Explaining the Apple Ebook Price Fixing Suit
By now, you’ve undoubtedly heard the news that U.S. District Judge Denise Cote has ruled against Apple in the antitrust suit filed against the company by the U.S. Department of Justice and 33 states, saying that Apple conspired with five major publishers to raise the retail prices of ebooks. Apple has announced that it will appeal, denying any wrongdoing. Initially, the next trial was supposed to set damages, but I imagine that will be set aside until the appeal is decided, first at the 2nd Circuit Court of Appeals, and then the Supreme Court if necessary.
Cote’s 160-page opinion is remarkably well-written and is a fascinating read, at least if you’re interested in the chronology and minutiae of this case. I’ve read the entire thing, and have found it far more compelling than the soap opera media coverage of the trial, which took place from 3 June 2013 through 20 June 2013. It also clarifies numerous points and questions that came up during and since the trial. Rather than attempt to summarize the entire opinion, I’m going to focus on answering questions surrounding it, based on what Judge Cote wrote.
If you have other queries that I haven’t addressed here, please ask them in the comments, and I’ll do my best to answer them.
Where did this situation come from?
There are two key factors that led to this suit. Most important was Amazon’s pricing of bestselling ebooks at $9.99, even when that was below the price Amazon paid publishers for those titles. The publishers hated Amazon’s pricing structure because they feared it would change reader perceptions about what a book ought to cost, they were worried that cheap ebook sales would cut into expensive hardcover sales, and they were concerned that the rise of inexpensive ebooks would further damage the brick-and-mortar bookstores that served as alternatives to Amazon. In 2009, Amazon controlled 90 percent of the ebook market, due to the success of the Kindle and to its lowballing of prices, so the publishers were looking for solutions to what
was called “the Amazon problem.”
The second factor was the introduction of the iPad in January 2010, and Apple’s desire to open a bookstore for ebooks along the lines of the iTunes Store. In June 2009, the book industry as a whole was estimated to be $35 to $42 billion in size, with trade books — books distributed to the general public — comprising $12.5 billion of that. Although trade ebooks were only $100 million or so at that time, predictions put the ebook market size at $1 billion by 2010. So Apple wanted in, and went to the Big Six publishers to negotiate an agreement to resell their books.
The publishers saw working with Apple as a chance — perhaps the only chance, an idea emphasized by Apple in the negotiations — to fight back against Amazon, with the publishers desperate for any means to raise ebook prices and Apple standing as one of the few companies with enough clout to compete against Amazon, thanks to the iPad hardware and the hundreds of millions of iTunes accounts.
How do pricing models fit into the equation?
Traditionally, books are sold via “wholesale” pricing, which means that the publisher sets a cover price for a book, and bookstores pay a negotiated wholesale price, usually about 50 percent of the cover price. The bookstore then sets the price wherever it likes. For instance, a $30 hardcover might sell for $15 to bookstores, and the bookstores might sell it for $25, advertising the $5 discount from the cover price. (As an aside, many author royalty agreements pay a percentage of the wholesale price, so if an author gets a 10 percent royalty, she’ll earn $1.50 on that $30 book.)
Amazon was exploiting the wholesale model by paying more for some ebooks than it was selling them for, the classic loss-leader approach. For every bestselling ebook Amazon sold for $9.99, the company might have lost $3 to $4. So, although the publishers were incredibly unhappy with the $9.99 price, they were still making the same amount as they would have had Amazon sold the book for $19.99.
When Apple first approached the publishers, it was assuming that it would purchase ebooks on a wholesale model, as the company does for music, TV shows, and movies sold in the iTunes Store. However, several of the publishers suggested that Apple instead adopt an agency model for ebook distribution, and after initially rejecting the idea, Apple became enamored of it.
In an “agency” model, publishers set the prices that retailers will sell books for, and then take a set percentage of those prices. Apple is no stranger to the agency model, since that’s exactly what’s used for the App Store and Mac App Store, where developers set their prices and take 70 percent from each sale, leaving 30 percent for Apple.
So what’s the problem with the agency model?
Nothing, inherently. Retailers tend not to like the agency model because it gives publishers control over pricing, something retailers prefer to manage on their own. But it’s important to note that there is nothing illegal about the agency model.
Apple’s legal woes instead stem from how the agency model ended up being applied more broadly, thanks to two other contractual requirements: pricing tiers with caps and a most-favored-nation (MFN) clause.
The pricing tiers with caps were designed to prevent Apple from being embarrassed with unrealistically high prices — Apple’s executives knew the company would be ridiculed if iBookstore prices were far higher than Amazon’s. Although the details varied throughout the negotiations, Apple ultimately succeeded in setting two basic price tiers of $12.99 and $14.99, with the first for new release hardcovers priced between $25 and $27.50, and the second for new releases priced between $27.51 and $30. There were also $16.99 and $19.99 tiers for new releases priced higher than that, by $5 increments.
The second key factor was the MFN clause, which stated that if any ebook retailer charged less than Apple was charging in the iBookstore, Apple could match it, regardless of what price the publisher had set. So, if Amazon had some bestseller for $9.99, Apple could also sell it for $9.99, even if the book would otherwise have fallen into the $14.99 tier.
Before coming up with the MFN clause, Apple had initially suggested that the publishers all adopt the agency model for all ebook retailers across the board. Apple’s goal in doing this was to avoid price competition with Amazon, since under the agency model, the publishers would likely set the same price everywhere. Although the publishers weren’t upset by this (they were less happy with the price tiers and 30 percent fee), Apple switched to using the MFN clause because it solved the price competition problem more elegantly, encouraging rather than requiring the publishers to move other ebook retailers to the agency model.
Why was this? Without across-the-board agency pricing, the MFN clause meant that publishers would earn far less money any time another ebook retailer lowballed a price and Apple matched it. The only rational reaction for the publishers was to move all retailers to agency pricing, so the same book was for sale at the same price everywhere.
An open question is why Apple was so interested in eliminating price competition. There’s some indication that Apple didn’t want to compete with Amazon’s loss-leader strategy, but Apple’s cash hoard would certainly have enabled it to win a price war with Amazon, which doesn’t have nearly Apple’s resources.
How this is an antitrust violation?
Again, there is nothing inherently illegal with the agency model, price tiers, or an MFN clause. And there isn’t even anything wrong with combining them in negotiation with a single company. The problem comes when they’re combined in negotiation with six publishers that between them control nearly 50 percent of the book market, and over 90 percent of the New York Times bestsellers.
After five of the Big Six publishers signed Apple’s deal, they immediately went to Amazon to switch their wholesale pricing agreements to the agency model. Amazon was understandably upset about this, due to the loss of pricing control, but had no choice but to accept in the end. Subsequently, the publishers also negotiated an agency model with Google, which was similarly unhappy.
Once the agency model was in place, ebook prices from those publishers rose immediately. Roughly two weeks after the move, prices at Amazon rose 14.2 percent for new releases, 42.7 percent for New York Times bestsellers, and 18.6 percent overall. Publishers raised prices for their hardcovers as well, to bump them into higher price tiers, and increased prices for their backlist books, older titles that sell relatively few copies each, but which form the long tail of book sales.
Simultaneously, and in a win for the basic economic rule that higher prices result in lower sales, the number of sales dropped by 12 to 17 percent per publisher. In short, customers bought fewer books and paid more per book.
In Judge Cote’s opinion, the combination of Apple working with all the publishers simultaneously to fix ebook prices in such a way as to cause them to rise was where Apple violated the Sherman Antitrust Act. Whether the 2nd Circuit Court of Appeals upholds or strikes down Cote’s ruling remains to be seen.
Do publishers and authors earn more money because of these higher prices?
That’s one of the counterintuitive aspects of this situation. Yes, customers paid more — as noted, prices rose nearly 19 percent per book overall after the agency model went into effect.
But publishers earned less per book, with some predicting the overall drop in earnings would be as much as 17 percent. Here’s why. Consider a $29.99 hardcover that Apple would sell for $14.99. The publisher would earn 70 percent of that, or roughly $10.50. But under the wholesale model, the publisher might have sold that book to Amazon for as much as $15. Plus, because publishers were earning less, they also allowed fewer promotions that would have reduced prices for customers.
Since author royalties generally track with publisher earnings, most authors presumably earned less as well, though the specifics undoubtedly varied by contract.
Ironically, the agency model probably caused Amazon to earn more than it was earning under the wholesale model, since it could no longer sell ebooks as loss leaders. But just as the publishers didn’t agree to the agency model in order to earn more money, Amazon wasn’t utilizing the wholesale model because it wanted to earn less. In both cases, the issue was control over pricing.
Isn’t Amazon really the bad guy in this case?
In a word, yes — Amazon started the snowball rolling by selling ebooks as loss leaders. But you shouldn’t be irritated that the judge is somehow letting Amazon off the hook. Amazon isn’t on any hook here — this case is purely about whether Apple’s activities in negotiating agency model contracts with price tiers and MFN clauses with the major publishers is a violation of antitrust law.
