Washington - Apple conspired with five major book publishers to fix the price of e-books, a US federal judge ruled last week in a damning finding.
The ruling is a chronicle of these firms’ incredible stupidity.
In 2009 and 2010, the judge says, Apple and the publishers conspired more or less in the open, telegraphing their moves to the press, memorialising their discussions over e-mail, hinting at their anti-competitive agreements in public statements and strategising in swanky restaurants.
For a short while, they succeeded in their goal of raising book prices: Overnight, the average price of e-books rose by nearly 20 percent, with some best-sellers shooting up by close to 50 percent.
Books that used to sell for $9.99 (R99) were $12.99 (R128) or $14.99 (R148), prices Apple and the publishers believed would threaten Amazon.com, the undisputed king of e-books.
The battle for the e-book market was a fight between the differing business philosophies of Steve Jobs and Jeff Bezos.
Amazon was bent on keeping prices low, even at the cost of profits. Apple, as ever, wanted to make sure it could make a bundle on e-books.
The iBookstore was Apple’s effort to do to Amazon what it had so long done to the rest of the tech industry: Beat it over the head with a combination of better software, hardware and content.
With the iPad, Apple hoped to create a device that would make Amazon’s Kindle obsolete and give it the same dominance over books that the iPod had given it over music.
But Apple’s gambit failed.
Predictably, the rise in e-book prices led to a decline in sales, hurting the publishers’ bottom line.
The iBookstore, whose success the publishers were banking on, never really became a big hit.
Then the US government intervened and pressed antitrust charges. The Justice Department settled with the five publishers, but Apple maintained its innocence, went to trial, and has now suffered a devastating loss.
Altogether, then, the price-fixing effort was a resounding failure. In one of his last efforts to shake up the media world, Jobs went after Bezos with everything he had. And he lost.
Amazon’s e-book plan aimed for simple goals: Bezos wanted to make e-books the primary format for publishing, and he wanted to establish $9.99 as the market price for new e-books. Amazon was willing to sacrifice profits in the short term to achieve these goals.
By charging so little for e-books, Amazon was encouraging people to ditch print books. More than that, Amazon was willing to lose money on every e-book it sold.
The company dealt with publishers under the so-called “wholesale model”, meaning publishers sold books to Amazon for a set price, and then let Amazon choose the retail price.
Publishers often set the wholesale price at $12 to $14. Amazon then sold the books for $9.99 – that is, for less than it had paid for them.
Under this strategy, publishers still made a profit on each book – Amazon was taking the loss, not them – but publishers feared that once Amazon gained a stranglehold over the e-book market, it would force publishers to lower their wholesale prices.
This was a reasonable assumption, because no business – not even Amazon – can stand losing money forever. And if it got big enough, Amazon could replace publishers entirely, signing deals with authors that lowered book prices and gave writers a bigger cut on each book sold. (That’s exactly what Amazon does under its Kindle Direct programme.)
When it entered the e-book market, Apple could out-crazy Amazon – it certainly had the cash reserves to take a similar loss on e-books, to sell them at $9.99 or less to become a leader in the business.
But Apple had no desire to do that. Documents in the case make clear that it didn’t see much value in competing on price, especially because it believed the iPad offered a better experience than the Kindle for e-books. Apple also had no interest in losing money. At Apple, profits are inviolable.
But how could Apple make a profit on e-books if the prevailing price, set by Amazon, was below cost?
There was only one way: by working with publishers to force Amazon to raise its prices.
To do so, Apple proposed that publishers adopt the “agency model” for e-books. Under this model, a publisher sets the retail price of the book, and the e-book store – that is, Apple and Amazon –would take 30 percent of that price. Apple liked this model because it guaranteed a profit.
Ironically for publishers, the new scheme actually lowered profits. Under Amazon’s plan, publishers were getting $12 to $14 a book; under Apple’s proposal, they would get 70 percent of $12.99 or $14.99 (which Apple had set as the maximum e-book price), or between $9 and $10.50.
Still, the major publishers were thrilled with Apple’s model because it allowed them to charge more than $9.99 per e-book; the higher retail prices, they believed, would make for a more sustainable e-book business in the long run.
The only problem was convincing Amazon to go along with this plan.
That’s where the collusion came in.
According to the ruling, after negotiating deals with Apple, five major publishers approached Amazon simultaneously with an offer it couldn’t refuse – either Amazon could move over to the new, higher-priced agency model, or it would have to wait months to begin selling best-selling titles in its store.
Collusion was necessary here, the court explains, because if any single publisher approached Amazon with this deal, Amazon could have balked and simply delisted that publisher’s titles from the Kindle Store.
The only way the publishers could fight Amazon was by illegally working together – and by making sure they had a fallback place to sell their wares in case Amazon refused, namely at Apple’s store.
Apple and the publishers come out looking sleazy in this saga.
One of the sorriest moments occurred in 2010, when Apple cooked up a way to pressure Random House – the only major publisher that had refused to switch over to the agency model – to join its bookstore.
When Random House submitted a few e-book apps to Apple’s App Store, Eddy Cue, who heads Apple’s content division, refused to let the apps go live unless Random House agreed to do “an overall deal” with Apple. Random House capitulated. It joined the iBookstore and raised its prices.
It’s possible to sympathise with the publishers in this saga. With their business models in peril, they were stuck between two behemoths and had little leverage; though it’s illegal, collusion might have seemed like the only way to fight back against Amazon.
But I really can’t see anything good in Apple’s effort. Jobs embarked on a strategy that had the effect of helping Apple and potentially helping publishers, but by raising prices for every customer.
It was shameful. It was also a failure, and now, despite the iPad and the iBookstore, Amazon is still the undisputed leader of the worldwide market for e-books. Thank goodness. – Slate/The Washington Post News Service