The Department of Justice (DOJ) warned Apple and the nation’s biggest publishers that it would be suing them for fixing prices on ebooks.
The case could cause much disruption in the ebook industry, damaging Apple’s iBooks offering and hitting publishers’ bottom lines, while simultaneously being a boon to Amazon and resulting in cheaper ebooks for consumers.
According to the WSJ, the publishers involved are Simon & Schuster, Hachette Book Group, Penguin Group (USA), Macmillan, and Harper Collins.
The practice in question was introduced by Steve Jobs in preparation for the launch of the iPad. It’s called the Agency Model, and in Jobs’s vision publishers could set the price of ebooks and Apple would take a 30% cut. As part of the contract, however, Apple stipulated that publishers couldn’t sell titles to rival retailers (Amazon) at a lower price.
Before this model was introduced, Amazon was buying ebooks in bulk at a wholesale prices. Before Amazon came along, retailers would generally price harcover and best-sellers at about double the wholesale price. Amazon was able to undercut this market because of the shear volume of its purchases. To promote its Kindle device, for example, Amazon often sold ebooks for less than they paid for them. As a result, publishers feared the value of the book would plummet and that Amazon would destroy competitors like Borders and Barnes & Noble, who couldn’t compete with its narrow margins.
As the agency model went into effect, publishers said they would no longer sell their books to Amazon unless the company raised the price (in most cases for best sellers and hardcovers from $9.99 to $14.99).
From there, the publishers were able to fix the price across the industry, something which Jobs admitted in his biography with Walter Isaacson:
“We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” They went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.’ ”
(For a detailed timeline of the ebook pricing wars, see A Kindle World Blog)
According to paidContent.org, it is unlikely the case will ever go to court. All parties have an interest in settling before that point. Apple and the publishers don’t want the bad publicity, nor do they want to raise the stakes by taking the case to court. The DOJ wants to be able to tell the consumers it secured better prices without risking a potential blight for losing the case in court.
Either way, Amazon will see an improvement in their fortunes. As it is now, Amazon has no choice but to sell books at a fixed price. Therefore, any settlement would be favorable. The settlement may not necessarily revert the industry back to wholesale pricing, but it will likely include restrictions on agency price fixing as well as permissions for retailers to discount the books.
The biggest losers will be the publishers (Apple doesn’t really care all that much, what with all its cash hordes), because they will have much smaller margins.