That’s not to say that Amazon couldn’t be brought up on antitrust charges for predatory pricing, but that would be an entirely separate case. Indeed, Judge Cote even addresses this:
If Apple is suggesting that Amazon was engaging in illegal, monopolistic practices, and that Apple’s combination with the Publisher Defendants to deprive a monopolist of some of its market power is pro-competitive and healthy for our economy, it is wrong. This trial has not been the occasion to decide whether Amazon’s choice to sell NYT Bestsellers or other New Releases as loss leaders was an unfair trade practice or in any other way a violation of law. If it was, however, the remedy for illegal conduct is a complaint lodged with the proper law enforcement offices or a civil suit or both.
Nor should you interpret Amazon’s role in this case to mean that Apple was somehow riding in on a white horse to save the day for customers. First, the agreements that Apple negotiated with the publishers caused ebook prices to rise, which is one of the things antitrust law is aimed at preventing. Second, although it’s easy to say that the iBookstore increased competition in the ebook market by providing an alternative to Amazon, Apple’s agency model and MFN clause ensured that the publishers would charge the same price everywhere, entirely eliminating competition on price. That in turn would likely have made it significantly harder for any new companies to enter the ebook retailing market and compete with Apple and Amazon.
What happened with the publishers?
Initially the U.S. Department of Justice filed this lawsuit against Apple and five of the Big Six publishers (Random House didn’t agree to the initial iBookstore contracts). Over time, though, all five publishers settled with the Department of Justice, basically agreeing to terminate existing contracts with Apple and other ebook retailers, and renegotiate contracts that don’t prevent retailers from discounting ebook prices. However, retailers are not allowed to discount below the point of breaking even on a publisher’s works overall. In other words, Amazon can still discount titles below cost, but not to the extent of losing money on a particular publisher’s
titles in their entirety.
From a practical standpoint, ebook retailers have gained price control again, and ebook prices have vacillated, dropping initially, then rising slowly. Plus, Amazon has started raising prices for scholarly and small-press books.
Does this decision have any effect on the App Store or other Apple businesses?
For the moment, definitely not, since Apple is appealing the decision. A subsequent trial was to be scheduled to assess damages, but there was no hint in the opinion that Apple’s actions in this particular case are in any way related to its other businesses.
So the fact that the App Store and Mac App Store rely on the agency model, and that Apple has an MFN clause in one of its music agreements (which used a wholesale model) are simply unrelated for now.
Wasn’t the judge biased against Apple from the start?
Much was made of the fact that Judge Cote said before the trial: “I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that.”
What’s now clear is that this wasn’t the gaffe it was made out to be. In accordance with the court’s procedures for non-jury trials, much of the information was submitted during the pre-trial phase. Judge Cote had prepared a draft opinion based on those materials, and the parties to the case understood that the final decision would incorporate both the pre-trial information and the evidence that came out during the trial.
So, as the opinion states in footnote 2: “Consistent with these procedures, and with the expectation that the Court had already prepared a draft opinion, the parties jointly asked the Court for its preliminary views on the merits at the final pretrial conference held on May 23, 2013.” Hence Judge Cote’s statement.
What does Apple’s appeal hinge on?
After working through the chronology of the case, Judge Cote examines the six major arguments that Apple raised in its defense. In each case, she dismisses Apple’s position, of course, but Apple’s lawyers will undoubtedly be digging into her reasoning in their appeal.
Not being a lawyer, I’m uncomfortable analyzing the strength or weakness of each argument, or of Judge Cote’s counter-claims, but Philip Elmer-DeWitt, writing for CNN Money, runs through each argument, laying out which he believes are the strongest and weakest.
Regardless, it’s now a matter for the 2nd Circuit Court of Appeals to decide!
I admit to a healthy amount of naivete when it comes to the legal issues here, but it's odd to me that Apple should be held somehow accountable for seeking the best deal it could get on pricing through the MFN clause. Apple didn't require the publishers to do anything but guarantee that they wouldn’t sell their books cheaper to anyone else.
Yes, the result was that book prices went up, but if that’s the main argument on which the case against Apple is hanging, it's a pretty specious one. Amazon was using artificially low prices to try to foster a monopoly. It's the same thing Microsoft was doing with IE in the 1990s -- and the government went after them for it! So Apple proposes a remedy and now they're wrong, too?
1. It wasn't that Apple was asking for the MFN, it was that it was doing it with publishers who monopolized the market.
2. If Amazon was a problem, then Apple could file a complaint, as Judge Cote pointed out.
David's spot on. The issue with the MFN clause is that it resulted in the publishers requiring all other ebook retailers to switch to the agency model, and, coupled with the price caps, meant that there would be no price competition in the entire industry. Even though Apple was a newcomer to the market, that's still a no-no under antitrust law.
I am surprised that Amazon hasn't been sued for this predatory pricing yet, but I certainly don't know all the variables in play.
But they're no longer selling new books at a loss, are they? They're still selling other books at a loss. For example, each day they run a Kindle Daily Deal, and every month they offer a collection of books for cheap. So the complaint would be that they should *never* be allowed to sell at a loss?
I don't think the concern is with limited-time or single-title promotions, but with the across-the-board discounting of all new releases below cost.
Do you mean paper or non? Amazon has never per-se sold paper books at a loss. They pay 50% to 60% off the list price and have sold at discounts from 10% to 40% off list. Yes, there's overhead and their super saver and prime shipping. But they mostly sell close to or above cost, even on deep discounts.
For ebooks, it's trickier. Under the wholesale model, publishers price ebooks based on the current cheapest print edition available. If a book comes out in hardcover and no paperback is available, and it's $30 list, the publisher may charge $15 for the ebook version. Amazon charges $10 and eats $5 (plus its overhead).
When the publisher or a secondary licensed publisher releases a softcover or trade paperback edition for, say $12, the wholesale price for the ebook drops to $6, and Amazon continues to sell the book for $10 (typically) and pockets a 40% margin before expenses.
In the agency model, publishers set a price and give booksellers 30%. The advantage to consumers is that all bookstores can offer the book at a set price well below the print edition price (when it is in hardcover) without having to sell below cost, which ensures robust competition among ebook sellers.
The DoJ decision ensures that either only booksellers capable of sustaining prolonged losses can remain competitive. Amazon has distributed its below-cost expenses across many other lines of business. It has also, in fact, reduced its discounts on print books, so is recovering margins there for books that used to be more highly discounted until Amazon killed effective competition for those titles through bricks and mortar and other online stores.
I don't think Apple's loss can be viewed as an elimination of the agency model, so that's not off the table for publishers. I don't know what the Big Six contracts look like in the iBookstore now, but the rest of us publishers certainly still have to use the agency model.
The problem with the way Apple had set things up is that there could be no competition on ebook price at all, since the publishers retained price control within Apple's pricing tiers and under the MFN clause.
In the physical world, bookstores can compete on many things other than price, but on the Internet, and in an era of DRM and proprietary platforms, it's difficult to compete on anything but price when selling commodity digital items like books.
Realistically, Amazon basically strong-armed the entire market while no one was looking.
I don't get it. If everyone is forced to sell at the same price by the publisher, then by definition there's essentially no competition for an ebook, since price is all there is. Sure, you can compete on selection or availability or format, (but not lack of DRM, because the publishers require that) but it's going to be hard to beat Amazon at that game. It's not Amazon's fault that I can read a Kindle book on a iPad but I can't read a iBook on a Kindle (or a Mac, for that matter). You can actually read Kindle books on a Nook, as I found out when my daughter got a Nook.
But that's precisely the point. Given the ruling, they _aren't_ forced to sell the book at the same price. They're forced to _buy_ the book at the same price and can sell it at a loss in order to put competition out of business. (After which they will surely turn to publishers and demand lower prices so that they are no longer selling at a loss.)
Where you can read it is irrelevant.
As I see it, the argument boils down to this:
Amazon/DoJ: Any one contract can agree to MFN/Agency, but if all contracts move to that at the same time, that is collusion by a cartel.
Apple/Publishers: Amazon's pricing was an existential threat, so everyone naturally adopted what they saw as a good deal.
Because I distrust retailers driving down prices and removing profit from a sector to everyone other than themselves, I'm inclined to sympathize with Apple, but that doesn't mean everyone reaching the same agreement at the same time (even one they all thought was good) wasn't ipso facto against the law.
The DoJ investigated Amazon and concluded that there is no predatory pricing because the whole ebook division has been profitable since day 1
Page 9, point 30
And it sounds like a rare antitrust situation - I realize this isn't exactly the legal word from on high, but the Wikipedia page about predatory pricing says this:
"because the antitrust laws are ultimately intended to benefit consumers, and discounting results in at least short-term net benefit to consumers, the U.S. Supreme Court has set high hurdles to antitrust claims based on a predatory pricing theory."
How did the MFN clause encourage publishers to switch to the agency model?
If Amazon buys Harry Potter at wholesale and sells it for $2, then Apple sells it for $2 and the publisher only gets $1, they're still getting $15 from Amazon. I don't understand why this is problematic, let alone so pressing to be considered inevitable.
