: What do you think of my argument that publishers are actually shooting themselves in the foot by fighting to keep prices high — and that their resistance to lower pricing is a lot like the resistance that the music industry mounted against lower CD prices and subsequently to low prices in the iTunes stores? I think the nature of book pricing has changed in an e-book world, and publishers need to step back and try to take advantage of those changes, instead of simply throwing up walls around their traditional business models.

LO: I agree with you that publishers need to experiment much more with e-book pricing, taking into consideration factors like whether a book is new or old, whether its author is well-known or unknown, etc. In fact, I think agency pricing has made publishers much more willing and able to experiment with lower e-book prices — across retailers.

With agency pricing gone, Amazon would be running those pricing promotions itself, and competitors like Barnes & Noble, Kobo and Google will have to decide whether they want to spend resources matching those prices instead of building up their platforms in other ways.

MI: And I agree that having too much power concentrated in too few hands is not good for the industry or for readers and authors. But I think Amazon is on balance a force for good, in that it is pushing publishers to become more flexible and adapt to the changes that are happening in the book world — and that could wind up being a benefit for everyone.

LO: OK, and my last point: agency pricing is abolished and Amazon gradually becomes the only player in the game, there’s no guarantee that it will keep e-book prices low…or that it will keep paying self-published authors generous royalties. Why should it, if it doesn’t have any competition?