Ebook News: Apple & Big Publishers Under Investigation For Alleged Collusion To Fix Ebook Prices

March 14, 2012
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Apple and five major publishers, suspected of colluding to artificially raise and fix prices for ebooks, are under investigation by regulators in the U.S. and European Union. The whole thing began when Apple introduced its “agency pricing model” for ebooks last year. Up until that time, Amazon, as the dominant player in the ebook field, had set the standard for ebook pricing. In a nutshell, Amazon could set the selling price for a book (or ebook) wherever it liked, so long as the publisher received its agreed-upon fee per copy sold. The Passive Guy (pseudonym for an attorney who writes the highly respected The Passive Voice blog) described the situation this way:

[Agency pricing is] a reaction by publishers to what was happening to their pricing, particularly for best-sellers, on Amazon.  Amazon was aggressively pushing pricing down on big books by selling hardcopy New York Times bestsellers for $9.99, substantially undercutting prices in physical bookstores.  Amazon was selling below its own cost in some cases to build sales volume and market dominance.

This tactic accomplished Amazon’s goals and contributed to it becoming the largest seller of books on the planet.  Impact on authors?  Positive, because most publishing contracts paid royalties based on cover price.  Amazon’s sales price moved more books, but, just like retail discounting at a physical bookstore, the royalty base was unaffected by Amazon’s discounting.

When ebooks began to take off, Amazon did a variation on this play by offering 70% royalties for ebooks priced between $2.99 and $9.99.  Essentially, what Amazon was saying to publishers was, “Sell ebooks in this preferred price band and we’ll charge 30% for doing what distributors and physical bookstores do for your hard copy books.”

The ebook pricing/royalty structure aggravated a problem that began with Amazon’s hardcopy discounting.  I don’t know if the publishing world uses this term, but in the tech world, where I have a lot of experience, this is called channel conflict.  Instead of having only a single major channel – bookstores – publishers in effect had two channels – physical bookstores and Amazon.  What made Amazon happy – offering hardcopy bestsellers for $9.99 – made bookstores very unhappy because the booksellers couldn’t compete with this price.

Later in the same article, he goes on to explain:

When Apple came on the bookselling scene with iBooks for the iPad, it was facing a brand-new ebook market where Amazon ruled.  In order to curry favor with the publishers, Apple offered them something Amazon wasn’t – the ability for the publisher to set the retail sales price.  Instead of iBooks being like a traditional bookstore that bought books from publishers at wholesale prices and resold them to customers, iBooks would be a sales agent for the publisher, selling the publisher’s books at a price set by the publisher and taking a 30% agency fee for doing so.  Hence the term, “agency pricing”.

After a brief showdown between publishers and Amazon, Amazon buckled and allowed publishers to set higher prices for books than Amazon thought was ideal.

The publishers had a brief moment of happiness because they had solved their channel conflicts between physical bookstores and online sales because they could set online prices in a way that wouldn’t kill sales in the bookstores.  The price of peace in the channels?  Amazon was no longer goosing sales by selling gobs of books at $9.99.

But in implementing this plan, were Apple and the publishers who agreed to the agency pricing model guilty of colluding to fix prices? And were they guilty of fixing those prices at an artificially high level? You may have noticed that bestsellers from major publishers offered in Apple’s iBookstore are generally priced higher than the $9.99 that used to be more or less standard for the same type of Kindle book on Amazon. You may also have noticed that ever since this agency agreement came into existence, you’re seeing many more Kindle major bestsellers on Amazon priced at $14.99 or higher.

Many independent publishers and consumer watchdogs have noticed too, and a year later Apple and the ‘Agency 5’, as the participating publishers have come to be known, face antitrust lawsuits here in the U.S. and abroad. From The UK Register:

The European Commission, the US Justice Department and a group of plaintiffs in a US class action suit are all looking very closely at the fruity firm for that sin amongst sins in the modern world of anti-competition legislation: price-fixing….

Some widely reported quotes from the late Steve Jobs to his biographer Walter Isaacson that have been bandied about as a “smoking gun that proves collusion” haven’t helped either.

“We told the publishers … you set the price, and we get our 30 per cent, and yes, the customer pays a little more, but that’s what you want anyway,” Jobs reportedly said.

“[The publishers then] went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books’.”…

“Apparently Apple made some comments at the time that the pricing was going to change and then very shortly after that all of the publishers followed up with a threat to Amazon that it adopt the agency model or face a boycott,” Robert Vidal, UK Head of Competition, EU and Trade at law firm Taylor Wessing, told The Register.

“So the fact that they all did that more or less at the same time after some meetings with each other would indicate that it was done in concert and so the allegation is that they got together and decided to bring in this new pricing model in order to fix pricing.”…

…publishers and bookshops were screaming that Amazon was undercutting them, destroying the publishing world and robbing authors of their fair due. But whether you believe that or not, it probably wasn’t illegal.

“You’d have establish that Amazon was dominant in relation to ebooks and then if it priced at below cost, you could claim that it was predatory pricing,” Vidal explained…

“The general principle is if you drop your pricing, then that’s going to be good for consumers because they get access to cheaper books. So to claim that a company is somehow acting in an anti-competitive manner by dropping its prices … It’s a strange argument, particularly from a regulator,” he said.

“The way that regulators would see this is that Amazon entered the market and started selling ebooks really aggressively and that was great because consumers could get access to cheaper books. They’re looking at the market now and all the ebook prices have gone up and there’s thousands of consumer complaints.”

Read the full article on The UK Register.

We’ll be watching developments in the case closely, as the final outcome is sure to have an impact on ebook pricing and availability.

 

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