MFN meant if Amazon sold it at $9.95 to end users, Apple had the right to override the price that was keyed to the hardcover price and sell it at $9.95. The publishers knew this and forced Amazon to adopt agency pricing.
Basically, almost every isolated thing Apple did was legal in and of itself. There's nothing wrong with agency pricing. There's nothing wrong with MFN. And so on. That was one of the big elements of Apple's defense, in fact. "See? That was legal, and that was legal, and that was legal..."
It's just when you add the things up together, the gestalt becomes an illegal price-fixing collusive monopoly. The whole is greater than the sum of its parts, you could say.
"After five of the Big Six publishers signed Apple’s deal, they immediately went to Amazon to switch their wholesale pricing agreements to the agency model. Amazon was understandably upset about this, due to the loss of pricing control, but had no choice but to accept in the end.” Why did Amazon have no choice?
Because those publishers are the sole suppliers of 50% of the books sold, and 90% of the New York Times bestsellers - if Amazon had refused to accept the deal, it wouldn't have been able to sell a vast number of books.
Thanks Adam. Your article is a breath of fresh _clarity_ for someone (me) who didn't have the time to wade through all the guff associated with this matter. Your knowledge of the ebook market also gives me confidence in the validity of your analysis.
My 21yr association with TidBITS (yes, I was a little late to the party) continues to pay dividends. Keep up the great work.
You're very welcome - it took me all day to read, distill, and write the piece, so I'm happy people are appreciating it.
This is a very well-written and informative piece. Thank you, Adam, for your work.
"However, retailers are not allowed to discount below the point of breaking even — Amazon’s loss-leader approach is no longer kosher."
This is wrong. See pg. 14-15 of http://www.scribd.com/doc/88892887/Competitive-Impact-Statement
Retailers can loss lead as much as they like, as long as they don't lose more money than they make on a publisher's works overall.
Which is fine with Amazon, since that's what it was doing already. The $9.99 books were just a lure to entice people to buy backlist titles that WEREN'T discounted.
Thanks, I was oversimplifying that bit, and I've clarified now. One thing that I wasn't able to confirm easily is if that Competitive Impact Statement was in fact exactly what the publishers agreed to.
Written up some further background here:
It's worth noting Amazon's monopoly on e-books has never been "predatory" in the strictly legal sense. It would have had to be selling EVERYTHING at a loss for that to be the case. "Here, have any e-book for $1. We've got money to burn, heh heh heh."
Instead, Amazon has consistently priced NYT bestsellers low to make bank on the less-discounted backlist that customers buy after that. Classic loss-leader strategy.
I think it's telling that when Apple et al formed a monopoly, Amazon complained to the government and got relief (as Judge Cote said was the proper response in her opinion). But when Apple and the publishers thought Amazon was a monopoly, their response was to collude themselves instead.
"I think it is telling..."
The difference, which people are concerned about, is Apple's alleged "monopoly" is only in eBooks. Amazon's alleged monopoly is over all books, physical and digital, if not more.
In the question of predatory pricing: Of course Amazon isn't making an overall loss per publisher -- because Amazon is using the physical book market (where it drove physical stores out of business and thus reduced competition) to leverage its eBook business!
Amazon CAN make a loss on eBooks, because it ALREADY DESTROYED competition in physical books!
That's MS bundling IE for free so that it can distract from huge licensing fees for Windows and Office which ALL PC users are obliged to pay... then turning to Apple's smaller but more lucrative market and saying, "how can you profit on software and attract and pay developers so much? Oh, attractive business model and integrated hardware? -- Hey, Apple has a new monopoly on mobile dev and we don't, call the Feds!"
Good article, and thanks for the additional background.
The mistake on the publishers part may have been to overstate the importance of Amazon's $9.99 pricing. Had they attempted to deal with it in other ways, such as by changing their wholesale prices to make Amazon's approach unprofitable, or by just gritting their teeth and waiting it out (since loss-leader strategies are seldom long term plays), they might not have gotten themselves into this situation to begin with.
Then again, it's not clear to me that the publishers themselves have been hurt much by their settlements. They lost some level of autonomy in pricing models and have some antitrust oversight, but I don't see them all going down in flames.
So, while this trial was going on, Amazon adopted MFN clauses itself, the result being that Baen ebooks went up in price (from 6.99 to 8.99 or higher), and many books disappeared from their free library.
But that was okay, because it's Amazon, not Apple.
I'm not up on the details of this move, but MFN clauses aren't a problem from antitrust law, unless they're applied broadly across an industry (and meet various other criteria). But there's only one way to find out, and that's for someone to file a suit against Amazon!
From my perspective as a consumer, and someone with ties in the publishing industry:
1. Amazon pulling all MacMillan books because it MacMillan wouldn't sell ebooks at the price Amazon wanted: good. (No DoJ action on this!)
2. Publishers insisting on a retail price and profit to Amazon: Bad.
3. Apple saying "Sell at the price point you want, but we take 30%, and your portion has to be no higher than what you sell to anyone else": bad.
4. Amazon saying "Sell at the price point you want, but we take 30%, and your RETAIL PRICE has to be no higher than anywhere else": good.
Nice to know that justice is ... well, obviously not blind -- it's obviously pro-Amazon.
What's not clear to me is that why, if everyone is so upset with Amazon (and legitimately so, in many cases) no one has filed suit against them for these activities. Justice (in the legal sense) doesn't work in a vacuum - it can only be applied once something is in court.
Do we know for certain that a publisher or a retailer other than Apple had not already sought a remedy from the DoJ and was turned away or otherwise discouraged from filing?
I don't know. Did you check?
I don't know either, I'm afraid. And I'm not sure really where to start looking, without a source at the DoJ or Amazon.
Well, how about looking at Amazon's campaign contributions?
"However, retailers are not allowed to discount below the point of breaking even on a publisher’s works overall. "
But who is not allowing the retailers to discount below the break even point? The Feds with their settlement agreements with individual publishers? The Publisher's themselves with new contracts with the retailers?
As long as this restriction is in place their will never be price competition.
OK so if this week's best seller from Publisher X cost the retailer $10 wholesale they can sell it below cost for $5.
But collectively if they bought 50K in wholesale books from Publisher X this month, they cannot sell them in total for anything less than 50K.
That means if they sell this weeks best seller for $5 they have to make it up in net by selling other books over the wholesale price to overcome the individual book discount and make sure they take in at least 50K.
The net effect of this restriction is high prices.
And Amazon should be sued for Predatory monopoly pricing as well. Since they were in the monopoly position ("In 2009, Amazon controlled 90 percent of the ebook market") a different set of rules apply to them. Smaller retail startups could sell below cost. But Amazon should of never been allowed to.
I'm glad Apple lost. But I Justice Department should of simultaneously sued Amazon as well for predatory monopoly pricing. It would of deflected much criticism and it would of protected consumers too.
As it stands now higher ebook prices are hear to stay. And writers won't benefit.
Just like the music biz, content creators and the audience get screwed.
It's not clear to me how authors necessarily gain or lose based on these various situations. Since author income is based on publisher income, when agency pricing reduces publisher income, that hurts authors too. Especially when prices drop as well. But of course, as prices drop, sales go up, which is good for authors.
At the moment, my gut feeling is that the traditional wholesale model, with inexpensive prices (but not loss-leader prices driving down customer price perception), is probably best for authors.
These are clauses in the settlement agreements between the publishers and DoJ. And they do have time frames associated with them, so they're not in place forever.
If the Feds required the publisher to put these restrictions (Cant sell at a net loss) on their Retailers I think that is a big dumb mistake that hurts consumers. (High Prices)
I think that the Feds should of applied that restriction directly to Amazon. Again they are in the monopoly position and different rules apply if you are a monopoly. Their retail competition should feel free to sell below cost (always a risky business move that cant be sustained for long if you are not a monopoly).
That would of protected competition and consumers much better and appeared more logical and fair.
One little point Adam. Backlist books are any books that are no longer on the front list (new titles). Being a backlisted title does not mean that it is no longer selling well, quite the contrary for most non-tech publishers. For a publisher like Peachpit or O'reilly most their backlist becomes quickly obsolete, thus very few backlist sales. But say for a Cookbook, they can be reprinted for decades, without a new edition or revision, and still be selling a healthy amount. Think Julia Child's Mastering the Art of French Cooking.
It's certainly possible for a backlist book to sell well, but in most publishing fields that I'm aware of, most don't. My wife's aunt has been publishing cookbooks for 30+ years, and her stories about old titles correlate exactly with what we've seen in the tech world. And my understanding of the science fiction/fantasy world (this comes from before the current obsession with series so perhaps it's different now) is that books get about 3 months on the shelves and disappear almost entirely after that if they don't sell well.
I am also not a lawyer. But it seems that if Apple had been willing to negotiate an agency deal with each publisher separately, and if they each independently and at different times had told Amazon that they would renew their contracts withAmazon only on an agency model, that none of the parties would have been charged with illegal collusion on pricing.
If so, it's more than a bit ironic that the same outcome would have resulted. Plus, it's obvious, no publisher has the same titles as any of its competitors—each title is published by only one shop and other publishers' practices have no bearing on your price for 50 Shades of Gray.
