Apple Verdict Marks Digital Power Shift in Book Publishing

E-book prices have fallen sharply since the major publishers settled the case.

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Robert Galbraith / REUTERS

Apple suffered a major legal defeat this week when a federal judge ruled that the tech giant violated U.S. antitrust law by orchestrating a conspiracy with five big publishers to raise electronic book prices. Consumers won’t feel much immediate impact from the decision, however, because e-book prices have fallen sharply since the publishers agreed to settle the charges before Apple’s trial.

The most interesting aspect of the case is the future of the publishing industry itself, says Mark Lemley, a Stanford law school professor and antitrust expert. The settlement limits publishers’ ability to influence the retail price of e-books, underscoring their waning power as the industry hurtles toward a future in which most books are bought and read in digital form.

In her 160-page decision, U.S. District Judge Denise Cote found that Apple hatched a scheme with the five publishers — Macmillan, Penguin, Hachette, HarperCollins, and Simon & Schuster — to raise e-book prices by pushing the industry from the traditional “wholesale model,” in which retailers set the price, to an “agency model,” in which the publishers set the price. The conspiracy increased the cost of e-books for consumers, Judge Cote found. Apple was found guilty of violating the Sherman Antitrust Act.

“This was the publishers’ last-ditch effort to prop up their print business model,” said Lemley. “Over the long-term, it’s going to be very hard for them to maintain their traditional role as intermediaries, in which they take the lion’s share of industry profits.” Judge Cote determined that the goal of the conspiracy was to undermine Amazon, which had spooked the publishers by selling e-books for $9.99 — below wholesale cost — in order to drive sales of its Kindle e-reader.

(MOREApple Found Guilty in E-Book Price Fixing Conspiracy Trial)

As Amazon gobbled up e-book market share after introducing the Kindle in 2007, the publishers feared that $9.99 would become an “entrenched” consumer expectation for e-books, and ultimately drag down the price of hard-cover books. In the traditional wholesale model, the major publishers were able to justify list prices of $25 or more for new print best-sellers because of the fixed costs associated with editing, manufacturing, and shipping books, as well as the system that compensated authors.

Brick-and-mortar retail giants like Barnes & Noble and now-defunct Borders were happy to pay the publishers $15 per best-seller under the wholesale model, because they knew they could mark up the price, perhaps not as high as the $25 list price, but high enough to make a profit and still make consumers feel like they were getting a discount. For decades this system worked well for the publishers, the retailers, and consumers.

Amazon radically disrupted that model, because instead of selling e-books above the wholesale price, the company sold e-books at a loss, in order to drive Kindle sales. As e-books exploded in popularity after the Kindle was introduced, the underlying cost structure of the publishing business began to crumble, because e-books cost much less to publish, store, and distribute than print books. By 2010, Amazon e-book sales had overtaken hard-cover sales.

As a result of Amazon’s e-book discounting, the publishers feared that their profit margins would erode, and they panicked. When Apple approached the publishers with a plan to raise e-book prices, the industry giants seized the opportunity to protect their pricing power. That’s where the price-fixing conspiracy occurred.

(MOREHow Apple’s Steve Jobs and Book Publishers Cost Consumers Millions)

In the long-term, however, the publishers were fighting a losing battle, because e-books simply cost much less to produce and distribute than print books. Before the Apple trial even started, the publishers struck a settlement deal with the government worth tens of millions of dollars to be paid out to consumers who had been over-charged as a result of the conspiracy.

The agreement required the publishers to end their agency agreements with Apple, which allowed retailers like Amazon to once again set the price for e-books. Almost immediately after the settlement, e-book prices began to decline.

“The settlement had the effect of breaking up the conspiracy and introducing price competition back into the market,” said Lemley. Over the last year, the average price for best-selling e-books has declined by nearly 50%, according to Jeremy Greenfield, editorial director at Digital Book World, a leading trade publication covering the e-book and digital publishing business.

Apple, of course, is in a much stronger position than the publishers, not least of all because the company generates more profit every year than the entire value of the book publishing industry itself. This helps explain why Apple held out after the publishers had already settled. Unlike the publishers, Apple’s litigation and potential settlement costs were minuscule relative to its size, so the tech giant had almost nothing to lose financially by seeking to clear its name.

