eBooks, Apple, Amazon and pricing

Given the recent US judgement against Apple in US courts for eBook price fixing, I figured my views would make a decent topic for another post here.

Firstly, some history.

When eBooks first started becoming mainstream (before iBooks was launched), eBooks were sold using the traditional “wholesale” pricing model. This model is the same as the one used to sell physical books everywhere. The publisher has a wholesale price they sell to retailers at, who are then free to determine their own pricing on their shelves – creating the situation where one retailer may have a book at $12.99, whilst another might have it at $11.99, with the wholesale cost being less than this cost (bookstores have storage, customer service etc overheads). It’s common for retailers to occasionally sell books as “loss leaders” – such things happen mostly with popular new releases – where the retailer chooses to sell the book below wholesale price (i.e. less than they paid) to encourage more people to visit the shop and spend more (due to feeling that they got a “good deal”).

The benefit of this pricing model is obvious – in theory market forces will lower the prices for the consumer by ensuring that there is competition between retailers, and new retailers can enter the ring to try and compete.

When Amazon first launched the Kindle the eBooks were sold with the wholesale model. However, Amazon sold every eBook as a “loss leader” in an attempt to sell more Kindles. They sold for $9.99, whilst being bought by Amazon for $13. Due to a combination of factors including Amazons (at the time) huge eBook market share – over 90% according to the WSJ; Publishers insistence on DRM causing consumer Lock-In; The possibility of Amazons pricing becoming ‘right’ (and thus a ‘loss for publishers); and the general tension between publishers and Amazon, Publishers wanted to raise eBook prices quickly. But with no major competitor their negotiation position was poor – at the time if they didn’t put eBooks on Amazon, their eBook sales would be decimated.

Enter Apple. Apple based its iBooks pricing on the model used in the iTunes Store – so called ‘Agency Pricing’. In this pricing model the publisher decides the retail price, and it has to be sold for that price – the retailer simply gets a percentage cut of that price (in Apples case, 30%). Suddenly the publishers could work with Apple to break Amazons stranglehold on the eBook market. Apple included a clause in the contract for the iBook Store that stated that eBooks must not be sold less elsewhere – i.e. if it was sold cheaper elsewhere then that price had to be used in the iBook Store as well. With these contracts in place the Publishers suddenly had a much stronger position to negotiate with Amazon.

For a short while Amazon held out – causing the infamous situation of an entire publishers catalogues becoming unavailable overnight. Eventually Amazon gave way and allowed publishers to use the Agency Pricing model on Kindle eBooks. Ebooks on Amazon now cost more than the old “wholesale” price due to collaboration between the major publishers and Apple. The seeds for the Price Fixing charge had been sown.

A couple of notes before moving in to my own opinions on the case. Some publishers are now experimenting with DRM-Free eBooks. The proliferation of alternative devices has meant that ePub is now the dominant standard for eBook formats – in all cases except Kindle which still uses the MobiPocket standard. Publishers also claim that physical production and transportation of a book is only a tiny fraction of a books cost.

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Right, my own thoughts on this. It’s clear that Apple and the Publishers did break the law. They collaborated as a cartel to raise consumer prices. One of the few kinds of behaviour that is ‘per-se illegal’ (illegal in and of itself) is horizontal price fixing, that is fixing the price across an entire market. There is no defence in law.

That said, morally I’m not sure it’s wrong. The market back when the Agency model was introduced was heavily skewed in Amazons favour (and the publishers position was incredibly weak). They were a monopoly, and charging all ebooks as loss leaders meant it would be very hard for another store to break into the market, unless they could offer something above Amazons offering (which being cloudy is very seamless). If Apple hadn’t managed to break Amazons pricing structure its possible that their own eBook store wouldn’t have been anywhere nearly as successful – especially given there is a Kindle app for iOS. Yes consumers ended up paying more for eBooks – but for the convenience of having them anywhere and having hundreds in my pocket I’d be willing to pay a premium. That premium was, in my opinion, needed as a means of breaking up the market. I’d also argue that Amazon was abusing its dominant position by selling as a blanket loss leader.

It should be said however, that now that Apple has been forbidden from using the Agency model, I have no idea what is going to happen to eBook prices now. The public has become used to the near-retail prices of eBooks, I doubt that a switch to wholesale would see any decrease in price from Apple.

Finally as a disclaimer: I don’t like Amazon as a bookstore. I say this whilst having Amazon Prime, and having ordered books from them recently, and many over the years. Their attempts to become fully integrated vertically by becoming a direct publisher, their questionable practises of remotely wiping books from Kindles, and their sheer advantage of economies of scale disturbs me. When possible I buy from brick and mortar stores, but I must hold my hands up and say that I do still order from Amazon – particularly if I don’t have plans to go to the nearest bookshop within 24 hours. I’m very weak willed when it comes to book purchasing. It’s entirely plausible that this has tainted my own opinions, although I hope they still make logical sense without them.

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