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| Antitrusting Apple: the plot with publishers to hike ebook prices | Antitrusting Apple: the plot with publishers to hike ebook prices |
| (35 minutes later) | |
| It is hardly surprising that a federal judge found Apple guilty of conspiring to raise ebook prices. The evidence, based in large part on the company's own words, was overwhelming. Apple will surely appeal because it's in the company's nature to give no quarter in any battle it sees as core to a strategic goal – and its control over the iOS ecosystem, including the "stores" it operates there, is certainly a crown jewel of its business model. | It is hardly surprising that a federal judge found Apple guilty of conspiring to raise ebook prices. The evidence, based in large part on the company's own words, was overwhelming. Apple will surely appeal because it's in the company's nature to give no quarter in any battle it sees as core to a strategic goal – and its control over the iOS ecosystem, including the "stores" it operates there, is certainly a crown jewel of its business model. |
| The ruling (pdf), by District Judge Denise Cote in New York, was tough and clear. Her summary of the issues underscored several key points, among them the reality that the publishers were as conniving as Apple, but that they perceived Apple's market power too strong to challenge. So, they decided to work together against their common enemies: Amazon and genuine competition. | The ruling (pdf), by District Judge Denise Cote in New York, was tough and clear. Her summary of the issues underscored several key points, among them the reality that the publishers were as conniving as Apple, but that they perceived Apple's market power too strong to challenge. So, they decided to work together against their common enemies: Amazon and genuine competition. |
| Apple and the publisher defendants shared one overarching interest – that there be no price competition at the retail level. Apple did not want to compete with Amazon (or any other ebook retailer) on price; and the publisher defendants wanted to end Amazon's $9.99 pricing and increase significantly the prevailing price point for ebooks. With a full appreciation of each other's interests, Apple and the publisher defendants agreed to work together to eliminate retail price competition in the ebook market and raise the price of ebooks above $9.99. | Apple and the publisher defendants shared one overarching interest – that there be no price competition at the retail level. Apple did not want to compete with Amazon (or any other ebook retailer) on price; and the publisher defendants wanted to end Amazon's $9.99 pricing and increase significantly the prevailing price point for ebooks. With a full appreciation of each other's interests, Apple and the publisher defendants agreed to work together to eliminate retail price competition in the ebook market and raise the price of ebooks above $9.99. |
| The way they eliminated competition – for a time – was to insist on changing the terms of bookselling online. Before, publishers had sold digital rights, mostly to Amazon, as it was by far the biggest online retailer, based on the wholesale model that physical bookstores have used: Amazon (et al) would pay a percentage of the retail price, and then was free to set its own price for the retail sale. Amazon (disclosure: I own a small number of shares) sold many new bestsellers below cost, typically at $10 (OK, $9.99), as "loss leaders" and set off a panic among publishers, which worried that: a) the public was being conditioned to believe the price of all new books should be $10; and b) Amazon was going to monopolize the ebook market. | The way they eliminated competition – for a time – was to insist on changing the terms of bookselling online. Before, publishers had sold digital rights, mostly to Amazon, as it was by far the biggest online retailer, based on the wholesale model that physical bookstores have used: Amazon (et al) would pay a percentage of the retail price, and then was free to set its own price for the retail sale. Amazon (disclosure: I own a small number of shares) sold many new bestsellers below cost, typically at $10 (OK, $9.99), as "loss leaders" and set off a panic among publishers, which worried that: a) the public was being conditioned to believe the price of all new books should be $10; and b) Amazon was going to monopolize the ebook market. |
| The publishers wanted to sell under an "agency" method, where they'd set the retail price and the store would get a percentage. They agreed with Apple to do things this way – and to a contract that forbade them from working with retailers that sold books at lower prices. Hence, Amazon had to go along or not get its books in the first place. | The publishers wanted to sell under an "agency" method, where they'd set the retail price and the store would get a percentage. They agreed with Apple to do things this way – and to a contract that forbade them from working with retailers that sold books at lower prices. Hence, Amazon had to go along or not get its books in the first place. |
