Reuters reports the Justice Department may reach a settlement with Apple Inc. and some other major publishers suspected of contriving to raise prices of electronic books in the next few weeks.
According to sources, although negotiations are indefinite, the resolution will expectedly get rid of Apple’s so-called “most favoured nation” standing, which has hindered the publishers from distributing eBooks at lower prices thru competing retailers, such as Amazon.com Inc. and Barnes & Noble Inc.
One of the sources says the deal could also push a shift, at least for the time being, in pricing control from publishers to retailers.
Such a step to switch to the wholesale approach would not only be beneficial for consumers, but more importantly to Amazon, which has been the leading bargain eBook retailer with its Kindle reader.
“It would be a positive for Amazon because the company’s greatest strength is as a high-volume, low-price retailer and the wholesale model plays into that,” said Jim Friedland, an analyst at Cowen & Co.
The Justice Department aims to ravel out agreements procured by Apple from five publishers – namely Simon and Schuster Inc, a unit of CBS Corp; Lagardere SCA’s Hachette Book Group; Pearson Plc’s Penguin Group; Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH; and HarperCollins Publishers Inc, a unit of News Corp – two years ago, about the time Silicon Valley was launching iPad and aiming to break up Amazon’s domination in the digital book market.
Neither the Justice Department nor Apple has given any response as to calls for comments. The publishers involved are the same.
Part of the publishers’ agreements with Apple was to shift to an “agency model” that allowed them to set prices of eBooks and give a 30 percent cut to Apple.
Before that, Amazon has been distributing based on the “wholesale model”, in which retailers can buy books from publishers and set the retail price themselves.
Amazon was able to set many eBooks to a $9.99 price tag, sometimes even pricing new releases or popular eBooks lower to encourage buyers.
The scheme worried publishers who deemed readers might get used to cheaper books and that Amazon would dominate the market, which could lower the sales and prices of material books.
The Apple agreements effectively prevented publishers from allowing competitors such as Amazon to sell the same eBooks at lower prices.
A switch back to the wholesale model could increase Amazon’s revenues by about $1.1 billion in 2012 and $1.6 billion the succeeding year, although gross profits may not increase as much because of the expected discounts.
The effect on Apple will expectedly be minimal. Apple generates about $50 million from eBook sales, a tiny slice in comparison to its $100+ billion revenue.
The Justice Department and the European Commission are examining whether Apple reached its agreements with the publishers in a way that has violated the antitrust law.
Even though agency pricing itself is legal, the Justice Department infers that publishers may have connived to implement it with e-book retailers.
According to Walter Isaacson’s biography of Apple founder Steve Jobs, which contains details on Apple’s push for agency pricing, Jobs was aware of the publishers’ frustration over Amazon’s low-price strategy and took advantage of it.
Jobs was quoted in the biography saying: “So we told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30 percent and yes, the customer pays a little more but that’s what you want anyway.’ … So they went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.'”
When Apple entered the digital books market in January 2010, Amazon dominated almost 90 percent of the eBook market. As estimated by Cowen & Co., Amazon now has around 65 percent of the e-book market, Barnes & Noble has 20 percent and Apple has 20 percent at most.
Last year, a class action lawsuit against Apple and the publishers reached a Manhattan court on behalf of eBook customers, saying that the price of the eBooks sold by the five publishers rose to 30 to 50 percent in just a few months following Apple’s deals.
Despite the higher prices, the digital market has continued to grow rapidly.
From $78 million worth of sales in 2008, the industry has grown to $1.7 billion in 2011, according to Albert Greco, a book industry expert at the Business School of Fordham University.
Greco estimates the sales to rise to $3.55 billion this year.
In its request to dismiss the private lawsuit, Apple said it negotiated separate vertical agreements with each publisher and insisted on agency pricing because it had “no desire to incur the losses that would flow from retailing in such an environment.”
Andrew Gavil, who teaches antitrust at the Howard University School of Law, says the consumer would win under a Justice Department settlement that rips up the agency model, even shortly.
“The consumer will be the short-term winner because the autonomy to set the price of e-books will go back to Amazon. Manufacturers may have to lower the price of hard cover books. They may have to adjust their expectations of profits of hard copy books,” said Gavil.