My suspicion is that if the industry had ended up with one party essentially fixing prices, even without the collusion that reportedly happened in this case, the DoJ would have become interested at some point anyway. Perhaps not right away, and perhaps not at all if the prices to consumers had ended up lower than before (as has happened with software via the App Store and Mac App Store, compared to boxed software before). But there's no way to know for sure.
I agree entirely about how the publishers compete entirely outside the price sphere, and I think that might have been why they were so willing to work together and perhaps didn't even see what they were doing as wrong - they know that price isn't generally what causes someone to choose one book over another.
Price competition is only important at the retailer level, where the same books can end up at different prices from different retailers.
One thing really going unmentioned is just how much Judge Cote thought Apple VP Eddie Cue lied through his teeth. Time and again she calls his testimony "not credible." Much of her decision hinged on this factor. If Cue had been credible, the decision would have been different.
I didn't say much about that, indeed, but it's worth noting that this particular trial procedure had most of the materials for the case submitted and evaluated before the trial, so Cue would have had not only to be credible, but to overwhelm the evidence that the judge had already been presented with.
Just one correction, DoJ investigated Amazon and concluded that they are not doing predatory pricing so no, Amazon is not the bad boy
Just because a government agency makes a conclusion doesn't mean that its conclusion is accurate or withstands scrutiny.
Are you saying that the DoJ is wrong?
I'm saying one shouldn't be credulous.
But just for the facts we don't like or all?
Do you have any reason to no believe what the DoJ found?
Apple did nothing wrong. It merely negotiated contracts with six publishers.
Any publisher remains free to not negotiate with Apple.
Anyone remains free to enter the e-book market as either publisher or as retailer.
Oletros, you read the DoJ complaint (you note it earlier). The entirety of its argument that Amazon's ebook business is profitable is:
"From the time of its launch, Amazon's e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles."
There is no methodology nor footnotes as to how they determined this. That's an assertion that is based entirely on the way in which Amazon reports its earnings, which has been widely criticized by analysts who favor and don't favor Amazon for years. It provides too little information to make informed conclusions about wide swaths of its business.
Do you have any proof that that conclusion is wrong?
Your repeated question is interesting in intent. The DoJ assertion is an assertion. There's no evidence provided to ensure it's true. Thus, no reasonable person can accept it as true on the sole word of the DoJ because we don't know how they made the conclusion.
My problem isn't that I know it is false and can prove that; it is that no one can establish whether it is true or false and the DoJ asserts it as true.
Amazon doesn't provide enough information in its regular financial filings to evaluate it. The DoJ may have used SEC filings and Amazon's say-so. But we don't know how they came to this conclusion.
Thus, I don't accept the DoJ statement as having any meaning because it isn't provable as either true or false.
It may not have any meaning to you, but it has the same legal meaning that Judge Cote's decision does, and we are after all discussing legal truths at the moment, not epistemological ones. In both cases, the preliminary determination of the legal system has been that Apple is guilty and Amazon is not.
Incorrect. Just as an Attorney's general opinion is just that - an opinion. Legal determination is only obtained through the court system.
That's why I called it a "preliminary determination." And yes, it's not exactly equivalent to Judge Cote's decision, but if someone tries to complain to the DOJ about Amazon again, you don't think that the DoJ's initial conclusion is going to carry weight?
Great piece Adam. I have lots of questions, but they touch on the legal aspects so I will spare you of them.
1. The way you explain price caps/tiers is a little off. As far as I know they aren't the same thing, but you appear to use the concepts interchangeably. There are/were caps -- i.e., the publisher of a $30 print book can't price the ebook above price X -- and then the tiers are/were for foreign exchange and rounding issues; for example a USD 11.49 print book would be tier 10 and that tier dictates rounding up or down (and by how much) after currency exchange in the UK, CA, AU etc. Seemingly, the assumption behind your explanation is that caps match to tiers one-to-one, but in fact tiers are irrelevant to the case. In other words saying "pricing tiers with caps were designed to…" is misleading. "Pricing caps were.." is better.
2. You make the assumption that Google was unhappy to relinquish pricing control to the publishers. I am not sure that's true. Was that said at the trial?
3. And lastly, you say that pricing MFN made it "significantly harder for any new companies to enter the ebook retailing market". I don't understand your reasoning here. If price competition is suppressed, wouldn't that make it easier to compete?
Anyway, thanks for taking the time to digest this.
3. How are you going to compete with Amazon if you charge the same price? I'm sitting here with my Kindle Fire. If I buy a book at Amazon, it automagically shows up on my Kindle. If I buy a book from you, I have to go through an extra step to get it on my Fire. Amazon makes it easy to do (drop the file on an application they provide), but it's still an extra step. If you charge the same price, why do I buy from you? If you charge less, I might be willing to spend the extra time. For the same reason, I usually buy music at the iTunes Store. The Amazon price has to be significantly less before I go through the trouble.
Don't forget that you don't have the infrastructure that Amazon has, either. You may not be there when I want to buy the book, but Amazon will.
Good points - I was trying to summarize 160 pages and more, so in places I oversimplified.
1. It's true that pricing tiers aren't the same as price caps; what I was trying to convey was that a particular hardcover price resulted in a particular ebook price, thus limiting (but not eliminating) the publisher control over the ebook price. Apple's goal with the combination of them was to eliminate the possibility that publishers would charge ridiculously high prices and make Apple look bad.
2. Yes, the opinion says: "Google, like Amazon, would have preferred to use the wholesale model and set the retail prices for its e-books, but the Publisher Defendants refused to allow it that option. "
3. This bit with the MFN clause is subtle, but here my thinking. Ebook retailers carry the same products, so price is one of the main ways they can compete. The MFN clause ensures that Apple could match any price lower than what the publishers set (via the tier system). So if you're a new online bookstore, price competition has been removed as a way for you to set yourself apart from the entrenched parties. That doesn't mean there aren't other ways of competing, but since all books are basically the same (you can't carry "better" books than other stores), it's one of the primary approaches.
3. Cool Adam/Paul. That makes sense to me now. I was thinking that a new entrant wouldn't want to bleed $5 off the bestsellers. The company with the deepest pockets would win. It's the reason I am/was skeptical that Google, B&N, and Kobo would want the wholesale model, but as you say in the piece a "cash hord" is an effective counter to this.
1. This one isn't worth discussing further but my point was "a particular hardcover price DIDNOT result in a particular ebook price" but yes Apple's goal was to avoid ridiculousness.
What is the point of having the price caps/tiers when they had the MFN? Wouldn't the MFN be sufficient not to have ridiculous prices in the iBookstore since it would be guaranteed to match the lowest price? I can't help but wonder if they hadn't included the tiers and not insisted on everyone else adopting agency model that this implication of conspiracy could have been avoided? Is there a way that the MFN could have been included without looking anti-competitive?
It's hard to answer the question of whether the MFN clauses could have been separated from the price tiers/caps. In the chronology of events, the price tiers/caps come first, and the MFN clause appears later in the negotiation.
I do think there were probably ways the negotiations could have unfolded that wouldn't have resulted in antitrust scrutiny. And had Apple been thinking about that as a concern, they probably would have changed their approach appropriately. From what I can read in the opinion, though, they really didn't anticipate this.
From the article: "So, although the publishers were incredibly unhappy with the $9.99 price, they were still making the same amount as they would have had Amazon sold the book for $19.99."
Your arithmetic is correct, but not your economic analysis. When Amazon set a price of $9.99 for ebooks, that cannibalized the sale more profitable physical books -- so publishers earned lower profits overall due to Amazon's pricing policy.
Due to this, publishers had already begun "windowing" their new releases -- i.e., withholding the publication of ebooks from Amazon. (I see no mention of this critical issue in the review article.) Thus, going forward Amazon was NOT going to be selling new titles in ebook format for $9.99. Thus, their deal with Apple didn't increase the price of newly released titles above $9.99. That was not the status quo when Apple entered the market.
Yes, you're absolutely right - I was trying to convey that, under wholesale pricing, the publisher earned the same amount for a particular title regardless of what price Amazon sold it for. At this point in the article, I'm just trying to explain wholesale pricing, not Amazon's overall strategy.
I decided not to include the windowing issue in the article because it actually doesn't relate to anything that Apple ended up doing, even though it's absolutely relevant to the case as a whole.
In essence, the publishers tried windowing (withholding new ebook releases for some period of time after the hardcover release), but they ultimately decided that it was a losing proposition because it encouraged digital piracy. There's quite a lot in the opinion about their concerns with windowing. Apple played to that fear as well, with Jobs even saying this in email about it:
"Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I’ve seen this happen with my own eyes."
But in the end, windowing didn't end up in any contracts or policies, and it wasn't really even used - only 37 titles were held back from Amazon.
I believe that windowing was only in its early stages when Apple was preparing its iPad launch. Major companies typically start new policies slowly and examine the results before going all-in. The suggestion that windowing would result in digital piracy was a possibility, not a certainty. The ability of music labels to obtain large verdicts in court (e.g., the Jamie Thomas case) plus the differences in the age and income profile of defendants between music and books (older, richer) suggests that piracy would have been less of a problem than it had been with music 10-15 years ago.