(MOREApple Says It’s Not an E-Book Crook as Price Fixing Trial Begins)

More importantly, Apple had sentimental and even prideful reasons not to settle with the government. Senior Apple executive Eddy Cue, the tech giant’s chief negotiator with the publishers, was keenly aware that the company’s late co-founder and visionary leader Steve Jobs was gravely ill in the run-up to the January 2010 iPad launch. Cue wanted to secure one final media coup for his mentor.

If Apple had settled, it could have been viewed as a tacit acknowledgement that Jobs might have broken the law, Lemley said. After all, some of the most damning evidence introduced during the trial included Jobs’s own statements, such as his now-infamous quote to his biographer 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.'”

Apple continues to maintain that it did nothing wrong, and has pledged to appeal the decision. “Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations,” Apple spokesman Tom Neumayr said Wednesday. In addition to its appeal, which will take place in the U.S. Court of Appeals for the Second Circuit, Apple faces a new trial to determine damages based on how much money the tech giant made as a result of the conspiracy.

20 comments
wilsonsmith
wilsonsmith

I would like to mention that apple is brand, to which I am a huge fan. I hardly miss any blog that relates to the apple and this concept of combining the book publish and apple is simply relevatory.

Book printing

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wilsonsmith
wilsonsmith

Thanks a lot for this beauty Enjoying article with me. I am appreciating it very much! Looking Forward to Another Great article. Good luck to the Author! All the best.

pjdxxxwa
pjdxxxwa

READERS:    Before you purchase an ePublished book consider a couple things:

1: Is it also available in print?
2: Do you know what the ePublisher's terms are with the author?
3. Does the book have reviews?

WHY:     Many ePublishers have total control over what they do with the an author's book.
The AUTHOR, not the middle man, did the work. Give them decent payment.
They can alter the price without the author's consent, and allow a person to "loan"
the book to another reader - thereby cheating the author out of pay. It is is also in
print, the author could have a better deal with the publisher so consider buying the
print version. This will also keep book stores from going bankrupt. Keep jobs in the
US.
Reviews: Look for books with several good "normal" people reviews. Chances are you can
tell by real people reviews if the book is in your style.

Fastgirl
Fastgirl

Why shouldn't any retailer be allowed to sell things for what they want? If they want to sell items for less than they paid for them that is their business.

ChrisMeadows
ChrisMeadows

"Amazon radically disrupted that model, because instead of selling e-books above the wholesale price, the company sold e-books at a loss, in order to drive Kindle sales."

This is a vast oversimplification. Amazon sold a very very few e-books at $9.99, which was either close to break-even or a small loss. People get the idea that Amazon was selling all its e-books that way from sloppy writing in articles like yours, which in turn feeds the angry torches-and-pitchforks mentality that Amazon is engaged in predatory pricing.

In fact, it was just using those books as loss leaders, the same as every big box store does in its ad circulars every week but especially at big sale times like Black Friday: make a few things ludicrously cheap, then make a profit on everything else that isn't. Amazon would break even or lose a couple of bucks on the latest NYT bestseller by King or whoever, then make a nice chunk of change when you went and bought Carrie or Firestarter or whatever for something to read next.

But don't just take my word for it. The Department of Justice investigated Amazon's pricing as part of the run-up to charging Apple, but it found Amazon's e-book division was actually "consistently profitable." It's right there on page 9 of the original complaint.

JWolfe
JWolfe

Publishers haven't lost anything and nothing is really shifting, sorry. What is going on however is that a) Apple wanted digital content to sell devices. It could care less about books or book people, b) Amazon was first with its online and has been discounting right along, B&N tried to take them on rather than stick to core business and lost, c) e-books are grossly overpriced and publishers are to blame for their own misfortunes by becoming risk averse and following the Hollywood blockbuster model. Book pricing has always worked in reverse of other retail pricing. Instead of a "mark up" they offer a "discount" off the cover price. Margins for retailers are paper thin, always have been. The view from 30,000 feet up? Digital publishing is a partially baked pie that everyone is trying to cut up and eat before it's fully cooked. Sadly, it's not the first time this has happened but people in the business now don't want to hear about history. So repeat it. 

RedRackham
RedRackham

@jmey267 Under the agent model, one company *was* actually setting all the pricing. The publisher. Retailers were forced into the agency model, and had no power to set their own price. Under the wholesale model, every retailer can sell at any price they want, because the publishers still get the full amount from the retailers. Amazon has never set "all the pricing". They set their own pricing. It's free market competition, and it benefits consumers by driving prices down to a more reasonable level.

