Thursday, November 10, 2011

Amazon’s Lending Library Liability

Was “Freeloading” Contemplated by Contract?

In September, I wrote, "It comes as no surprise that Amazon is exploring a Netflix-like subscription service for digital book.  But what might Amazon's subscription book service actually look like for subscribers, authors and publishers?" 

Amazon's Lending Library answers my question.  It looks a lot like free. 

While the lesson is not yet clear, free is clearly a problem for publishers – especially when offered by a legal consumer-retailer like Amazon.  Actually, free is even more of a problem when offered by Amazon, since, they are the very model of efficiency and customer convenience.  When paying Amazon becomes optional, eBook consumption increases, but, the perceived value of the book (in all formats) drops. 

From published reports, Amazon didn't pretend to negotiate terms with publishers.  They simply forged ahead with a free eBook subscription program.  If true, Amazon has legal grief to pay.  

Amazon vs. Publisher’s Rights

Two separate legal issues: 

While copyright and publishing contracts may seem like chains that clank and confine us, they secure for rights holders the right to say no.  If publishers had trouble with Amazon’s “We Won’t Be Undersold” eBook pricing, Amazon had to know “free” would be an even tougher sell.  For all the criticism publishers must endure, they are the custodians of our print culture.  And, they have contracts to prove it. 

Amazon is a digital licensee, not a traditional retailer of books.    Unless Amazon specifically – in a gentlemanly manner –secured rights to give away free eBooks, my bet is that the publishing houses win. If Amazon wants to give away a bound book, that transaction poses no copyright issues. Giving away a free eBook does.  It’s the difference between a “sale” and a “license” for purposes of the First Sale Doctrine and the Copyright Act.   Giving away an eBook is not analogous to giving away a physical copy of a book.  Let’s build on that.  Selling or giving away an eBook is not analogous to selling or giving away a physical copy of a book. The latter poses serious copyright issues.

The impulse to give away eBooks for free is clearly understandable.  Retail sales are nice, but free is what sells devices.  Publishing is a niche business.  Amazon isn't.  Amazon's objective is device lock in.  As such, they have no problem with cannibalizing eBook sales to increase mobile device sales.  Free gives Amazon greater exposure, and makes them better positioned to win the coming tablet wars.  Amazon is willing to trade eBook sales for subscribers.  eBooks are cheap fuel. 

Several years ago the Authors Guild and the AAP brought suit against Google to wrestle back control of books Google scanned without permission.  Google made a colorable (i.e., plausible) argument that digitizing for indexing purposes fell under the Fair Use Doctrine of the Copyright Act.  Did Google exceed what was allowed under the Copyright Act?   The jury is still out.  Did Amazon exceed what was allowed under their digital books distribution or participation agreements?   The jury has not yet convened.  But, if Amazon exceeded the scope of their agreements with publishers, their breach, sounds in copyright, not contract.  If you exceed the scope of a license, you infringe the underlying copyright.  The damages can be significant.  

It’s worth pointing out that the Google Book Settlement contemplated an institutional subscription service.  The business model was broadly sketched for purposes of the settlement, but, the details were left  to further negotiation.

Agent-Author Concerns

Moving to the subject of author contracts, normally, if a retailer wishes to give away books for free -- or sell them at a deep discount -- the author takes a hit on royalties.  High-discount wholesale sales to powerful retailers, who, then slash the price of books sold to their customers, results in reduced royalties for authors under the shared pain theory of royalty agreements.  While deep discount clauses can be ameliorated by a good agent or attorney, they are a harsh fact of life for authors.  As Amazon’s “fix” is to treat each free download as a sale, here, the author is not being squeezed by the deep discount clause lurking in their author-publisher agreement.       

What to Do?

So, when Rachel Deahl at Publishers Weekly called me yesterday and asked “Could Amazon’s lending library end in court?” I said “Yup.”  Should Amazon be hauled off to copyright jail?  Nah.  A slap on the wrist should do (for now).  

The white hot issue right now is legal liability.  However, instead of getting inflamed, we need to negotiate a definition of “Subscription Revenue” that works for Amazon, publishers, authors – and their respective attorneys.  Once we accomplish that, we will then need to retrofit 70-years of publishing agreements. Perhaps, the lesson learned is we are shackled to one another by contract and copyright.

Next Great eBook Debate

Welcome to next great eBook debate. It’s not about territorial rights, or talking eBooks, or e-Book pricing. It’s about how to define the term Subscription Revenue.

Subscription book services are on the march. They make sense for both publishers and readers for reasons discussed in an earlier post.  However, a payment based on subscription revenue is a complex formula.  What trickles down to the author, ultimately, will be defined by both the “Subscription Revenue” definition hacked out between Amazon and publishers, and, in many cases, pre-internet author-publisher agreements. It is good to be an attorney working in the information age.  Thank you Norbert Wiener, father of cybernetics, and patron saint of information workers everywhere.   

Conclusion

In order to launch a subscription service offering downloads or streaming books, in addition to entering into terms of service agreements with subscribers, Amazon must obtain rights from publishers.  Amazon and its publisher partners need to start negotiating the contours of an acceptable download and cloud based subscription service.  It is, after all, under both contract and copyright law, the right thing to do.

If you want a snap shot of subscriber terms gathered from allied industries, click here and scroll down about half-way down the page.  Looking at it, what's clear to me is that the new metric of an eBook’s financial success is not just the number of books purchased and stored on devices, but revenue from advertising and other sources.  It's about monetizing readers.    

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