If you’re in the middle of talks that seem to be going well, here’s a warning: consider the impact of the agreement on those who aren’t at the table, or suffer the consequences. That’s a lesson that Apple and some of the largest U.S. book publishers are currently learning the hard way.
On April 12, the U.S. Department of Justice (DOJ) sued Apple and five major U.S. publishers for colluding to raise the price of e-books during secretive, anti-competitive negotiations. Three of the publishers have settled the suit; two others and Apple have so far been unwilling to settle.
Here’s the backstory. In 2007, to boost sales of its fledgling Kindle, Amazon began selling e-books at the rock-bottom price of $9.99. Five publishers – Simon & Schuster, Hachette Book Group, Penguin Group USA, Macmillan, and Harper Collins – felt Amazon’s low, flat price would undercut the sale of their new-release hardbacks, whose average cover price was $26, and potentially price the other retailers, such as Barnes & Noble, out of business. Under the publishing industry’s traditional wholesale model, publishers sold their books to retailers for about half the cover price, and the retailers were free to set whatever prices they liked.
In January 2010, the publishers negotiated a new business model for e-book pricing with Apple as it prepared to launch the iPad; in exchange for a 30% sales commission, Apple would let the publishers set their own prices for e-books. For the publishers, this so-called agency model – which turned Apple into a sales agent for the publishers – appeared to be a vast improvement on their wholesaling arrangement with Amazon.
The publishers leveraged their deal with Apple into a bargaining chip with Amazon. After at least one of the publishers threatened to delay the release of its digital editions, Amazon reluctantly replaced its $9.99 e-book pricing with the agency model, and prices rose industrywide to about $14.99 on average.
The publishers’ deal with Apple sounded like a great deal at the time. Moreover, the parties say they undertook it in part to increase, rather than decrease, competition in the e-book market. Yet the DOJ’s lawsuit suggests that the negotiators and attorneys involved may have neglected to thoroughly analyze whether their agreement would truly create value for consumers – and thus whether it fell within the parameters of U.S. antitrust law.
In the flush of hammering out a deal that appears to create synergy for everyone involved, negotiators sometimes neglect to consider how their agreement could affect outsiders, an oversight with ethical and legal implications.
What ethical responsibility do we have to those who aren’t seated at the table with us? Harvard Business School professor Max H. Bazerman uses the term “parasitic value creation” to describe the common tendency of negotiators to focus so narrowly on identifying benefits for those at the bargaining table that they unintentionally overlook potential negative effects of their decisions on outsiders.
When preparing to negotiate, and then throughout the negotiation process itself, take time to consider how various proposals and outcomes could affect not only you and your counterparts across the table but also your competitors, your customers, your industry, and society at large. This doesn’t mean that you should abandon a deal if it would harm anyone at all. Rather, assess whether your agreement would achieve a net increase in value to society. If it would, says Bazerman, you generally should feel good about inking the deal.
Adapted from “Giving Outsiders a Voice in Your Negotiation,” first published in the Negotiation newsletter, June 2012.