RedRackham
RedRackham

@bpicke Publishers were still getting every penny of the wholesale price *they* set from Amazon. Amazon did not drive them into the ground, they were simply nervous that they would become irrelevant as less people buy hard copies of books.

@stevesup You misunderstand the situation. Publishers charge Amazon $10-$15 per e-book under the wholesale model. Amazon selling at $9.99 was not subsidizing the cost of Kindle hardware.

stevesup
stevesup

Maybe this is the outcome Apple needed. Apple can now freely and really fix prices. Just like Amazon does.

So Apple sets prices at a buck a book. It uses a bit of its bank to cover the dif. Result: Amazon takes it in the neck cus' it needs ten bucks a book to subsidize the cost of its hardware.

The prices will fall anyway: All digital media—apps, games, shows, tunes—will settle at a buck a title. Let's get on with it.

bpicke
bpicke

Government sided with the monopoly here, just like in the bogus DOJ case against Microsoft, where they were found 'guilty' with absolutely no punishment whatsoever.    

Apple was playing by the rules.   Amazon was undercutting the market, just like Standard Oil did.   How is this not illegal--they drove the booksellers (and publishers) into the ground.   Apple was the publisher's only option!   Apple offered a better product than Kindle.  

Apple has more experience dealing with and overcoming monopolies than any other company in history.    And Amazon is no longer discounting anyone, after having been granted this monopoly by the clueless judicial system and government.

Here's an idea for the government.   Make Amazon pay taxes!   Or, are the campaign contributions just too good?

jmey267
jmey267

So it"s better we have one company (amazon) setting all the pricing? I dont see how this screwed consumers you have a choice where to buy from and amazon hasnt gone anywhere. Basically amazon sets its own pricing to kill all brick and mortar stores and competition till only they survive, how do they not get investigated for monopoly control? If book publishers and writers don't make enough eventually we all loose because there will be no reward to make content if you cant make a decent living.

PaulConnell
PaulConnell

"If Apple had settled, it could have been viewed as a tacit acknowledgement that Jobs might have broken the law"

And by not settling, we now know that Jobs indeed broke the law and Apple arrogantly refuses to acknowledge it.  It's this "screw the customers so long as we make even more money" mentality that has soured me to Apple as a company.  They're not the cool, think different, company they once were.  They're a steal from everyone else, screw everyone else, money grubbing corporation just like most all others.  They're not different anymore, and I refuse to reward them with my patronage any longer. 

pjdxxxwa
pjdxxxwa

@Fastgirl         Because ePublishing does NOT pay the author an upfront fee.  ePublishing is not retail.  Read my comment above your name and you see t he other reasons ePublishing is just a Capitalistic way to cheat another employee.

ChrisMeadows
ChrisMeadows

@bpicke Amazon was never undercutting the market, except on a few high-profile popular titles. It was always selling a few titles at or below wholesale as loss leaders, then making a profit selling the not-discounted backlist titles. The DoJ called Amazon's e-book division "consistently profitable" in its anti-trust complaint against Apple et al. In other words, it was selling more e-books at a profit than not.

AdamChew1
AdamChew1

@PaulConnell 

Some people know the price of everything but the value of none.

Btw Apple products hold their value better than all.

Only to the learned judge a loss leader price is treated as the low price and a norm but not an exception. If Amazon is just a bookshop they will not be selling their ebooks at $9.99. They can afford to do it because they sell more than books and this low price lure buyers to purchase other things from them where they make their money to cover these losses which all brick and mortar bookshops can't.

Fastgirl
Fastgirl

@pjdxxxwa @Fastgirl The authors need to make better deals with the publishers then. No matter what the retailer sells the book for the publisher gets their money. Interesting that you think the publishers shouldn't make any money. If the authors are unhapppy with publishers they can go elsewhere or self publish their ebooks. Some authors are already doing that.

random3877
random3877

@AdamChew1 @PaulConnell 

And you dont think that Apple earns enough money to absorb the losses? Apple has a MUCH greater profit margin built in to their prices than Amazon does... 

ChrisMeadows
ChrisMeadows

@AdamChew1 @PaulConnell You mean other things like more e-books? The DoJ called Amazon's e-book division "consistently profitable" in its anti-trust complaint against Apple et al, meaning that it had investigated and found Amazon sold more books at a profit than not.

AdamChew1
AdamChew1

More ebooks?

Amazon sell almost everything under the sun but I am not sure about coffins or funeral arrangement.