| The plan worked. Prices soared for ebooks from the major publishers, up 30 to 50% for many of the most popular books. | |
| So, publishers' collusion with Apple made business sense, even if it violated US antitrust law. The publishers showed more appreciation for legal reality after the Justice Department brought charges – and they settled. Apple, true to form, insisted it had done nothing untoward. | So, publishers' collusion with Apple made business sense, even if it violated US antitrust law. The publishers showed more appreciation for legal reality after the Justice Department brought charges – and they settled. Apple, true to form, insisted it had done nothing untoward. |
| Cote's ruling, quoting extensively from testimony and Apple's internal emails, shows the untruth of this. Consider what happened with Random House, which held out against Apple's entreaties until finally submitting to the company's terms. Why? Here's Judge Cote: | Cote's ruling, quoting extensively from testimony and Apple's internal emails, shows the untruth of this. Consider what happened with Random House, which held out against Apple's entreaties until finally submitting to the company's terms. Why? Here's Judge Cote: |
| In an email to Jobs, [Apple executive Eddy] Cue attributed Random House's capitulation in part to "the fact that I prevented an app from Random House from going live in the app store this week. | In an email to Jobs, [Apple executive Eddy] Cue attributed Random House's capitulation in part to "the fact that I prevented an app from Random House from going live in the app store this week. |
| There are lessons for the parties in this case. First, if the publishers had even an ounce of common sense, they would recognize that their paranoia about ebook piracy has given vast power to the online sellers. Apple and Amazon use draconian DRM (digital rights management) to restrict how buyers can use what they've bought – namely, by restricting which devices will display them. If the publishers ditched the DRM and sold directly to the public, they could charge a fair (that is, lower) price and make more money. | There are lessons for the parties in this case. First, if the publishers had even an ounce of common sense, they would recognize that their paranoia about ebook piracy has given vast power to the online sellers. Apple and Amazon use draconian DRM (digital rights management) to restrict how buyers can use what they've bought – namely, by restricting which devices will display them. If the publishers ditched the DRM and sold directly to the public, they could charge a fair (that is, lower) price and make more money. |
| But I won't hold my breath in expectation that such a hidebound industry will wake up on this. | But I won't hold my breath in expectation that such a hidebound industry will wake up on this. |
| Second, Apple might consider backing off its "my way or the highway" view of the world. This is even less likely, but worth a mention anyway. | Second, Apple might consider backing off its "my way or the highway" view of the world. This is even less likely, but worth a mention anyway. |
| Interestingly, prices for ebooks from major publishers have stayed high. Even after the publishers settled and restored the wholesale model in some cases, Amazon has not returned to its formerly aggressive pricing, at least not very often. | Interestingly, prices for ebooks from major publishers have stayed high. Even after the publishers settled and restored the wholesale model in some cases, Amazon has not returned to its formerly aggressive pricing, at least not very often. |
| So, did the publishers get what they wanted in the end? | So, did the publishers get what they wanted in the end? |
| For the moment, yes. But their victory has come at a cost. I was a voracious customer of $10 ebooks, as I confessed in 2011. But the publishers' greed has cost them the loyalty of this customer, for one, because it has reminded me that I don't really need to have the latest books the second they're published. | For the moment, yes. But their victory has come at a cost. I was a voracious customer of $10 ebooks, as I confessed in 2011. But the publishers' greed has cost them the loyalty of this customer, for one, because it has reminded me that I don't really need to have the latest books the second they're published. |
| The happiest result has been to remind me of an irreplaceable community institution: I've become a regular patron again of my local public library. | The happiest result has been to remind me of an irreplaceable community institution: I've become a regular patron again of my local public library. |
| • Editor's note: this article was amended to qualify the price rise of ebooks as applying for many popular books, at 5pm (ET) on 10 July |