For such a supposedly unifying and democratic force, the internet sure is causing a lot of fights. From disputes between smartphone makers over patents to the “battle for the internet,” the one thing everyone can agree on when it comes to the internet is that no one can agree on anything.
The latest stoush* is between Apple, big book publishers and the U.S. Department of Justice. Last week, the feds announced they were launching an anti-trust lawsuit against the big five U.S. publishers - Penguin, Hachette, Simon & Schuster, HarperCollins and Macmillan - and the world’s biggest tech company for allegedly colluding to raise e-book prices. Simultaneously, the DOJ said it was settling with three of the publishers, while Penguin and Macmillan will continue to fight the case. (The sixth big publisher, Random House, has managed to steer clear of this whole situation.)
At issue is the idea of an agency pricing model between the various parties, which the feds say led to an overall increase of between $2 and $5 on what consumers pay for e-books, or a total of $100 million so far. Under the model, Apple allowed the publishers to set whatever prices they wanted on their e-books, with the tech company getting its customary 30% cut when such goods were sold through its iTunes store.
The agency model differs from the traditional wholesale model, where publishers would sell retailers a set number of books at a discount, usually half their cover price. The retailer would then be free to sell the books at whatever price it wanted. Amazon, in an effort to sell Kindle e-readers, had been selling many e-books for $9.99, a price that publishers felt was too low. Amazon, they felt, was in danger of setting low e-book price expectations with the reading public, hence the deal with Apple.
The tech company, for its part, was coming into the e-book market as a challenger. When Apple launched its iPad in 2010, Amazon had a commanding lead of the market. The company dangled the promise of higher prices to publishers, who unsurprisingly bit since they were afraid of Amazon amassing too much power. Indeed, in counter arguments to the suit, Apple and the publishers are saying that their agency model agreement was ironically necessary to prevent an Amazon monopoly on e-books.
The Department of Justice believes it has the proverbial smoking gun in the form of a quote from the late Steve Jobs’ biography, wherein he said to publishers: “We’ll go to [an] agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.”
If you read the book back in the fall when it came out, well before any of this antitrust commotion arose, you may have been shocked by this admission. I know I was. Jobs openly talked about how he first played hardball with record labels and got everything he - and consumers - wanted, namely low prices and the removal of digital rights management copy protection on songs. The iPod’s commanding position in MP3 players then allowed Apple to establish a veritable monopoly on digital music downloads. However, when the shoe was on the other foot and Apple was coming from a challenger position, Jobs was quick to cut deals that appeased the respective content publishers. My friend Mathew Ingram has done a nice job of pointing this out in greater detail.
With this sort of shrewd-yet-mercenary-like acumen, it was easy to love Jobs one minute, then hate him the next, which seems to be the legacy the Apple founder left, if his biography is any indication.
To get back to the issue of e-book pricing, Apple’s attempt at an agency model should have been fine on its own. After all, if publishers wanted to charge more for e-books sold on the iPad, that should have been their prerogative. Consumers would ultimately have decided whether they wanted to pay that premium for whatever reason, or not.
The problem is that part of the agreement included a clause that publishers would not price their books lower through other retailers, which is what caused the overall price increase found by the Department of Justice. That seems to be a textbook example of a single commercial agreement designed to sway the overall market, which isn’t kosher under any circumstances.
If the Department of Justice can prove that e-book prices have indeed gone up overall, which shouldn’t be hard to do, it looks like a slam dunk case. The argument that this was all done to prevent an Amazon monopoly is a pretty weak one. Again, as Mathew writes in another post, the primary point of anti-trust laws is not to prevent monopolies, but to protect consumers from the effect of monopolies.
If Amazon was trying to keep prices low but was forced to raise them because of a deal between Apple and the publishers, it sure doesn’t seem like it was abusing its power, does it?
(*My apologies: “stoush” is a word for “fight” that I learned and came to love in New Zealand.)
Parallax Abstraction
April 19, 2012 at 10:28 am
Stoush is an awesome word.
To be honest, if Apple is indeed planning their iPanel/iTV thing (and I’m still not convinced they are) and the plan with that was to offer it at a subsidised price in order to lock people into contracts with cable companies as was rumoured, I wouldn’t be surprised if they shelve that idea until this DOJ thing is resolved one way or the other. The model that was rumoured for their entry into TVs sounds eerily like this. i.e. getting in bed with big content providers and offering a reduced price on the hardware in order to lock people into consumer unfriendly contracts that likely have large fixed price increases in them. It definitely strikes me as a little creepy that they were all about beating Big Content into submission with music “for consumers” (which is of course not true, it was for the company’s interests) but getting into bed with them the next which is suits them more.