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Apple, Amazon, and the bitter tale of selling e-books


The publishing world is abuzz today with news that the U.S. Department of Justice has filed an antitrust lawsuit against Apple along with five major U.S. book publishers: HarperCollins, Simon & Schuster, Macmillan, Penguin, and Hachette. The companies are accused of colluding to prevent e-book sellers from being able to set lower prices for digital books. And three of the companies — Hachette, HarperCollins, and Simon & Schuster — have already agreed to settle the suit out of court.

While this may seem like a simple case of Apple and publishers getting greedy, some believe that Amazon — not Apple — is the true villain of this tale. Moreover, it is a perfect example of how new technology dramatically transforms not just the way we shop, and the products we buy, but the very heart and soul of our culture, and what it holds dear. Because of this, it is important to take a step back, and look at the story from all sides.

Chapter 1: The deal

In January of 2010, prior to the launch of the first iPad, Apple CEO Steve Jobs made deals with the five aforementioned publishers to sell their e-books through the upcoming iBookstore. As part of the deal, the Apple agreed to buy the e-books under an “agency” pricing model, as a opposed to a “wholesale” pricing model — a key element of the case, and a publishing industry practice the Justice Department says it had been looking at since the summer of 2009.  

The wholesale model, which allows individual bookstores to sell books at whatever price they like, is what publishers most often used for physical book sales, and is the model through which Amazon purchased its e-books. (Much more on this later.) The agency model, by contrast, allows publishers to set the cost of the books they sell to booksellers. So, if Simon & Schuster says that it wants a certain book to retail for $19.99, bookstores must sell it at that price.

It must be noted that using the agency model does not mean more money for publishers or authors — it actually means less, at least on a per-book scale. The real value of the agency model over the wholesale model is that it gives publishers — not Amazon — the power to control the market.

The deal Apple and the publishers agreed to meant that the publishers would set the price of new e-books, not just for Apple, but for all book retailers. This benefitted  both sides: Publishers could keep their products from be sold a cut-throat prices, and Apple had a guarantee that it wouldn’t be undercut by the likes of Amazon, the thousand-headed leviathan of the book industry. In February of 2010, Macmillan kicked off the new deal by hard-balling Amazon into marking up the price of e-books from a standard rate of $9.99 to between $12.99 and $14.99, on average. If Amazon didn’t like the forced markup, it would have to wait several months to be able to sell new Macmillan e-book and hardcover titles, at which point it could sell the e-books at whatever price it liked. Not surprisingly, Amazon hated the deal, but admitted that it must comply.

Chapter 2: The backlash

On December 6, 2011, the European Commission announced that it was launching formal antitrust proceedings to investigate the publishers that had made their deal with Apple. (Random House, the largest book publisher in the U.S., decided it could afford not to take part in the deal, according to insider accounts.) The following day, reports surfaced that the U.S. Department of Justice was also looking into the matter.

As of today, Apple and the publishers face lawsuits from both the federal government, as well as 16 state governments.

Three of the five publishers have agreed to settle with the DoJ, which means they “will be prohibited for two years from placing constraints on retailers’ ability to offer discounts to consumers,” and “will also be prohibited from conspiring or sharing competitively sensitive information with their competitors for five years,” according to a statement from Attorney General Eric Holder.

The states, which include Connecticut, Texas, Alaska, Arizona, Colorado, Illinois, Iowa, Maryland, Missouri, Ohio, Pennsylvania, South Dakota, Tennessee, Vermont and West Virginia and the Commonwealth of Puerto Rico, seek to recoup around $100 million dollars, which they say e-book customers overpaid because of agency model pricing.

Apple, Macmillan, and (probably) Penguin have chosen not to settle, and will fight the battle in court. According to Macmillan CEO John Sargent, his company will not settle because it did not do anything wrong.

“…Macmillan did not act illegally,” wrote Sargent, in a letter to the company’s authors, illustrators, and agents. “Macmillan did not collude.”

Chapter 3: The other side

Upon hearing the news that the majority of the publishers had agreed to settle, meaning booksellers can go back to setting their own prices on e-books from those publishers, Amazon responded with sheer giddiness.

“[The settlement] is a big win for Kindle owners,” Amazon said in a statement. “We look forward to being allowed to lower prices on more Kindle books.”

And from a purely economic standpoint, that’s true: Some e-books will be cheaper now that the agency model has been thrown out the window, which is better for customers, or at least better for customer’s bank accounts. But according to publishing industry insiders, allowing Amazon to do what it wants is far more detrimental to competition in the book market than the agreement with Apple, and the agency model in general, ever was.

In a letter to members of the Authors Guild, Scott Turow, the organization’s president, says that Amazon effectively decimated the bookstore industry after it began selling new e-books at a loss — something few other retailers could afford to do. Not only did this have the effect of establishing Amazon, with its then-new Kindle e-reader, as the dominant e-book seller, it also made it far more difficult for brick and mortar bookstores to sell their hardcover copies, as both the physical and digital versions of the books came out at the same time — another demand of Amazon.

By eliminating brick and mortar bookstores, says Turow, Amazon has fundamentally changed the way readers choose books — and not in a good way.

“Our concern about bookstores isn’t rooted in sentiment: Bookstores are critical to modern bookselling,” wrote Turow. “Marketing studies consistently show that readers are far more adventurous in their choice of books when in a bookstore than when shopping online. In bookstores, readers are open to trying new genres and new authors: It’s by far the best way for new works to be discovered. Publishing shouldn’t have to choose between bricks and clicks.”

In short, Turow’s argument is that Amazon’s ability to sell e-books for a far cheaper price than any other retailer gives it an odd kind of monopoly. In most monopolies, the company uses its dominant position to raise prices for consumers. Amazon was doing exactly the opposite, which is good for consumers, but bad for the broader market, as it is killing off the book industry’s most valuable asset: physical bookstores.

Offering customers goods for a lower price than other companies is, of course, not against the law, nor is it considered anti-competitive — it’s how capitalism works. But according to Turow, Amazon’s incessant low-balling on prices, and the government’s demands that Amazon be allowed to sell books at whatever price it chooses, is bad for competition, not the other way around.

“The irony bites hard: Our government may be on the verge of killing real competition in order to save the appearance of competition,” he wrote. “This would be tragic for all of us who value books, and the culture they support.”

Chapter 4: The reckoning

As with all intellectual property industries, including books, music, movies, and television, new technologies have fundamentally changed the way the game is played. The old way of doing business no longer works. And the powers that be are quickly becoming the powers that were.

In the end, it is difficult to know who the bad guy is in this story. Is it the publishers? Is it Apple? Is it Amazon? If you ask me, it’s none of the above. The real villain here is us, the hungry bargain hunters. Today’s suits and settlements show that the publishing industry must evolve as the public’s consumption habits change. But this also proves that the future of the publishing industry is on our shoulders — we must decide whether we value physical books and bookstores enough to keep them around. And if so, then we must shop somewhere other than Amazon.com, and be willing to pay the higher cost of doing so. Will this actually happen? Not a chance in hell.

Lead image via nuttakit/Shutterstock

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