By most accounts, the economics of Amazon's $9.99 pricing policy resulted in a large amount of cannibalization of physical books, so I have strong doubts whether publishers would have continued their arrangement with Amazon even if Apple hadn't come along. I.e., I believe the 37 books you mention would have grown far larger. But that's admittedly an opinion that can't be proved at this point.
Yes, there's no telling what would have happened if Apple hadn't come along. There are quotes from all the publishers in the opinion about how much they didn't like windowing, and how worried they were about it. But they didn't like a lot of what Apple proposed either and they still agreed to that in the end, so they were clearly grasping at straws either way.
It's all a bit of a tempest in a teapot. The idea that mass market books will continue to be sold with any sort of intermediary is one of limited duration.
We've already seen the demise of the "agent" in the music industry, whether that is the traditional independent agent or the labels, themselves, acting as marketing and distribution for musicians. As soon as the majority of authors figure out self-publishing, you'll see the number of eBooks sold through the agency model (or Amazon's horrific "Hey-author!-we-are-giving-away-your-book-today" promotional model) will be greatly diminished.
An interesting high profile example is Rudy Rucker's new book, "The Big AHA!", which he is self-publishing in a paper version, and used Kickstarter to replace the traditional advance on royalties. His model is exactly what many others will follow soon, I suspect.
I'm of two minds on this, Chuck, since as a publisher, I see the sausage being made every day. (Mmmm, sausage, close cousin to bacon!)
On the one hand, you're absolutely right - the trend is toward disintermediation, with fewer middlemen in the way. At the most minimal, that would mean an author writes a book and sells it directly to a customer.
The problem is that most authors need editors, and help with production, and help with marketing, and help with distribution, and those activities are what publishers and retailers theoretically specialize in providing. It's not that someone couldn't do it all on their own, but the end product would almost always be better if they didn't.
And of course, there are certain things that are possible only with a strong intermediary. For instance, our readers like the fact that Take Control ebooks have a lot of consistent elements and a hopefully consistent quality and tone. If all we end up with are a bunch of individual authors, such consistency will disappear.
Yes, but can't all those tasks be done by *different* middlemen? You can have different organizations edit, produce, distribute, and market, can't you? The fact that they're all done by a single entity now is a historical artifact caused largely by the fact that up until now books have been physical objects that had to be manufactured. It's not clear to me that in the future there will be fewer middlemen. Judging from the complaints I've seen various places on the web from authors complaining about the marketing of their books, I'd think that hiring someone exclusively to market your book rather than have the publisher do it might be a net plus for some authors.
Yes, you can have multiple middlemen to handle all the different aspects of book creation, but that imposes a significant effort and cost on the author to manage that, and given the generally small returns (if any) on most books, it's hard decision to make. Plus, most authors lack the expertise that publishers build up in coordinating a book project, even when outside contractors are handling specific portions of the work.
All I'm saying is that it's not obvious to me that publishers will go away, any more so than movie or music studios. Exceptional individuals can always go it alone, but the vast majority of content creators lack the skills, experience, and financial resources to eliminate the major middlemen.
Adam, as an author, the hats and roles we play in the business of creating and selling books has grown exponentially over recent years. I'd say the trend for authors to take on more and more of the marketing, distribution and other ancillary roles -- rather than simply writing -- will only increase.
As a way of dealing with the complexity, it would be nice if a business appeared that would combine all those functions: do the copy-editing, printing, marketing, and distribution. That way the author wouldn't be overwhelmed. If only businesses like that existed!
We could call them "publishers."
This is absolutely true. I'd say that the main places authors are expected to do more work is in marketing, production, and creation of ancillary materials. Much less so in terms of distribution and reselling.
Thank you, Adam! Clearly-written explanation of the suit and the overall effect of the judgment. I am a lawyer, but I haven't had time to read through the entire opinion yet, and your explanation makes sense to me. I'm glad you pointed out how off-base the attacks on the judge were for giving her preliminary opinion. That's not unusual in a huge case like this, where both sides have already submitted massive amounts of documents and legal arguments. People believe a myth that the trial is everything, when there is a LOT that comes before. That is especially true in lawsuits between large entities like corporations and governments. The judge's preliminary opinion let both sides know how hard they had to work, and informed them about relative merits of settling without going through the expense of the actual trial.
The public makes a lot of uninformed attacks on judges. She may or may not be legally correct, but the preliminary opinion was certainly appropriate.
Thanks for the confirmation that this approach wasn't unusual or out of line!
Here's what I don't get...
The 5 publishers agreed in a relatively short time with Apple.
The 5 publishers arm-twisted Amazon.
The 5 publishers arm-twisted Google.
Now, Apple - who proposed this, is in trouble for having these publishers proliferate this model...
Am I off balance here, or is it THE 5 PUBLISHERS who are colluding?
No, you're absolutely right, and the initial lawsuit named all of them and Apple. What happened is that the publishers all settled with the DoJ instead of fighting, where Apple chose to fight.
So what I still don't understand after reading all of this... the proximity in which these 5 colluded are effectively the only thing that sets Apple apart. Apple didn't do this; the 5 colluded (clearly). So how is it that Apple is being held responsible for the timeline involved here?
They set forth an idea which brought additional competition to the e-book market, and they're being punished for reducing it? As stated above, none of the actions were illegal per se, but Apple is being held accountable because the publishers went to their competitors and said "we want to change how we do business".
So even if Apple says, "you should do this method with your competitors", it isn't anti-trust. It can't be. You cannot add a competitor and then simultaneously punish the new competitor for being anti-competitive.
'You're new. We like new people, so leave.'
I fail to even see something unethical, much less anti-competitive. Of course, IANAL.
This may be one of the key questions for the 2nd Circuit Court of Appeals to address, but Judge Cote would say that Apple was a key player in the conspiracy, both in terms of negotiating with all the publishers simultaneously (and encouraging them to communicate with one another), and in terms of designing the contracts that would have a price-raising ripple effect throughout the entire industry.
And be careful, because it's a trap to think that the iBookstore brought additional competition to the ebook market. On the face of it, it did - there was now another choice for where someone could buy books, and that improves competition. But because of the effect Apple's contracts had on the publishers, the net effect of Apple's entry into the market was to stifle competition in two ways. First, by causing prices to go up (which they did thanks to the agency model being applied industry-wide) and second, by making it less likely that any other competitor could ever enter the market (by eliminating price as a factor in which there could be competition).
Adam, I'm not sold on this argument that a rise in prices is somehow the smoking gun for anticompetitive actions. A rise in prices might very well be a simple correction in a market.
Likewise, I do not buy the very premise that price competition was prevented or even retarded by MFN, price-capping or the agency model. It just does not seem to automatically follow. If Apple were the incumbent party or the one with the monopoly status in the book market, perhaps the shift in models might then warrant scrutiny.
I'm not sure what more I can say to persuade you (and, realistically, I don't need to :-)).
I will say that a simple correction in the market to higher prices isn't a problem or even necessarily a bad thing. But when it's the result of the actions of Apple and five major publishers working in concert, it's not an organic market movement.
And as far as the price competition being eliminated as the result of all this, it's not really a question, since it actually happened, with prices going up at Amazon immediately after the Apple contracts went into effect and the publishers reacted by forcing Amazon to accept the agency model. That's pretty clear in the full opinion, with charts provided by Apple's experts.
My point is that you seem to be taking the ready assumption that the artificial / non-free market pricing stemmed solely from Apple's actions in trying to enter said market. I contend that the prior instance of artificial market influence by Amazon, who by most accounts was then in control of 90% of the market, was the factor that created this situation whereby a correction was needed in the first place. That's a situation where few other resellers could operate and offer price competition short of suicide -- it is a move designed to weed out Amazon's competition and to salt the earth for anyone else trying to break in.
And I'm not arguing with that - I'm trying to explain the judge's opinion in a case that involves (at the moment) only Apple. I don't disagree in any way that Amazon basically started all this, but that's neither here nor there when it comes to this case.
And I won't argue against the statement that two wrongs don't make a right.
You've done a pretty good job of laying out Judge Cotes' arguments, in which she (if you will forgive me) attempts to _justify_ her opinion, which others can argue from her opening statements and her presiding on the publisher settlements that she was prejudicially biased. That Amazon, the unmistakable retail monopolist in this market, could find swift remedy though the DoJ, not so much against the big six/five, a possible cartel on Publishing side of the equation, but against the entering retail competitor, Apple, which is not a monopolist in this market, speaks to our system of Justice not being fairly applied. In fact, I'll say it, it speaks to the worst of political pandering, "king-making" and the rail-roading of entities seen as not part of the order.
I hope to be proven wrong, that the appeal sees this for what it is, a shakedown, and thereby slaps down the DoJ and Cotes. But this has only fed cynicism.
"which others can argue from her opening statements"
The judge was asked, by both sides, to give a preliminary sense of the case, based on the mountains of evidence submitted before trial. She did, and that's hardly evidence of bias, despite the misreporting that went on around it.
