Mike Kueber's Blog

March 9, 2012

Apple and Amazon go at it

Filed under: Business,Law/justice — Mike Kueber @ 7:49 pm
Tags: , , , , ,

I just finished reading the Steve Jobs biography by Walter Isaacson, and one of its chapters concerned Apples’ move into e-book publishing.  As with much of his career success, Jobs was able to move Apple into e-book publishing by refusing to accept the prevailing orthodoxy, which at the time was the wholesale pricing – i.e., the publishers sold e-books for an agreed price and then the booksellers would sell the e-books for whatever price they wanted. 

The problem with wholesale pricing was that the world’s largest bookseller, Amazon, was selling virtually all e-books at $9.99 regardless of what its wholesale cost was, even if the e-books were sold for a loss.  Amazon’s rationale for this pricing was to get Americans hooked on e-books and increase the sales of Amazon’s Kindle. 

That makes sense, but the publishers were concerned that Amazon was becoming too powerful.  Thus, they were receptive to Jobs’ entreaties two years ago to develop an alternate marketing mechanism through Apple’s iBookstore.  Together, they developed and adopted a method called agency pricing in which a publisher set the retail price and the iBookstore sold the e-books at that price, keeping 30% for itself. 

That makes sense, too, but the federal government has some questions.  According to an article in the NT Times, the Justice Department is preparing to bring collusion charges against Apple and the publishers.  The article goes on to say:

  • There is general agreement among them, however, that it is vitally important to publishers that the agency model is kept in place.  If it were to disappear, then it would be a boon to Amazon, said Mike Shatzkin, chief executive of the Idea Logical Company, which advises book publishers on digital change, adding that it would be “essentially bad news for just about everybody else in the book business.  Ultimately, that would mean that the price of books is going to come down and the amount of money that authors can earn is going to come down.  This is ultimately going to deflate the book business and consolidate power in the hands of a single retailer.

The key statement above is that agency pricing was adopted to drive up the price of books, and although agency pricing may be a reasonable concept by standing alone, it is not something that five major publishers can collude to adopt. 

Sounds like the government has a good case.  




1 Comment »

  1. I think that Amazon was actually doing the consumer a favor. It was trying to establish a broad market for eBooks, first by offering the Kindle as a loss leader (they initially lost money on each unit), but by also establishing a pricing regime that was broadly attractive to readers.

    A eBook is less than a paper book. It cannot be resold or purchased used. It cannot be lent (except on highly restricted and changable terms dictated by the publisher). It frees publishers from the costs of typesetting, printing, distribution, and accepting returns from bookstores. There’s no wastage, or spoilage, or warehousing costs. And the consumer must accept additional risks–that the vendor will not go out of business, that the format they bought the book in will not become technologically obsolete.

    And yet publishers want to charge more for eBooks. Go browse Apple or Barnes and Noble, and you’ll see that publishers are expected to get more for eBook editions of a title, generally, than they do for the trade paperback. Rather than seeing eBooks as an avenue to help expand the marketplace for books, they see only an opportunity to raise their margin. Since the people who buy Kindles now are higher income than average, that may work in the short term. But it will limit the widespread growth and acceptance of electronic publishing.

    Amazon was trying to set a benchmark price of $9.99 (for non-technical non-textbook eBooks). And, because they were really the first mass marketer of electronic eBooks, they had a good shot at setting initial market expectations. That price seems just about right for the ultimate flourishing of the format. I just wonder if, 10 or 15 years from now, the publishers will wish they hadn’t shot themselves in the foot today.

    Comment by Snarky McSnarksnark — March 10, 2012 @ 4:14 pm | Reply

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