Apple (NASDAQ:AAPL) has reached a settlement in its e-book pricing lawsuit, hopefully closing an episode that will get the publishing industry to think about how it wants to proceed into the age of e-books and digital sales. Bloomberg reported that Apple reached a settlement in the class-action lawsuit over its fixing of the price of e-books. By settling, the company avoids a trial in which the plaintiffs sought $840 million from Apple, claiming that the company overcharged consumers for e-books by $280 million due to exclusive deals with publishers. The terms of the agreement are still sealed and subject to court approval.
In 2012, the U.S. government sued Apple and five publishers — CBS’s (NYSE:CBS) Simon & Schuster, Lagardere‘s (LGDDF.PK) Hachette, Pearson‘s (NYSE:PSO) Penguin Group, MacMillan, and NewsCorp‘s (NASDAQ:NWSA) HarperCollins — with whom it had signed agreements to let Apple sell digital copies of their books. The agreements laid out a pricing model that drove up the prices of e-books, with publishers setting prices and Apple receiving 30 percent. The settlement is contingent on the result of Apple’s appeal of the antitrust ruling that resulted from that trial. The company maintains that it hasn’t violated anti-trust laws, and has sought to remove a court-appointed monitor.
In the antitrust lawsuit, prosecutors alleged that Apple used publishers’ dissatisfaction with Amazon‘s (NASDAQ:AMZN) e-book discounts to get them to sign agreements ahead of the 2010 launch of the iPad and iBookstore. Publishers were unhappy with Amazon’s discounts, especially its pricing of many bestsellers at $9.99 for its Kindle reader. So when Apple allowed publishers to set e-book prices themselves, they set them above Amazon’s prices, upping them to $12.99 or $14.99, as reported by the Wall Street Journal. The publishers then threatened to withhold their most popular titles from Amazon, and imposed their new pricing model on the online retailer. At the time, Amazon’s e-book sales accounted for 80 to 90 percent of total e-book sales, and publishers were concerned that the company was selling e-books at a loss in order to dominate the market.
So what does this mean for the publishing industry, which has already undergone monumental change as printed books are increasingly superseded by e-books? Publishers’ goal with e-books, as with any other book that they produce and sell, is to ensure that e-books are profitable. But the way that they measure that profit, especially in reference to Amazon and its pricing of e-books, points to some areas where the business of selling e-books and the business of selling paper books diverge.
Coverage of the lawsuit and Apple’s settlement routinely cite Amazon’s $9.99 pricing as “below cost,” but it’s worth asking, as TechCrunch did this morning, what is “below cost” in the business of selling e-books? The idea that Amazon’s pricing of bestsellers at $9.99 was below cost implies that it incurred expenses higher than $9.99 to acquire and offer the e-book for sale. That implication seems inconsistent with what publishers really wanted out of e-book pricing reform, which was for more revenue to go to the publishers who produced and distributed the e-books.
The problem in comparing Apple and Amazon and saying that one model is unfair is that they operate on two different pricing models when it comes to e-books. As Business Week explained, all the way back in 2012, Apple operates under an “agency” model, where it receives a fixed percentage of the book’s sale price. That’s how it allowed publishers to set their own prices for e-books that they then threatened to withhold from Amazon.
Amazon, on the other hand, operates on a traditional “wholesale” model, where the publisher sets a price and sells the book to Amazon, which is ultimately able to set its own price. This is the same model that many businesses, a traditional brick and mortar bookstore, for instance, have always operated under. If Amazon were to calculate the cost of offering a particular e-book for sale, and found that that cost worked out to something higher than the $9.99 price tag, it could still choose to absorb that cost in order to gain market share. $9.99 as a marker of cost is largely a moot point; the cost of distributing e-books is negligible, especially when compared to the cost of printing and distributing paper books.
Those arguing that Apple’s agency model is unfair complain that it removes retailers’ control over the final price of its products, leading to higher prices for consumers. But as Business Week points out, the $9.99 which Amazon asked for bestsellers wasn’t determined by the industry to be the conclusive, fair price for an e-book; it was mainly a marketing strategy that helped Amazon to build the e-book market. The significant net effect of Apple’s entry into the market isn’t that e-book prices went up — although clearly it’s not a good move to fix prices or collude with publishers to force other retailers to raise prices. But in the long term, it’s much more important that the market went from a monopoly to a duopoly, because a competitive market is always better for consumers.
The publishing industry will have to contend with the politics and pricing of the e-book business, because e-books offer consumers accessibility, convenience, and immediacy that paper books are not able to match. The low cost involved in the production and distribution of an e-book should lead publishers to be flexible on their pricing to find a price point that’s just high enough to be satisfactory for the publisher and distributor but just low enough to increase consumer demand. That equilibrium is just as likely to be achieved under the agency or the wholesale model of distribution.