From the article: "but Apple’s cash hoard would certainly have enabled it to win a price war with Amazon, which doesn’t have nearly Apple’s resources."
This is not certain. Amazon has a market cap of 138 billion dollars and investors who have historically been willing to let them compete at zero margin or negative margin indefinitely on the promise of future market share.
Whereas Apple does not.
Amazon's no piker, certainly, but I was basing that statement on the fact that Apple has $145 billion in cash, which I suppose means that Apple could theoretically buy Amazon without taking out a loan. :-)
Market cap doesn't seem like the right metric to measure this on, since it's based on stock price and number of shares, and doesn't reflect what the company has to work with. I'm not enough of a financial guy to know if cash and short-term securities are a good stand-in for that, but on that metric, Apple has $145 billion and Amazon has $7.9 billion.
And while Amazon's investors seem willing to let the company operate on zero or negative margins, Apple is making billions and billions (cue Carl Sagan voice!) in profits every quarter.
Excellent article. Maybe this will quiet the usual Apple fanboys crying their usual theme that this was all a Sumsung-backed, anti-Apple orchestration by Google (or some other nonsense like that).
"So Apple wanted in, and went to the Big Six publishers to negotiate an agreement to resell their books.
The publishers saw working with Apple as a chance — perhaps the only chance, an idea emphasized by Apple in the negotiations — to fight back against Amazon"
This could just as easily imply that the goal of raising prices came from publishers, not Apple.
"When Apple first approached the publishers, it was assuming that it would purchase ebooks on a wholesale model, as the company does for music, TV shows, and movies sold in the iTunes Store. However, several of the publishers suggested that Apple instead adopt an agency model for ebook distribution, and after initially rejecting the idea, Apple became enamored of it."
And this certainly suggests that Apple didn't even initiate the adoption of the agency model.
So, it seems the MFN clause, is the only requirement that Apple insisted on in negotiations, not higher prices, and certainly not the agency model!
How this can make anyone conclude that Apple was the ringleader in all this is beyond me.
Furthermore, the fact that publishers ended up settling and paying fines and Apple did not must count for something.
The suit was filed against Apple and the publishers - they were all involved. The publishers did suggest the agency model, but it was Apple that set the price tiers and caps (which the publishers were not happy about), and insisted on the MFN clause that forced the publishers to push the agency model on everyone else.
As to why the publishers settled and Apple didn't, I think that has to do with the core businesses. Apple doesn't really earn any money from the iBookstore, whereas the publishers live and die by how many books they sell. They couldn't risk more significant damage from losing a lawsuit, whereas Apple can afford it and doesn't want the PR hit of being labeled a monopolist, like Microsoft.
It seems everyone has missed an important point in all this. If you use an iPad/iPhone etc and wish to use Apple's iBook reader, you are not doing comparative shopping. You cannot read anything in iBook that is not sold by Apple (with the exception of free pdf files, but, that doesn't figure into this discussion.) I have been reading ebooks for more than 15 years now and have a large library of different formats - some of which cannot be read on an iPad or any other current device. I have chosen to use iBook as my reader and therefore am committed to pay Apple's prices for my books. I feel certain that the iBook reader will be around a lot longer than the others (witness the fall of Nook recently) and personally I hate the experience of having to switch reader programs to read my purchases. So if a retailer cannot compete on price, they will have to compete on services or something else - that's capitalism. Lower prices are not a God given right; nor are books or music or films.
But in fact, Amazon makes Kindle apps for the iPhone and iPad, and while they're not identical to Apple's iBooks app, they're perfectly functional. So a lot of people do shop on price because the experience is basically the same.
It is not the same when you cannot call up your entire library in one app and see if you have, at a prior time, purchased a certain book. Or in my case, you don't even know which format it might be in. This is especially true if you read a lot. This would not be a problem if you could move your books from one reader to another, but you can't. I am sure this is one reason that Apple developed iBook Creator, so that publishers and authors could more easily create unique, multi-media based products that, at this point anyway, can only be read or experienced in iBook reader. That's a service that hasn't yet shown its face in Kindle or Nook or any other reader I know. So if Apple has found a way to compete, so can the others. If anything, these laws should be setup to protect the rights of the creators, not the purveyors or consumers. Again, the cost of consumption is not a right. Otherwise, everyone should be able to buy a Rolex - ugly or otherwise.
This is going well afield of the antitrust case at hand here, but it's quite clear that both Apple and Amazon are competing with one another largely on platform lock-in, supported by their use of DRM (which the publishers requested or required, presumably not understanding the power it would give Apple and Amazon).
In essence, Apple just copied Amazon's strategy here (Amazon applies DRM and uses a proprietary format so Kindle books can "only" be read on Kindle devices and Kindle apps - and I quote "only" because I'm well aware there are exceptions). Where Amazon's platform is the Kindle software, Apple's is the iBooks software; the main difference is that Amazon has migrated the Kindle software broadly, whereas Apple keeps the iBooks software on iOS devices (with Mac support coming over three years late in OS X 10.9 Mavericks). Both are rational - Amazon wants to sell books and Apple wants to sell iOS devices.
Neither of these approaches is consumer-friendly, since both seek to restrict what you can read and where you can buy to one specific store.
As far as what the laws should or should not do, I'll leave that for another forum. Antitrust law in the U.S. is what it is, and that's what Apple is being accused of violating.
Yes, I often read Kindle books on my iPod Touch, and even occasionally on one of my Macs; they also make a Kindle App for OS X. Amazon arranges it so that the apps and the Kindle send back to the mother ship where you're currently reading, so that you can move from device to device without losing your place. (Unfortunately, this isn't true of Kindle magazines). Occasionally if you read footnotes things will get screwed up because footnotes are usually stored at the end of the file, but "Whispersync" usually works.
The only iBook I've ever obtained is the free Winnie the Pooh book. There's no way I'd buy an iBook because I can't read it anywhere but on my Touch.
That is your decision, but, you are limiting yourself to purchase a very narrow and old school form of printed material unless Amazon produces changes in their reader which allows you to read iReader's multi-media material (or some other newly developed form of publishing). My point is there is no universality in any of these systems and as such laws that are based on those universal concepts simply don't currently do justice to anyone. There is also an element in the law known as intent. Do we really think that Apple was intent on colluding with the publishers to create a monopoly or were they simply trying to protect their ability to maintain parity in a market in which they were not known. I don't know, but, I don't feel that anyone has shown they were intent on creating a deliberate monopoly or antitrust situation.
Judge Cote addresses the issue of intent explicitly, saying:
"Apple’s entirely appropriate or even admirable motives do not preclude a finding that Apple also intentionally engaged with the Publisher Defendants in a scheme to raise e-book prices."
In other words, it's not an either/or situation.
Clearly a Federal judge well versed in anti-trust law thought otherwise. From the comments on the Web from lawyers familiar with anti-trust, they feel it's not likely the ruling will be overturned on appeal.
As for the wonders of iBooks, how many are there that are "multi-media" wonders? Going to the books section of iTunes, I see the usual suspects, what I'd see going to Amazon or B&N.
The Nook is not in good financial standing at this point. Here is a quote from a news source, "Recent news reports indicate the Nook has been a financial disaster for Barnes and Noble, leading to the resignation of the company’s CEO." The company claims they will continue to support the Nook, but, who knows for how long. And I realize that Apple could just discontinue the iBook reader and the iBook Store tomorrow, as they have done with other unprofitable items. Nothing is certain. But, I do believe they have the ability and the resources to hold it together longer than others, including Amazon. So that is why I have chosen to go with the iBook reader and the Apple products. I have purchased way too many books in other formats that I can no longer read as the Apps or the hardware no longer work or exist. And since the publishers have not seen fit to offer to allow owners of previous versions of their books to obtain newer formats free or at a discount, I am stuck with unreadable books.
I am sorry, I moved the discussion away from the trial. Yes, I am aware of Judge Cote's statement. But she does not say which facts prove Apple colluded, only that they don't preclude a finding of guilt. So in fact her ruling comes down to her best guess. I doubt that Apple's lawyers would continue an appeal if they thought "her best guess" was the best anyone else would ever proffer. Mr. Engst, your article was beautifully written and a good service to the general understanding. Let's hope that whatever the outcome, our society benefits.
I don't think there's a specific fact that the judge sees as the smoking gun, just the entirety of the evidence. But that's now up to the 2nd Circuit Court of Appeals to decide.
I will say that I don't believe we can assume from Apple's continued appeal that they think they have a strong case for the appeals court. For Apple, I think this is as much a PR challenge as anything else, because Apple very much doesn't want to be seen as... wait for it... Microsoft. :-) Seriously, for Apple to admit wrongdoing would be a blow to the company's image, and Apple has always gone to lengths to protect its image. Think of Tim Cook testifying before the Senate about taxes, or Apple making a huge fuss about the Foxconn suicides. Even if Apple loses in the end, it looks better if they've fought the case the whole way, claiming innocence. If they just cave, like the publishers did, they're admitting that they were big bad monopolists and can't be trusted.
