Government Seeks to Throw The Book at Apple and Major Publishers - Fordham Intellectual Property, Media & Entertainment Law Journal
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Government Seeks to Throw The Book at Apple and Major Publishers

Government Seeks to Throw The Book at Apple and Major Publishers

Ipad or Kindle?  This is a question many avid readers debate as they enter the modern world of reading.  My memory of reading as a kid was sensory and tangible: flipping dog-eared, yellowing pages at the library; savoring the smell of a new hardcover book as I attempted to earn my free “Book It” pizza.  The advent of tablets and e-readers has created a market of gadgets to read more.

Today, how we read transforming.  E-readers and e-books are a fast booming industry with the assurance of making reading more convenient, and, more importantly, cheaper.  But it seems like the promise of affordable prices has not been kept.  While sales of iPads, Kindles and other e-readers have risen, so have prices of e-books for those devices.   Also, as the marketplace for e-books has evolved so have the conflicts between competitors, specifically accusations of collusion.

The results of the U.S Justice Department’s recent civil suit against Apple and five of the nations biggest publishers may settle these tensions, if it makes a decisive verdict regarding charges of colluding to raise e-book prices.  The justice department alleges that the CEOs of publishing companies had “secret meetings” in Manhattan’s high life restaurants to plot to work with Apple to raise the “wretched $9.99” price point set up by e-book pioneer Amazon.com.  While Hachette, HarperCollins, and Simon & Schuster have decided to settle their cases, Apple, Macmillian, and Pearson PLC’ Penguin Group have decided to charge on to trial.

Are e-books really overpriced?  The government claims e-books went up an average of $2 to $3 in a three-day period in 2010.  Is this part of Apple’s plan to join forces with publishers to sabotage Amazon?  The answer requires a bit of history in the evolution of e-books.  When books moved from hard book cover to an online medium the natural perception among consumers was that prices should be much cheaper considering there is no cost for warehousing, shipping, printing and binding e-books.  CNET writer Nathan Bransford, however, astutely points out an overlooked fact in the debate, “Paper doesn’t cost very much.”  E-books actually do not save publishers from their biggest expenses, namely compensating authors, designing and marketing the book, and other necessary overhead.

In fact, publishers are not saving much money.  Consumers, however, were paying less than half for books on average ($24.99 vs. $9.99).  When e-books first arrived on the market publishers sold the books on a “wholesale” model.  Publishers would sell for half of a “list price” they sell to vendors such as Amazon.  In exchange, vendors were allowed to sell to the market at their own price.  Amazon’s strategy at the time was to pay $12.50 per copy and then sell the e-book on the market for a loss at a discounted rate of $9.99.  This loss leader pricing strategy was instituted in hopes of selling more kindles and to establish a strong foothold early in the e-book marketplace.  Publishers, however, were troubled by the discounted pricing and preferred for more competition to increase prices and break Amazon’s tremendous leverage over the market.  Bransford also points out publishers became concerned that Amazon was devaluing consumers notion of what a book really should cost.  

In 2010 Steve Jobs and Apple came to the playing field with the iPad.  He sought to break down the barriers of entry into the marketplace by changing the rules of the game.  Apple approached book publishers with an “agency model.”  Under that model the publishers set the final consumer price and retailer and vendors get a commission for the sale, around 70%.  They even went as for as to impose the model on Amazon as well.  Even by raising the consumer price $12.99 publishers, however, were actually making less per book than they would by charging 50% of their list price under the “wholesale model.”  Nonetheless, publishers were willing to shoulder this loss in order to allow competitors to enter the e-book marketplace, thereby solving the “Amazon $9.99 problem.”  This competition has allowed prices on e-books to rise, in some cases even higher than a print version.  Coincidently Mike Shatzkin, seems to implicate that the market for e-books has slowed for major publishers while the market for print books has stabilized.  While Shatzkin has not identified a cause, Bransford implies it could be due to agency pricing.  This would be a big win for publishers since they make a bigger margin on print books.

The question is, was this a natural evolution of the e-books marketplace or did Apple and the major book publishers orchestrate this master plot?  Steve Jobs explained to writer Walter Isaacson in his biography,  “[w]e told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30 percent.  And yes, the customer pays a little more, but that’s what you want anyway.’”  The government alleges that the key to forging this plan work was constant communication and pacts of solidarity between the major publishing companies to make assurances to destroy Amazon’s $9.99 pricing problem together.  Only one publisher attempting to force the agency model would risk losing massive sales if Amazon dropped them.  The government alleges, “publishing executives knew what they were doing was wrong and took steps to conceal their communications with one another, including instructions to ‘double delete’ email.” Led by Macmillion CEO John Sargent the publishers forced the agency model together on Amazon or threated to take away their titles.

Hachette, HarperCollins, and Simon & Schuster’s settlement to the suit seems like an initial victory for consumers and Amazon.  The settlement required the publishers to agree that “to stop “placing constraints” on retailers’ ability to offer discounts to consumers for two years; to stop sharing “competitively sensitive information” with competitors for five years; and to implement an “antitrust compliance program.”  This signals a temporary return to the $9.99 discounted pricing model.  Publishers argue the agency model is crucial to protecting the publishing industry by preserving competition.  The results of the lawsuits, however, could present even greater ramifications.  Apple, Amazon, and the publishers will eventually have to play nice and find a model that works.  Most importantly, however, they must insure that consumers are not victims of pricing controversy and reading remains an affordable hobby.

Malhar Naik

Malhar Naik is a 2L at Fordham Law. Born and raised in New Jersey, Malhar graduated from Boston College in 2008. He enjoys competitive sports, running, and movies.