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A court has found that Apple conspired with major book publishers to raise the price of e-books, but the mammoth price-fixing effort failed to dislodge rival Amazon from its position as top seller.
By
Farhad Manjoo

Source
Slate
UPDATED 10:48 AM - 26 Aug 2013

On Wednesday, a federal judge issued a damning finding that Apple conspired with five major book publishers to fix the price of e-books. The ruling is a chronicle of these firms' incredible stupidity. In 2009 and 2010, the judge says, Apple and the publishers conspired more or less in the open, telegraphing their moves to the press, memorializing their discussions over email, hinting at their anti-competitive agreements in public statements, and strategizing in swanky restaurants. For a short while, they succeeded in their goal of raising book prices: Overnight, the average price of e-books rose by nearly 20 percent, with some best-sellers shooting up by close to 50 percent. Books that used to sell for $9.99 were now $12.99 or $14.99, prices that Apple and the publishers believed would threaten Amazon.com, the undisputed king of e-books.

The ruling would be a great yarn if it involved just any companies, but it's all the sweeter when you consider the players involved. The battle for the e-book market was, at its heart, a fight between Steve Jobs' and Jeff Bezos' differing business philosophies. Amazon was bent on keeping prices low, even at the cost of profits. Apple, as ever, wanted to make sure that it could make a bundle on e-books. The iBookstore was Apple's effort to do to Amazon what it had so long done to the rest of the tech industry: Beat it over the head with a combination of better software, hardware and content. With the iPad, Apple hoped to create a device that would make Amazon's Kindle obsolete, and give it the same dominance over books that the iPod had given it over music.

But Apple's gambit failed. Predictably, the rise in e-book prices led to a decline in sales, hurting the publishers' bottom line. The iBookstore, whose success the publishers were banking on, never really became a big hit. Then the government intervened and pressed antitrust charges. The Justice Department settled with the five publishers, but Apple maintained its innocence, went to trial, and has now suffered a devastating loss. (The company says it will appeal.) Altogether, then, the price-fixing effort was a resounding failure. In one of his last efforts to shake up the media world, Jobs went after Bezos with everything he had. And he lost.

Apple and Amazon are both often hailed as "disruptors," but in this case, only Amazon earned that label. Amazon's e-book plan aimed for a couple of simple goals: Bezos wanted to make e-books the primary format for publishing, and he wanted to establish $9.99 as the market price for new e-books. Amazon was willing to sacrifice profits in the short term to achieve these goals. By charging so little for e-books, Amazon was encouraging people to ditch print books, which — in the early days of the Kindle — still made up the bulk of Amazon's book sales. More than that, Amazon was willing to lose money on every e-book it sold. The company dealt with publishers under the so-called "wholesale model," meaning that publishers sold books to Amazon for a set price, and then let Amazon choose the retail price. Publishers often set the wholesale price at $12 to $14. Amazon then sold the books for $9.99 — i.e, for less than it had paid for them.

Under this strategy, publishers still made a profit on each book — Amazon was taking the loss, not them — but publishers still hated Amazon's $9.99 price. They feared that once Amazon gained a stranglehold over the e-book market, it would force publishers to lower their wholesale prices. This was a reasonable assumption, because no business — not even Amazon, with its incredibly forgiving shareholders — can stand losing money forever. And if it got big enough, Amazon could do something even worse: It could replace publishers entirely, signing deals with authors that lowered book prices and gave writers a bigger cut on each book sold. (In fact, that's exactly what Amazon does under its Kindle Direct program.)

How do you compete with a crazy person, a guy who seems congenitally allergic to profits? When it entered the e-book market, Apple had two choices. First, it could out-crazy Amazon — it certainly had the cash reserves to take a similar loss on e-books, to sell them at $9.99 or less in order to become a leader in the business. But Apple had no desire to do that. Documents in the case make clear that it didn't see much value in competing on price, especially because it believed the iPad offered a better experience than the Kindle for e-books. Apple also had no interest in losing any money. At Apple, profits are inviolable — the only real point of doing anything.

But how could Apple make a profit on e-books if the prevailing price, set by Amazon, was below cost? There was only one way: by working with publishers to force Amazon to raise its prices. To do so, Apple proposed that publishers adopt the "agency model" for e-books. Under this model, a publisher sets the retail price of the book, and the e-book store — i.e., Apple and Amazon — would take 30 percent of that price. Apple liked this model because it guaranteed a profit. Ironically for publishers, the new scheme actually lowered profits. Under Amazon's plan, publishers were getting $12 to $14 per book; under Apple's proposal, they would get 70 percent of $12.99 or $14.99 (which Apple had set as the maximum e-book price), or between $9 and $10.50. Still, the major publishers were thrilled with Apple's model because it allowed them to charge more than $9.99 per e-book; the higher retail prices, they believed, would make for a more sustainable e-book business in the long run. The only problem was convincing Amazon to go along with this plan.

That's where the collusion came in. According to the ruling, after negotiating deals with Apple, five major publishers approached Amazon simultaneously with an offer it couldn't refuse — either Amazon could move over to the new, higher-priced agency model, or it would have to wait months to begin selling best-selling titles in its store. Collusion was necessary here, the court explains, because if any single publisher approached Amazon with this deal, Amazon could have balked and simply delisted that publisher's titles from the Kindle Store. (In fact, Amazon did that for a few days with books published by Macmillan.) The only way the publishers could fight Amazon was by illegally working together — and by making sure they had a fallback place to sell their wares in case Amazon refused, namely at Apple's store.

Apple and the publishers sure come out looking sleazy in this saga. (Disclosure: I'm under a book contract from Simon & Schuster, one of the defendant publishers in this case.) One of the sorriest moments occurred in the fall of 2010, when Apple cooked up a way to pressure Random House — the only major publisher that had refused to switch over to the agency model — to join its bookstore. When Random House submitted a few e-book apps to Apple's App Store, Eddy Cue, who heads Apple's content division, refused to let the apps go live unless Random House agreed to do "an overall deal" with Apple. Random House capitulated. It joined the iBookstore and raised its prices.

It's possible to sympathize with the publishers in this saga. With their business models in peril, they were stuck between two behemoths and had little leverage; though it's illegal, collusion might have seemed like the only way to fight back against Amazon. But I really can't see anything good in Apple's effort. Jobs embarked on a strategy that had the effect of helping Apple and potentially helping publishers, but by raising prices on every customer. It was shameful. It was also a failure, and now, despite the iPad and the iBookstore, Amazon is still the undisputed leader of the worldwide market for e-books. Thank goodness.