In the latest update of the ongoing e-book price-fixing lawsuit, Hagens Berman has served Amazon and Big Five publishers with a whopping 56-page opposition to the defendant’s motion for dismissal. While Amazon et al argues that this case has no evidence to support it, Berman illustrates that this case, much like their previous price-fixing lawsuits, is based around the use of MFNs. The conspiracy that Berman is presenting: Amazon and the Big Five are utilizing this clause within their contracts to eliminate competition throughout the publishing market, in order to further line their pockets.
But what is an MFN? And how is it causing so much harm?
An MFN stands for Most Favored Nations clause, and it has little to do with nations of any kind. On the surface, an MFN controls the price of the seller’s goods under said contract. But the truth is a great deal more far reaching. The true depth of the MFN is the control of the wholesale price, not the retail. That’s the price which other businesses pay for this product to then sell it to their customers. Under Amazon, the MFN is used to ensure that price is always lowest at Amazon by forcing sellers who utilize their services to bloat the wholesale price so that no other retailer can get a better deal.
The end result is e-books becoming far more expensive across the board, going so far as to diminish even our public libraries ability to meet demand. It’s a gross move to limit competition, as publishers have stated in the past, to limit borrowing at libraries and improve purchases in stores. Sargent, previous CEO of Macmillan until his removal in 2020, claimed that libraries were “cannibalizing sales”. (A statement which is incorrect; the audience that borrows a book is not one that will translate into future sales, as they’re often borrowing due to poverty). While we’ve been unable to find statistics on the growing price of e-books in the past five to ten years, as Amazon does not participate in AAP sales statistics, numerous complaints have risen to substantiate this (many of which are the basis of this lawsuit). E-books today can cost anywhere from 9.99 to 14.99, often to the point of costing more than a print book.
MFNs are not limited to e-books – they are a problem affecting trade (physical) books, as well as Amazon’s marketplace as a whole. In Berman’s concurrent ongoing case, representing indie bookstores suing Amazon and Big Five for price fixing in the trade publishing market, this same contractual aspect is being leveraged to create larger profits for publishers by any means necessary. As best explained by Berman, “When combined with Amazon’s market dominance, they serve an anticompetitive purpose that controls the wholesale price of print trade books, destroys Amazon’s retail competition, reduces consumer choices and creates a disincentive among booksellers to compete on price or non-price promotions in the sale of print trade books.”
Despite this clear cut explanation of the harm of MFNs, confusion continues to rise on the involvement of traditional publishers. How does the Big Five stand to profit from this alleged partnership? The key to understanding this lies in where the price-gouging is happening. By applying fees at a retail level, Big Five publishers can then utilize the MFN with Amazon to uphold those prices with any retailer. These increased prices on wholesalers mean that retailers both online and in-person cannot put these products on sale and still make a profit. To put it simply: if the wholesale price of a book is only 40% off list price, the retailer cannot then offer a 40% off sale (Rule of Wolves by Leigh Bardugo, for example, is at the time of this article 40% off on Amazon for $13.78, with the e-book being sold for $11.99.) Even offering titles at 25% off would turn a barebones profit.
However, that increase in price still turns over profit for the publisher, even if the retailer isn’t making as many sales, because Big Five publishers are now their own distributors. There is no middle-man to take a share of their profits on titles. So that initial wholesale purchase of say $400 goes directly to their profit margin. It’s a long term game that Big Five publishing has set in motion by forming monopolies as distributors have gone out of business in the past decade; this is the end result. Even in a pandemic, Big Five publishers continue to enjoy soaring profits year after year. So while this tactic may not make sense to many, it’s working.
The effects of MFNs are so far reaching in fact that they can even be utilized to drive up Kindle Unlimited sales. Amazon, as holder of the MFN, can sell e-books for even less, while still turning a profit. They can also utilize these price hikes across their competition to increase subscriptions to Kindle Unlimited, a monthly subscription service that charges readers a monthly fee, in exchange for access to hundreds of thousands of books, without any additional cost per title. Amazon, which already controls at least 75% of all publishers e-books sales in the US, then stands to only increase its chokehold on the digital publishing market. To date, Amazon will not disclose Kindle Unlimited statistics, and so it’s reasoned that this percentage is substantially higher than anyone knows.
MFNs, such as they are currently used by Amazon, directly violate federal anti-trust laws. However, as these laws are incredibly vague, it is far too easy for numerous corporations to argue that they have done nothing illegal, but are simply upholding the American spirit of a free market. The numerous ongoing lawsuits we’ve cited in this article are striving to reign in Amazon by making MFNs illegal once and for all – an act that would work to vastly improve both the publishing market and every online retail sector Amazon currently participates in.
Update: As of August 5th, the price-fixing lawsuit against Amazon has seen a new development. The presiding magistrate judge Valerie Figueredo has recommended dismissing the lawsuit citing lack of direct evidence of coordination between the publishers and Amazon. The plaintiffs claims were only supported by the publisher’s prior coordination with Apple as evidence, and did not lend weight to their case.
Judge Figueredo stated that simply because there are new contract agreements, does not mean they are colluding and will lead to unlawful retail monopolization, going further to say, “…because the Publishers compete in a concentrated market with a single dominant retailer, each Publisher could have rationally expected that the other Publishers would have reached the same conclusion about the need to secure an agreement with Amazon.”