BUSINESS WEEK ONLINE
March 26, 1998


INSIDE THE BOOK BUSINESS: ARE THE GIANTS CRUSHING THE LITTLE GUYS?


Edited by Douglas Harbrecht

The consolidation of the book publishing business has some observers wringing their hands about powerful conglomerates. But there's a force even more powerful than those global players: the retail giants that, to an increasing degree, control what books get sold at what prices in the U.S.

That, at least, is the implication of a lawsuit filed on Mar. 18 by the American Booksellers Assn. against Barnes & Noble Inc. and Borders Group Inc. The ABA, which represents 3,500 independent retail booksellers, alleges that the two chains have forced publishers to give them secret, illegal discounts in violation of federal and state laws barring inequitable terms of sale.

Filing in the U.S. District Court for Northern California, the ABA and 26 bookstore plaintiffs argue that the deals have put smaller stores in an impossible situation. "At the end of the longest day, the problems are insurmountable," says ABA CEO Avin Mark Domnitz. The association says that the chains also possess sufficient heft to muscle around the publishers, since B&N's and Borders' combined annual sales exceed $5 billion.

Chain stores now sell around 26% of all adult trade books, up from 22% in 1991, while independents' market share has fallen from 33% to less than 19% over the same period. Both Borders and B&N have declined any comment on the details of the suit, with B&N adding that it "follows accepted industry practices."

The lawsuit follows similar ABA actions alleging unfair discounting that were brought against several publishers in recent years. In 1996, a lengthy FCC probe of the publishers' practices ended inconclusively. But the lawsuits prompted seven publishers to enter consent decrees and forced one, Penguin U.S.A., to pay $25 million to end the dispute.

Nevertheless, the independents feel that the chains still have an unfair advantage, and that this has caused many smaller stores to go out of business. So, Domnitz says, the ABA "had to strike at the heart of the problem before things became truly desperate."

Among the association's allegations: Each of the defendants has demanded and received from publishers secret terms, including "off schedule" prices that are better than those offered publicly, extra discounts for new stores, special price cuts disguised as promotional and advertising programs, and substantially more generous payment schedules.

Several of the alleged practices revolve around return policies, which allow retailers to send back any unsold titles for full credit. This is especially significant, since publishers have been battered by returns in recent years: For new adult trade hardcover books, the average 1997 return rate was 36.7%, according to the Association of American Publishers. When books get returned, the ABA charges, chains have demanded and gotten special payments. Moreover, they allegedly get price breaks "based simply on the expectation of future returns." In some cases, publishers allegedly agree to markdowns of unsold books, picking up a percentage of the price cut. And when the retail giants accept books on a nonreturnable basis, they get special rates then, too, claims the ABA.

The complaint offers a portrait of the chains as merciless and predatory. Indeed, the duo have been setting a breakneck pace -- B&N has opened about 90 new stores a year for the past several years, Borders 45 or 50 stores. One of the association's most startling claims: "Barnes & Noble employees were explicitly told that the corporation's success in Missoula [Mont.] would be measured by whether one of the leading independent bookstores in the community was put out of business."

How did the ABA come by its claims? Domnitz cites sources including the discovery phase of the litigation against publishers and information sent in by store owners. For example, bookseller Clark Keppler of plaintiff Kepler's Books & Magazines in Menlo Park, Calif., says he has received invoices meant for a chain store but mistakenly sent to him. "You see them and say, 'Hey, these prices aren't available to us!'"

Some publishing executives see the ABA's focus on chains as a tactical matter, since it's difficult to say where book publishing's multitude of problems begin and end. In the words of one longtime publishing insider: "They've sued the chicken, now they're suing the egg."

But legal experts say that under the federal Robinson-Patman Act, designed to protect small buyers such as mom-and-pop stores from the market power of large competitors, the ABA may have a case. "Buyers who induce or receive special discounts are liable," says Andre R. Jaglom of New York law firm Stecher, Jaglom & Prutzman, "unless they meet certain defenses, such as that they have provided some savings to publishers."

Federal trustbusters aren't likely to provide much help to the ABA, however, says Harvey J. Goldschmid, a Columbia University law professor and antitrust expert. "Since these statutes are little employed by enforcement agencies, this is a battle that's likely to be played out without government interference," he says. That's bad news for the independents, because right now they need all the help they can get.

By Hardy Green in New York

News Flash Archives

Copyright 1998, Bloomberg L.P.
Terms of Use