The Charge that Amazon is Promoting Piracy and Devaluing Books

There has been a huge kerfuffle about a recent (March 1st) change in Amazon’s seller policies regarding third-party sellers and “new” books.

You can read more the-sky-is-falling articles on Huffington Post, at the IBPA, and at Publishing Perspectives.

After you do that, join with me in saying this:

Amazon is not promoting piracy.

And we really need to stop saying that it is.

I’m going to address three things in this post. The first is something called the First Sale Doctrine. The second is the practice of book distribution and wholesaling. (These two aspects are largely why third-party book sellers exist.) Finally, libraries and reviewers are charged with contributing to third-party sales as related to this Amazon policy, but that’s flat-out false and I’ll explain why.

During my college career, I minored in business and took a class on contract law. It’s the reason why I nearly table-flipped my desk when I read that some people were accusing Amazon of promoting piracy, and there’s a damn good reason why I had such a sharp reaction.

What is First Sale Doctrine and where does the idea come from?

First Sale Doctrine pertains to copyright and exists to protect consumers. It is similar to the Exhaustion Doctrine, from the phrase “exhaustion of intellectual property” that pertains to patents. It is a limitation of the rights of copyright holders, and it is one of the few limitations in existence. It is alternately referred to as the “right of first sale”, “first sale rule”, or “exhaustion rule”.

The reason it exists is to separately distinguish the intellectual property that is protected by copyright from the material object which is not.

A book is a bunch of paper bound together between a cover with words on its pages. A book is a story created by an author after hours, months, or years of work. One of these is protected by copyright. One of them has protection but is limited by the First Sale Doctrine when it is sold as a material object.

The intellectual property of the author – the story – is always protected by copyright. We all know the line that appears in some variation on nearly every copyright page: “This book cannot be copied, distributed, reproduced, or altered, either in whole or in part, without express written consent [from the copyright holder]”. That means when a book is printed, the copyright holder is entitled to enforce copyright until the copyright is exhausted.

If I buy a book from Barnes & Noble, I can’t photocopy and distribute the copies because that runs afoul of the fully-enforceable reproduction rights covered at all times by copyright protection. (Any time your teachers have handed you worksheets that look like they were photocopied out of something, they were possibly violating copyright. This is also where fair-use comes in, which might be a blog topic for another day.) However, if I sell that same book I bought at Barnes & Noble at a yard-sale, I’m not violating copyright because the copyright protections have been exhausted by the limitations of the First Sale Doctrine.

Basically, I can’t replicate or distribute (selling or otherwise) an author’s intellectual property, but I can resell (or donate, or destroy) a book that I have purchased. These are two different things according to the law.

All that matters to qualify for the limitations of First Sale Doctrine is that my ownership of the item was obtained lawfully.

One of the reasons the First Sale Doctrine exists is because it would be impossible and unreasonable to repeatedly enforce copyright on subsequent sales, trades, or destruction of a material object. It also wouldn’t be fair, because if a book was considered bound by the same laws as the copyrighted story on its pages, then if I drop a book in a puddle I’ve destroyed a copyright protected item without the consent of the copyright holder who could then claim that they are entitled to compensation for the loss of future sales from that water-logged book.

That was a long sentence that basically says if I lawfully obtained a book either through sale, trade, gift, or other legal transfer of property, that book is now my property and I do not need the permission of the copyright holder to decide if I want to sell, trade, exchange, burn, or otherwise dispose of the book in question. If I did need their permission, then an accidental drowning of a book would be considered copyright infringement ( a reference to the line of copyright and “altering” material).

First Sale Doctrine is a reasonable and prudent limitation on copyright, which is why it’s been law since 1908 after a court case a publisher lost against Macy’s department stores. It is more formally codified in the 1976 copyright act.

This is why we absolutely cannot say that Amazon is promoting piracy. Every copy from a third-party seller was obtained lawfully, or they would face felony charges for violating copyright.

For those wondering, digital copies are licensed, not sold, so First Sale Doctrine does not limit the enforcement of copyright. If I buy a Kindle copy of a book, I have no rights to resell that copy. The licensor almost always has a license agreement I must acquiesce to before obtaining access, and they can enforce the agreement separately from copyright of the work itself.

To the second issue at hand, wholesaling and distribution of books is complicated. One of the things that was common in all of the “sky-is-falling” articles is that no-one seems certain where these third-party sellers are getting their books. Some of their theories are stretching the bounds of reality, but I’ll touch on two of them briefly.

Review copies are ineligible to qualify for any third-party seller listings on Amazon, not even as a “used” item listing and definitely not for a “new” one. This is straight out of Amazon’s guidelines:

If your publisher has been giving out review copies, so long as they are printed with “review copy” or “advanced reader copy” or “uncorrected proof” or similar language, they won’t show up on Amazon’s listings. (And if they do, you can report them and get the seller off the Amazon market.) If you are an indie and use POD, you could consider making review copies, too, to remove the chance that your reviewer could turn around and sell the books you give them for free. (Do some research for best practices for creating review copies before you do.)

Second-hand bookstores and bargain bins at libraries or elsewhere: These both are covered by the First Sale Doctrine and copyright holders have little possibility of enforcing their copyright on such sales. The assumption is that the first sale of the book ends the protections of copyright (remember, it’s not always about the money – I can sell a book at a yard sale that my brother can give me for $0 that he got from a friend for $0 who got it as a gift from his mother who bought it at a used book sale at a library who received the book as a donation from someone who bought it on clearance before Borders went out of business and the whole chain is totally lawful).

Here’s some more reading on the subject:

Bringing us back to wholesalers and distributors…

Books have a list price, and they have a production cost, and everything in between is gravy. This is where wholesalers and distributors come into play.

