DOTHAN, AL, June 6, 2013 — One does not normally think of the book industry as a hotbed of illegal activity, but the Apple price-fixing trial that opened this week is shaping up as a modern day “clash of the titans” involving the biggest players in publishing.
The industry is not without its lawsuits. Scratch the surface at any given time and you will find lawyers battling over copyrights, royalties and distribution rights - all small stuff compared to the Department of Justice (DOJ) anti-trust case against Apple and the six largest publishing companies in America.
It is generally believed the DOJ initiated the action based on complaints from Amazon that it was being pressured into accepting an agency pricing model. That means publishers would set prices, not retailers. Up to that point Amazon had been selling e-books at $9.99, which helped it capture about 80% of the entire e-book sales market. Publishers claimed that was a loss-leading price in order to help Amazon sell its Kindle e-reader. Amazon claimed they should have the right to set their own prices.
Enter Apple, hungry for a piece of the fast-growing e-book market.
Apple started an eBookstore service and was anxious to adopt the same business model that made selling music so successful. The big five publishers - Penguin, HarperCollins, Hachette, Simon & Schuster and Macmillan - believed that Amazon’s pricing was costing them money. Publishers believe everything costs them money.
Apple lit the fuse to the anti-trust bomb by siding with the publishers and allegedly pushing them to cut off other retailers who would not go along with the new pricing model. Poor Amazon, what was a poor multi-billion-dollar global enterprise to do? According to testimony from the publishers this past week, Amazon executives “yelled and screamed” at them and hurt their feelings. Uh oh, you know what happens when feelings get hurt.
At that point the whole situation was starting to sound like the story of the goose that laid the golden eggs. E-books were gaining in popularity but were still far from overtaking print sales. Apple executives, under orders from Steve Jobs, were scrambling to get content for the iPad. Amazon wanted content for its Kindle. There was some pushing, some shoving, an elbow here and a poke there and finally Amazon caved in. The big online retailer presumably agreed to go along with the publishers to avoid being cut off on orders.
After that, details of the pricing battle got kind of murky and the trial will have to sort out who did what to whom. The publishing companies have already admitted complicity and settled with the DOJ, preferring moderate fines to an extended court case. Apple became the lone holdout to resist DOJ and is crying “foul.” The problem is, Amazon is crying “foul” also. It is important to remember that, unlike the publishers, both retailers have vested interests in selling hardware. E-books are obviously necessary to sell e-readers.
This past week several publishing executives testified that Apple put pressure on them with a “most favored nation” clause that demanded pricing parity. Apple didn’t want to sell books for $9.99 when there was potentially more profit to squeeze out of them. Apple is not exactly noted for discounting anything. Apple lawyers would be more than happy to convince the DOJ that the ultimate blame for this mess lies with Amazon. If Amazon would just stop complaining, everyone could get on with the business of overcharging consumers.
There is no jury for this case. Pity the poor U.S. District Judge, Denise Cote, who has to sort all this out on her own. Did Apple try to unfairly manipulate prices to sell its iPad and violate anti-trust laws, or was it just pursuing a legitimate, if overly aggressive, business practice? Was Amazon lily white in the fracas or did their yelling and screaming at publishers trigger Apple to act in self-defense? If there was no anti-trust violation, why did the publishers surrender to the charges so readily?
Other than making for some high courtroom drama for columnists and journalists to write about, the bottom-line to this case is that consumers have been duped and will pay higher prices no matter how it turns out. You are not likely to see e-book bestsellers for $9.99 ever again. If you bought an e-reader thinking you would ultimately spend less for your reading habits, you’ve been had.
E-book prices are still marginally cheaper than print, but not by much when you consider that a print bestseller listed at $27.95 can be purchased at Sam’s Club for around $17.95 while the e-book version is $15.95. For a savings of just $2.00 per book purchased, it would take some time to get back the $150 you spent for a device to read it on.
Small independent bookstores lose in all this too. They cannot compete against the discounts given by online retailers and do not qualify for volume discounts from the publishers. Publishers could still make a profit selling e-books at $9.99, just not as much profit. Publishers like big profits and don’t like to share them with anyone, including authors and especially small bookstores.
One player missing in this case is Barnes and Noble, last seen flirting with Microsoft to possibly divest its digital assets. Microsoft, ever jealous of Apple, could use a content service to bolster its flagging sales of the Windows 8 tablet. Hopefully Barnes and Noble will return to what it does best, which is run stores with shelves full of print books that readers can browse through without a computer.
E-books are innovative and have a place in the world of reading, but conventional wisdom suggests it is best not to slice a pie before it is fully baked. Perhaps the current generation of Apple managers needs to visit a certain landfill in Utah and see what happened to the Lisa computer.
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