23 July 2010

The 15% Solution

I'm still shaking my head more than a bit over the Andrew Wylie/Kindle fiasco, not to mention the industry in general's reaction or, specifically, Random House's reaction. There are just so, so many things wrong with both the initiative and the reactions. I'm going to start with the trees and work my way up to the forest.

The first, and perhaps most obvious, issue is whether Random House is in a position to object at all. Those with long memories — and in the entertainment industry, a decade certainly qualifies as "long" — may recall who the opposing parties were in Rosetta Books. Now, admittedly, that case was confidentially settled in the end... but there's this tiny little procedural device called "offensive collateral estoppel" that seems to eviscerate Random House's claim (as stated by Mr Applebaum in the press release quoted in that link above) that Random House owns those rights. The non-judgment ruling in Rosetta Books — that Random House's contracts, from the same era as many of the works cited by Mr Wylie (and, indeed, there's some overlap in authors!), do not transfer electronic rights to the publisher — has only been reinforced by Tasini, which made a virtually identical holding as to periodical contracts that did not specifically mention electronic and/or database rights. "Offensive collateral estoppel" prevents a party that has lost an issue after a full and fair hearing from relitigating the same issue in another case. For example, once a court has found that transaction x was fraudulent, the con artist doesn't get to claim (in the next lawsuit, by a different victim of the same con) that it wasn't; all that victim n+1 need do to win that issue is present the finding in the previous matter. The rules for exactly when offensive collateral estoppel applies are rather complex, but Rosetta Books seems to satisfy them... so Random House is not in a position to claim that it has any legal rights based on the form of contracts it used in the 1960s. And even absent offensive collateral estoppel, I see no way for Random House to overcome Tasini.

The "exclusivity" issue raised by some publishers cuts both ways, against both sides. On the one hand, Mr Sargent (of Macmillan USA) is right to be disturbed by the exclusivity with a "single retailer" — particularly one with a long history of activity that won't bear much scrutiny under antitrust law by itself. The problem, though, is that this particular objection is coming from a monopsonist; under even the ridiculously lax, Reagan/Bush I-ideologically-suspect DoJ antitrust guidelines, the market in "serious literary fiction" is already overconcentrated. That is, this is very much an instance of the pot and the kettle arguing over how much light we get out of all this heated rhetoric... while ignoring the heat, the boiling away of the contents, and potentially the cracking of the vessels.

The antitrust issues get even more disturbing — and I'm going to pick on Macmillan again, but it is far from alone — when one considers the publishing industry's negotiating tactics on e-rights. Suffice it to say that recent correspondence with ignorant1 Macmillan representatives has demonstrated to my satisfaction that the company does not, in fact, have any idea of what constitute commercially reasonable terms for electronic rights; instead, it demands them, on its terms, essentially non-negotiably, because it can. The key point is that the particular terms imposed by publishers on electronic rights are, themselves, grossly unfair to the authors... and represent a windfall to the publishers.

Most disturbing of all, though, I have huge problems with the way that Mr Wylie has gone about this. The appearance of a conflict of interest must be treated as an actual conflict of interest, and even more so when that conflict is in a fiduciary... such as an agent, in both the literary and the legal sense. There are quite a few circumstances in which one can later clear up the appearance of a conflict of interest and demonstrate that there isn't an actual conflict; none of those circumstances apply to fiduciaries. That is, Mr Wylie — and, indeed, any individual agent/agency — is absolutely the wrong person to be simultaneously the publisher and the literary agent for authors... particularly in an instance such as this, in which Mr Wylie's legal interests will be on both sides of the v. in any later lawsuit concerning these electronic rights, however indirectly. Sure, there may be the fiction of another corporate entity actually doing the e-rights — but fiduciaries don't get to take advantage of that kind of fiction. The key point is this, Mr Wylie: You'd better be sending 85% of the revenues received from Amazon along to your authors, because your agreement with the authors allows you to keep only a 15% agency commission; keep a penny more and the fiduciary duty issue becomes a live one.

Ironically, all of this implicates the inadequate information being offered, combined with the lag in that information. Publishers simply refuse to provide adequate information on the costs and revenues of e-books (and when they do, they ignore sunk costs and duplicative accounting), and what information they do provide is verifiable only a year or more later when the royalty statements actually get issued. Retailers (like Amazon, which is particularly relevant in this instance) do no better, relying on grandiose generalizations and statistical methods that would be rejected as a sample solution during the first month of college-level statistics. And authors... authors (and, as particularly relevant here, their estates) generally don't know anything about the business interests and implications of their writings in the first place; that's one reason that they have agents.

So that's a pretty disturbing set of trees, most of which would be more at home in Mirkwood than in the Hundred Acre Wood. What about the forest? Even leaving aside the antitrust issues — which are more than disturbing enough all around — it's a pretty gnarled, dank forest. In Tasini, the Supreme Court ruled that authors may dispose of rights they did not explicitly transfer to publishers as they choose. The problem with that optimistic meme is that it assumes that authors have realistic choices for doing so. We can't forever ignore the monopoly/monopsony problems and the conflicts of interest, but the utter lack of standardization in electronic formats and devices makes many of the purported choices available to authors unrealistic at best.

   This all reflects back into the package problem (which I will return to... once my own little conflicts get resolved).2 Basically, the argument is over how to move the actual property to the actual end-user; and the argument is between various middlecreatures in modern America's favorite game show, Who Wants to Be an Arbitrageur?,3 with very little consideration of the distinct (and disparate, and inconsistent) concerns of the authors, or of the constitutionally mandated purpose of US copyright ("Progress... in the Useful Arts"). We need to find a way to "pay the writer" that doesn't treat writers like production-line drones... even those writers who are production-line drones. I don't know what that method might actually end up being; I'm just reasonably certain that the status is not quo, and that Mr Wylie's "solution" isn't either (quo, that is).

  1. I'm being perhaps unduly generous here. At least as to Macmillan, I do not (at this time) have satisfactory evidence of bad faith or discrete antitrust violations (such as overt collusion among publishers). I cannot say the same for another media conglomerate on this issue.
  2. When a conflict comes up related to something that I'd ordinarily blawg about — even if it's in the middle of a series — I halt. Sometimes I say something; sometimes I don't. In this instance, several licensing consultations hit in the week following Part II of "You're Staring at My Story's Package" that have made it necessary to place that series on hiatus. That is, I apply those same rules about "conflicts of interest" here... even though arguably there isn't one, as this blawg is just general commentary. The appearance is enough. I'd advise Mr Wylie (et al.) to think seriously about that.
  3. More of this problem is driven by the linguistic errors of management theory than one might expect. An "arbitrageur" is supposedly engaging in a low-risk transaction to take advantage of an inefficiency in the marketplace; and arbitrage supposedly improves marketplace efficiency by, over time, eliminating those inefficiencies as more and more arbitrageurs flock to particular inefficiencies and, through the magic of market forces, crumple them to fairy dust. The definition of "risk" in modern investment theory is based not on any actual probability of loss, but on the estimated time-sliced variability of return. That is, "risk" (usually termed "beta") has come to assume a positive return as the norm (not merely the objective), ignores long-term effects and replicability, and — as a purely scalar measure — tries to make all considerations of "risk" contextless. This is a flawed enough representation generally, but it is definitely inappropriate regarding intellectual property whose price is set at a blind, non-equilibrium auction without immediate feedback.