Production costs are the money that has to be shelled out to get the book into existence. That can be everything from cover cost, to editing, to printing, to shipping, and everything else in between. There are algorithms to assign those costs out realistically ($1000 for editing on a book that only sells 1000 copies is technically more expensive per book than $1000 for editing on a book that sells 5000 copies). However publishers handle it, at the end of the day they’ve put some money out into the world as an investment that is represented in the material form of a book.

Now that the book exists, they want to make their money back, with a profit. But in the world of publishing, distributors have a set operating procedure that says they will only pay a certain percentage of the list price because wholesalers and retailers will only pay a certain percentage of the list price.

I highly recommend this article from Joel Friedlander, aka The Book Designer, to understand how wholesale, distribution and retail pricing works for printed books.

Now, let me bring you back to the First Sale Doctrine. The publisher ONLY gets paid for the first sale. So a retailer sells a book to a consumer at a ten percent discount or ninety percent of list (hello, Barnes & Noble members!) that they bought from a wholesaler for sixty percent of list, who bought it from a distributor for forty-five percent of list, who bought it from a publisher for thirty percent of list. Do you know how much money the publisher sees?

Thirty percent of list. Just the very first sale in the chain. And it’s totally lawful under First Sale Doctrine.

For those who like numbers: a $20 list price book is sold for $6 to a distributor, who sells it for $9 to a wholesaler, who sells it for $12 to a retailer, who sells it for $18-$20 to a customer. (Distributors might charge fees rather than making direct sales, so the costs aren’t necessarily this straightforward. There might also be times some of these steps are skipped, so a publisher might sell a book for $8 instead of $6 or straight to a retailer for $12.)

That’s one $20 copy that has [potentially] cumulatively earned $6 + $9 + $12 + $18 for a whopping $45 total. And at the same time, the publisher only gets $6 while having to mitigate production costs before giving the author their royalties and the author is not entitled to any percentage of any secondary sale. (Read your contracts!)

What Amazon is doing is removing some of those steps. What they aren’t doing is changing that initial $6, which is the only thing that should matter to authors because that’s what a publisher is using to calculate royalties.

Anyone who is saying that Amazon is devaluing books is terribly wrong, and yet terribly right for the wrong reasons. By removing even one of those steps, a single book will earn less money in its early existence. What this effects most is the publishing business – the publishers, the distributors, the wholesalers, and the retailers. Amazon has brilliantly gotten them to suddenly compete with each other.

The author may be impacted, but not the way “the-sky-is-falling” articles would have you believe.

Where the First Sale Doctrine limits an author’s copyright, it also ensures it. Because that first sale must always be lawful, unless your publisher is doing something where they lose track of the books they print there is always money exchanging hands at the beginning of the supply chain.

So why does it seem like this should be a big concern? Because publishing is a bulk business that tries to disguise itself as a scarcity business. What it really is is a business that lives between the margins – pardon the pun.

I think it helps that I regularly sell print books to real, live readers. We order what we need, transport them to a convention sales table, and proceed to have no middle-men between us and the customer. The only thing the books costs us is production and our time. We can sell a book in-person for $8-$10 that we list on Amazon and Barnes & Noble for $14.99 and earn the same, or more, profit per sale. Our margin on an $8 sale in person is about $3 profit where we earn around $2 when someone buys the same book for $14.99 at a retailer (remember, there are production costs plus the discounts for anyone who thinks that math seems off).

I’m certain the readers who buy our books from us directly are generally happier with the experience of handing us $8 rather than $14.99 plus shipping. And we’re happier making $3 versus $2 in the process.

Now, to go back, it’s possible that your publisher would be selling a $20 book directly to Amazon. If that’s the case, the “sky-is-falling” articles all seem to cite that Amazon pays the publisher forty-five percent of list (meaning a fifty-five percent discount) which would be $9. If the book is obtained through the retailer, wholesaler, distributor chain, the publisher is getting as little as $6 or as much as $12. That does mean that publishers are getting less money and therefore the author will get less money. But authors will still be paid.

The part I don’t understand is why Amazon is getting the blame for a distribution chain that was created by the publishing industry. If authors and publishers have a problem with wholesalers and distributors directly selling to consumers for the same rates they usually sell to the next step in the chain then the publishers should change the percentages they discount their books.

If I don’t like my $20 book being listed for $10 + shipping, then I shouldn’t sell it to a wholesaler for $8 while expecting the consumer to pay $20.

Amazon isn’t devaluing books. The publishing industry does that all by themselves.

It would also be nice if people found something positive to focus on. Such as, book retailers have been struggling. By removing them from the process of getting books into consumers hands, and by allowing the other parts of the existing book supply chain to have access to online storefront space, Amazon has given publishers a chance to sell more books without inflicting extra costs on the readers.

So to round out…

Stop saying that Amazon is promoting piracy – the practices of third-party sellers are protected under copyright law, specifically First Sale Doctrine.

Stop saying that Amazon is devaluing books – they merely gave digital storefronts to people lower in the book supply chain that already existed.

Stop saying that this hurts authors – how much authors get paid will be up to the contracts they signed with their publisher, and how much of a discount their publishers are giving to wholesalers, retailers, and distributors – not Amazon.

What can you do about it?

Nothing. Even if you buy from somewhere other than Amazon, you have no way of knowing if the book that ends up on your shelf was sold directly to a retailer or through the supply chain. If it was direct to a retailer, the author [theoretically – remember, contracts don’t have to be logical] earns the maximum royalty from a single book sale. Or, if that book came through the entire supply chain, the first sale is the only one the publisher got paid for, which locks the author into whatever their contract specifies for that situation.

A Barnes & Noble book might still pay less to the author than a “new” copy from a third-party seller on Amazon.

And it’s been that way since you were a kid. The sky is not falling.

Thanks for reading.

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