By Jim Karpen on Fri, 07/12/2013
Earlier this week, federal judge Denise Cote found Apple guilty of conspiring to fix eBook prices, though Apple continues to deny having done anything wrong and has vowed to appeal the decision. The US Department of Justice had not only sued Apple but also five of the six major publishers who it said had conspired with Apple. All five of those publishers settled with the government. But Apple was resolute, convinced that its actions helped foster competition in the eBook industry rather than undermine it.
What did Apple do? When it came out with the original iPad, it wanted eBooks to be a major selling point. Amazon was dominant, and Apple needed to be able to compete with them. At the time, Amazon was acting as a retailer for the publishers, just as with print books. That meant Amazon was free to set whatever price it wanted. And that price was low: typically $10 for a New York Times bestseller. Amazon was willing to set prices so low, it may have even been losing money because it saw these eBooks as "loss leaders"—the age-old trick of selling an item below cost in order to get customers in the door.
Steve Jobs, of course, would have none of that. Apple doesn't like to sell things cheaply. And the publishers hated the fact that Amazon exerted so much control over pricing, making it difficult for other retailers to compete. So Steve Jobs came up with a solution: an agency model. That is, Apple would act as an agent for the publishers, not a retailer. The publishers could set whatever price they wanted, and Apple would simply take its standard cut.
That was fine as far as it went. But the problem was that the agency model would typically mean that eBooks would cost more in Apple's online store than on Amazon. Who would buy eBooks from Apple when they could buy them for cheaper on Amazon and read them on the less-expensive Kindle eBook reader?
So Steve Jobs took things a step further, and this is where Apple got into trouble. He told the publishers he expected them to also switch Amazon to the agency model, so that it would be a level playing field for everyone. This, in the view of the Justice Department, was a no no. As a result, it forced Amazon to switch to the agency model, and eBook prices went up, typically $13 to $15. Apple conspired to raise prices, the Justice Department said.
But frankly, most of the industry was behind Apple. Publishers, as you well know, are nowadays struggling to survive. They feel like Amazon has too much control over the industry, and that it has already been the death knell for many bookstores, including the Borders chain. Even the eminent Barnes & Noble is struggling. Many observers feel Apple's move fostered competition, which ultimately is better for the viability of the industry.
The judge disagreed.
In the meantime, following the settlements by the five publishers, eBook prices have again dropped somewhat on Amazon, with some eBooks back at the $10 level.
It will be interesting to see what happens. On the one hand, the tendency is to protect the publishers and the industry as we've known it. On the other, new technologies often undermine industries, with old industries dying out and new ones being born. The book itself is a legacy of the print era. And there's a certain irony at the heart of the controversy: how to price a conceptual entity, an eBook, that may not even exist in the future, being replaced by multimedia texts and apps and web pages. Things change.
Of course, being a legacy of the earlier era myself, I hope the publishers survive and thrive. They've long acted as guarantors of accuracy and quality. They've played a major role in introducing great ideas and great works of literature to the reading public. But I also recognize that their era may be fading, and a new era is being born.