Also note that the publishers really had to settle - their core businesses were in danger. But for Apple, the iBookstore is a drop in the business bucket, so there's no real harm to Apple's bottom line in continuing to fight.
"Fall of the Nook"? Nook's still around. I just went to the B&N web site and it's advertised right on the front page. I haven't been in the local B&N store lately, so I can't tell you about the situation currently, but it was prominently displayed last time I was there.
I wouldn't count on iBook being around forever. Apple has closed things that weren't working out (iWeb, Newton). I don't know whether anyone knows how well iBooks are doing.
One of the difficulties with this sort of a case is that the products are, by their very nature, "monopolistic". By that I mean that any given book is unique and the publisher of that book has a monopoly on its sales (save, for example, multiple versions of classics and such). If I want to buy the new Doc Gooden autobiography, I have no choice but to buy it from New Harvest Books, (a division of Amazon). Yes, there are other books available from other publishers, but people don't generally want 'any book', they want a specific book.
Obviously, movies, music, software, and other goods are generally the same sort of thing (though with software, there can often be reasonable alternatives).
Long time Apple fan...and long time Kindle user. I can't make informed comments on the legal issues but I can say this without worrying about being contradicted:
Kindle books were generally 9.99 until Apple launched iBooks. Suddenly, many, many books jumped to $12.99 or $13.99
So, yeah, I am not upset to see Apple take it on the nose this time
It's not about Apple, nor saving a few bucks in the short term. The valid concern is that Amazon, by selling some books below cost, disrupts the publishing industry in a way that reduces choice and establishes Amazon as even more of a monopoly. At which point they gradually raise prices.
Amazon is now already reducing its discount for print books because it no longer has to compete as hard with the demise of Borders and reduction in competitive ability of Barnes & Noble.
"It's not about Apple, nor saving a few bucks in the short term"
I'm pretty sure that Wally can figure out what the issue is to him.
Let's step back and take a look at the broad picture. Initially, the publishers had the merchandise, but no way to sell it. Amazon offered the Kindle store and became a MONOPSONY (buyer of a merchandise, not producer ). When Apple came into the picture, it gave the publishers the additional capacity of being ALSO a seller for their own merchandise. In this whole picture, Apple is perfectly passive: I only take my commission, and let you guys sell the books. What happened is that it turned the publishers themselves, not Apple, who is simply a passive conduit, into competitors with Amazon. My question is: I have my merchandise, and the option to sell it myself, through a commision. There is Amazon who is offering to buy my merchandise at wholesale price and resale it. Why am I accused of price fixing if I want to price match Amazon. Don't I actually have the option to even cut Amazon completely and sell all my merchandise on commision ? If so, then I can negotiate my terms with Amazon.
I agree with you 100%. A business has a right to sell their products using any model they see fit to use. As Adam says in the article above, there is nothing illegal about the agency model, even one with MFN clauses. But obviously, when several publishers go to Amazon at the same time with these new contracts in hand and demand that they sign them something is fishy and that, I suspect is what is this trial was about.
But in spite of what Judge Cotes might claim, I do still think its a stretch to say that Apple was a "ringleader" of a conspiracy when there is no direct evidence of them requiring or encouraging the publishers to put pressure on Amazon whatsoever. Apple very well could have been passive, you you said, during this whole thing. The 70/30 contract is after all the standard MO for Apple not an insidious new plot they dreamed up just for eBooks. I find it disturbing that a company can be held liable for simply being associated with another company that commits a crime.
Unfortunately, Apple was anything but passive. Apple's contracts with the publishers required very specific actions on their part (which they weren't happy about!) and encouraged certain other actions on their part (switching Amazon and others to agency pricing). So selling through the iBookstore was nothing like selling directly.
We live this every day. We do sell our Take Control books directly, which means through a cart we run, to customers we have a direct relationship with. That is far more lucrative and flexible than selling through the iBookstore (which we also do) or through Amazon (ditto).
Even though we don't own the cart (we could build such technology if we wanted), it has no policies about what can be sold or how prices can be set (beyond certain minimums to make sure the credit card transaction fees are met). That's a far cry from what the retailers like Apple and Amazon require.
And you know what? Amazon does undercut us, selling our books cheaper than we do. It's a small portion of our income stream, so we don't stress about it, but if we had to match them, that would be a real problem for our business model. (And we can make our books cheaper in general through sales and bundles and things like that which Amazon can't or won't do. Plus, we offer a better service in terms of multiple formats, online library, update notifications, and so on.)
Were there any limits on Amazon selling eBooks from one particular manufacturer at a loss before this whole ordeal? If not, this seems like a win for the publishers. Since its so hard to prosecute a company for predatory pricing at least this reins in some of Amazon's worst tendencies.
As far as I know, no, there were no such limits before the publisher settlements.
One issue that has been ignored is the cost of producing and selling the eBook. Unlike printed books, there is no cost per copy to sell an eBook. You as a seller buy a single copy and duplicate it whenever someone buys the eBook. Also the cost for the publisher to create that eBook master is minimal given they they are just recycling the content and editing effort producing the original hardback/paperback version. IOW: There is minimal cost for Amazon or Apple to sell an eBook as well as minimal incremental cost for the publisher to create the eBook master. Thus for both the publisher and the seller, the sale of an eBook is mostly pure profit.
Yes, that's of course true, but you shouldn't assume that the materials costs are sky high either. Most people don't realize just how efficient the publishing industry has become in terms of production costs.
I don't have current details, since I haven't worked with a print publisher in years, but I remember the materials costs for my "Internet Starter Kit for Macintosh" in 1993, which was a hefty 650-page tome, being only a few dollars. And of course, the wholesale cost for any given title is based on the cover price, so the publisher can adjust that to get the necessary profit.
I also remember that, for a later edition of "Internet Starter Kit for Macintosh," we tried to license Netscape Navigator for the CD-ROM that came with the book. Netscape was amenable, but was going charge $5 per copy, which was radically more than the materials cost for the entire rest of the book. Microsoft, in comparison, was happy to license us Internet Explorer for free, so we went with that.
All that said, we're only interested in selling ebooks for our Take Control titles, since doing so is a lot cheaper, easier, faster, and more flexible than with print books. But that's partly true because we've built our entire business around ebooks, whereas traditional publishers have their businesses built around print books, and adding ebooks wasn't cheap or easy.
"In June 2009, the book industry as a whole was estimated to be $35 to $42 billion in size, with trade books — which are books distributed to the general public — comprising $12.5 billion of that."
What kind of books comprise the remaining $25 to $30 billion of the industry? Do you have a source for these numbers, Adam? I'm just wondering since I expected the vast majority of the book market to consist of "books distributed to the general public".
Those numbers come from the DoJ lawsuit. They're asserted in the text of the suit. In a quick search across book industry stats, I find that some sources put the number lower.
Textbooks comprise $14 billion of the total.
Glenn's absolutely right - such estimates are often in a certain amount of dispute, and the textbook market is quite big. Other possible segments include professional, scientific, and medical text, dictionaries and encyclopedias, atlases and maps, and more. Some stats include religious books as trade books; others may not.
Adam, this is a very well written explanation, thank you.
As I see it, the DOJ argued the agency model becomes illegal price fixing if you negotiate with much of the industry to adopt it simultaneously in a way that eliminates price competition between retailers selling the same item.
The DOJ asserts Apple conspired to raise eBook prices along with the publishers while Apple contends it was never their intention to raise eBook prices across the board, but rather to give publishers something they wanted (control over pricing) in order to gain a foothold in the eBook market.
The DOJ did not address the right of retailers to try to compete effectively against Amazon who was selling new release eBooks below cost. Many will recognize Amazon had become a de facto monopoly putting other booksellers out of business (like Borders) and thus had significant power to dictate terms to the publishers in exchange for selling their product at all.
The DOJ took a rather limited view of "competition" citing competition at the retail price level while ignoring competition to carry and distribute eBooks at all, or for authors and publishers to have more than one sales channel for their product.
We often forget that the purpose of market competition is to allow supply and demand to regulate pricing. Competition is only effective at restraining market abuses when there is some balance of power among sellers and also between sellers and buyers. It is this recognition that lead to the creation of anti-trust laws in the first place.
I think the DoJ's point would be that price competition is necessary in an industry where everyone is selling the same goods, since it's very hard for anyone new to enter such a market. Apple would have been competition for Amazon, but no one else could ever have competed with the two of them, after Apple's agreements had had their effect.
To which I would ask: Where is the market distortion or unfair pricing power this ruling was intended to correct?
The court didn't rule MFN clauses are anti-competitive, they ruled Apple is guilty of conspiring to "distort fair market prices". How is the eBook industry different from the many App stores which use the agency model along with MFN clauses?
"To which I would ask: Where is the market distortion or unfair pricing power this ruling was intended to correct?"
In the collusion of the publishers that sent e-book prices higher.
But Amazon was selling new eBooks at a loss, so "higher" in this case means closer to their wholesale price or fair market value.
I would guess that in terms of antitrust law, they take the existing standard price as the baseline, regardless of whether it might be somewhat artificial (all prices are, I suppose). From that point, any increase in price across the industry - at least that's caused by collusion rather than organic market forces - is a bad thing. But I don't know antitrust law well enough to really say - I'm just relating what's in the opinion.
