It was the Bezos of times, it was the …
Most folks involved in the retail and wholesale business of buying and selling books know of the head butting between Amazon and Apple in their e-book fight (via publishers as their proxy.) Could one ask for a more engaging contest?
In one corner stood a CEO whose mantra was ‘extract every last drop of financial value’, that is, always charge more for a non-open source product — customers should expect to pay extra for sleek design and better utility. In the other corner bounced a CEO whose shareholders steadfastly back him up on selling items below cost (to quote an old joke, perhaps they make it up on volume.) And the winner is……
The five publishers who were charged with colluding with Apple on e-book ‘price fixing’ settled with the U.S. Department of Justice some time ago. Apple, however, denied wrong-doing and said, “we’ll see you in court!” And so they have — and say they will again. Wednesday U.S. District Judge Denise Cote, Southern District of New York, ruled against Apple writing that they violated anti-trust law (Section 1 of the Sherman Antitrust Act, 15 U.S.C., 1 as well as various state’s laws) in a conspiracy with the five publishers. A trial for damages is now in the wings with Apple saying it will appeal the ruling.
Joining the feds in the June 3 − 20, 2013 bench trial (a non-jury proceeding) as plaintiffs were 33 U.S. states and territories. The five previously involved publishers were Hachette Book Group, Inc., HarperCollins Publishers LLC, Holtzbrinck Publishers LLC d/b/a Macmillan, Penguin Group (USA), Inc., and Simon & Schuster, Inc.
Aside from the non-disguised machinations between Apple and the publishers in working this collusion, the scheme failed from Steve Job’s hubris in thinking that readers would turn in droves toward his iBookstore and glitzy technology, all coming at an increased financial price for readers. And, indeed, prices for e-books did rise from an average of $9.99 to some as high as $14.99 — overnight. Why did Jobs believe he could succeed? He was using his music world revolution with iTunes as a model. Why did publishers join in? Because they were feeling the pressure from the 800 pound gorilla in the ring: Amazon.
Apple was attempting to institute a service where the publishers would set e-book prices (“agency pricing”) and their vendor, Apple, would take a 30% cut. In this scenario Apple would make money, always a Jobs requisite, but the publishers would actually make less money than they were making with their Amazon deal! (Amazon buys e-books wholesale from the publishers at, generally, $12 to $14 dollars and sells them at $9.99.)
How did this work and why were publishers willing to lose money they were currently earning per book? Let’s break it down.
Apple sells an e-book for $10. It keeps $3.00 and forwards $7 to the publisher (who, remember, has set the $10.00 retail price.) Amazon, using a “wholesale pricing” model, sells that same e-book for $10.00 and forwards, say, $12.00 to the publisher (who has set this as their wholesale price with the retailer selling the book for whatever price they wish.) In this real world scenario Apple has made $3.00 per book and Amazon, on that same book, has lost $2.00. Crazy, eh? Publishers made money on both sales, but more on the Amazon sale, $12 gross profit, than on the Apple sale, $7.00. Confused yet?
Publishers were willing to make less money in a deal with Apple to counter what they see as their ‘death by a thousand cuts’ from Amazon. Competition is at the heart of a healthy economic system. When it disappears quality, service, diversity — everything suffers. Although Amazon disavows the idea, everyone pretty much has figured out that the company would like to drive competition out of the arena. Imagine, as the physical book disappears one’s recourse is an e-book, sales of which have just surpassed the sales of (non-children’s) physical books for the first time. With its Kindle as king Amazon would be in a powerful position to dictate prices — and more. They already give away some public domain books for free and don’t charge for the bandwidth used by the Kindle service.
Kindle Direct is an Amazon program where authors can bypass the traditional publishers altogether. It doesn’t take a rocket scientist to see that publishers recognize the writing on the wall: their futures are in a precarious position. Physical book publishing is an expensive operation what with paper, shipping, returns, etc. E-books are cheap by comparison. But you have to be around, in business and have a distribution network to take advantage of this new-ish technology. A buffer, that is, a competitor, who could go toe-to-toe with Amazon was a desirable thing. So desirable that publishers were willing to take a momentary loss of revenue to prop up Apple as that competitor.
See U.S. District Judge Denise Cote’s ruling here.
SIDE NOTE: Stephen King, one of the first authors to have his books come out in e-book form, is releasing his latest book, a sequel to The Shining, as a physical book only, to help a small publisher.