Wow this has generated a ton of interest. So, harm has come to the consumer because of collusion by Apple to set prices at a sustainable level while Amazon's predatory pricing has helped price competition because it is organic market forces at work. This is the bottom line of this decision? This DOJ cannot see the forest for the trees. Justice isn't blind here, more like suffering from tunnel vision.
There's no evidence that Apple was trying to do anything in terms of "sustainable" prices at all with its price tiers, and in fact, the publishers made less money with the agency model and higher prices than they did with the wholesale model and Amazon's lowball prices. So as far as the industry goes, what Apple and the publishers came up with was worse in some respects. The publishers did this purely so they could regain some level of pricing control and attempt to keep the consumer perception of what book prices ought to be higher than Amazon's $9.99.
In short, there are no innocents here.
If Apple's intent wasn't to maintain prices at a certain rate or level (the definition of sustainable) I am not sure what else to call it. However it may have turned out, it is still what they were trying to do. How else could they get their 30% as 30% of nothing is nothing. There are no innocents in all this, just hard-nosed business people. What the publishers were trying to do seems to me to be irrelevant to Apple. They wanted 30% of "something". I think the appeal will be quite interesting.
Are we really going to invite the wolf into the fold here? Once you allow the courts to judge antitrust cases based on an arbitrary measuring stick of prices, instead of based on other factors such as market share and control of resources, then you can say good-bye forever to price competition. Who wants a government that cannot manage its own budgets involved in setting market pricing? (This would be back-door socialism.) I believe it is a serious mistake to look at a rise in the price of a product within a vacuum.
Courts have always used prices as one of the bits of evidence in anti-trust cases. As to the rest, you're going to have to argue with Teddy Roosevelt, who pushed anti-trust enforcement in a big way at the turn of the 20th century.
@Peter: Where did you get the idea that there is a "fair market value"? Things get priced according to what people are willing to pay, and that often has nothing to do with the cost of production. Amazon was willing to sell certain books at a loss for their own business purposes. The publishers and Apple (using their dominant market position and according to the court) deliberately entered into an agreement that would prevent them from doing that. The result was that consumers started by paying higher prices for their books.
Look, if a chain of gas stations decided to sell their gas at a loss and make it up in snacks, and the gas producers got together with one of their competitors and forbade it from doing so, on pain of not getting any gas to sell, thus forcing the price of gas up, we'd have much the same situation. That's what the court decided happened. You may disagree with the court's conclusion, but wittering on about "fair market value" is just silly.
The market distortion comes about because of how the agency model was arrived at, as a result of Apple's agreements with the major players in an existing market to create a non-competitive situation.
The fact that the App Store uses the agency model is rather different, since Apple created the market and has always controlled it firmly. I personally am not wild about Apple's power in in the App Store either, but I have to assume that Apple's market position (with respect to Android, in particular, and because it was never an independent market) is not such that antitrust concerns come into play.
But I'll bet the DoJ is keeping a close eye on Apple these days, given Apple's market power.
Baen Books used to sell ebook versions of their books for less than the price of the paperback version. But when they started selling Kindle versions on Amazon, the latter forced Baen to raise the prices in Baen's own store.
Ebooks should always be priced less than paperbacks like paperbacks are priced less than hardbacks. This is based on costs of which there is very little for ebooks since unlike physical books, only one ebook needs to be "warehoused". All ebooks sold are just a copy of that file. Ebook production costs are just pennies compared to physical books.
It's hard to say that anything "should" be priced at any level, since prices are merely set at what consumers can be convinced to pay. The production and distribution costs of hardcovers aren't that much more than paperbacks, and neither is as high as many people believe - materials cost was only a few dollars for my massive Internet Starter Kit books back in the 1990s, and I suspect mass market paperbacks are far less.
And, it's worth keeping in mind, in most cases, what you're buying is not really a physical object, but the words within the book. If you want the latest Bill Bryson book, you want to read what he has to say, and how those words are displayed to you is relatively immaterial. Hardcovers generally "merit" their higher prices because they're all that's available initially, or at least that used to be the case in the pre-ebook world. So their prices are artificially high, because publishers have created a sort of artificial scarcity surrounding them.
This is in fact, one of the core reasons that this case happened at all. By selling ebook bestsellers at a loss, Amazon was attempting to change consumer perception of what books ought to cost, and the publishers were scared and angry about that. But, in fact, attempting to change consumer perception of pricing happens all the time - Apple did exactly that by encouraging such low prices in the App Store for iOS apps, and again with the Mac App Store. Software used to cost a lot more, but our perception has shifted. Whether or not that's for the better is a philosophical question.
Price is a balance that includes:
(1) value to the consumer
(2) cost to produce
(3) quantity that can be sold to amortize fixed costs
Consumers expect to receive more in "use value" than they pay in "cash value". Producers expect to cover expenses plus earn some profit to grow or adapt to change.
Each of us is both a consumer and a producer. If we push prices too low, we reduce our own wages, benefits, or quality of service. If prices are too high, they reduce our collective spending power. We rely on markets to help set prices based on supply and demand, but this only works if there is a balance of power among the participants.
The publishers believed Amazon had become too powerful. This belief was so widely shared, Apple was able to convince 5 of the big 6 to adopt an agency model with an MFN clause. The Doj ruled that was a violation of anti-trust regardless of being an attempt by Apple to enter a new market and by the publishers to address a power imbalance.
"Consumers expect to receive more in "use value" than they pay in "cash value"."
So the Yves St. Laurent dress that cost $50 to make and was sold for $3000 fits that analysis?
"I think it's telling that when Apple et al formed a monopoly, Amazon complained to the government and got relief (as Judge Cote said was the proper response in her opinion). But when Apple and the publishers thought Amazon was a monopoly, their response was to collude themselves instead."
The difference being, which people are concerned about, is that Apple's alleged "monopoly" is only in eBooks. Amazon's monopoly is over all books, physical and digital, if not more.
In the question of predatory pricing: Of course Amazon isn't making an overall loss per publisher -- because Amazon is using the physical book market (where it drove physical stores out of business and thus reduced competition) to leverage its eBook business!
Amazon CAN make a loss on eBooks, because it ALREADY DESTROYED competition in physical books!
This is like MS the monopolist complaining that Apple has a new "monopoly" in mobile development because Apple is more attractive to mobile developers.
Again, as the Judge pointed out, Amazon's situation is irrelevant to whether Apple committed an anti-trust violation. If Amazon robbed a bank to get more money, would you defend Apple for robbing a bank as well?
Obviously Amazon wasn't on trial. But the possible relevance is exhibited like this:
The only real issue with Apple, is that prices (for one type of one product) went UP, despite offering another store, format and other differentiation.
The prices went UP, because they couldn't go anywhere BUT UP.
Why were prices where they were and expectations set there, so low? Because the goods were previously sold under "value" by Amazon, the only game in town.
This is said NOT to be predatory pricing on the basis that Amazon does not make net loss on ALL products from a publisher (hardcover, etc.). And YET, it is ONLY the eBook product that is being judged in isolation in Apple's case. How can Amazon/Prosecution have it both ways?
Judge Apple on the eBook, judge Amazon on the eBook -- predatory pricing. Judge Amazon on all books, judge Apple on whole book market -- no monopoly.
The only real issue with Apple, is that prices (for one type of one product) went UP, despite offering another store, format and other differentiation.
That wasn't the only real issue.
And why couldn't prices have gone down?
Thank you so much for this article. I know I'm really late to the comments, but this is the best explanation I've seen of this whole thing.
Here's what I still don't understand though (I'm going to sound a bit like an entitled consumer, but I really am looking for good refutements to my argument; I want to understand better):
- For me, I use Amazon because it's better than a physical bookshop. A physical bookshop to me serves no other purpose than holding books until I buy them. Unlike Amazon, their selection is constrained as a result. So why is what Amazon is doing 'destroying bookstores' a bad thing in and of itself? Isn't it just that Amazon's product (the added convenience and massive selection) is better and the market is speaking?
- How can it be a good thing that authors and publishers now earn less while consumers pay more for eBooks? How does that even add up?
I know I'm probably missing something here.
The reason this is confusing is that there are multiple parties involved, and they have different, sometimes conflicting desires. The publishers want to protect bookstores because they remain a major sales channel, particularly for hardcovers, where the publishers earn a lot more money. Whether that's better or worse for consumers is hard to say, although a lot of consumers like going to bookstores because being able to browse even a limited selection is more enjoyable in person than online at Amazon. So there are some parties that want to protect bookstores, even if it means somewhat higher prices. But, of course, as you note, bookstores are disappearing because it's hard business to compete in, especially when Amazon has everything and usually for cheaper, which is also better for many people.
It wasn't a good thing that authors and publishers earned less while consumers paid more, and that was what the Justice Department put an end to. The only reason the publishers wanted it was because they got more control over pricing, and they were very concerned with the long-term effect of Amazon low-balling best-seller prices.
Note that there's now a final judgment in this case.