Apple sued over ebooks, but did it save the publishing industry?

Apr 12, 2012

The US government says Apple colluded with publishers over pricing, but they might have done readers a favour

Getty Images

THE US government is suing Apple and book publishers MacMillan and Penguin for allegedly conspiring to raise the price of ebooks. Three other publishers, Simon and Schuster, Hachette and HarperCollins, have already settled. But observers are split over whether the Department of Justice's lawsuit, which will most likely lead to a reduction in the price of ebooks, is good for the publishing industry.

At issue is the so-called 'agency model' of book pricing agreed between Apple and the five publishers in 2009 before the launch of the iPad.

The deal allowed publishers to set the price at which bookstores sell ebooks and let the retailers keep 30 per cent of revenue. At the same time, Apple extracted from the publishers a guarantee that no rival retailer would be allowed to sell ebooks at a lower price than that for which they are sold at Apple's iTunes store.

This was a major concession to Apple and it was aimed squarely at the ebook market leader Amazon who were selling ebooks at $9.99. This price level - which represented a loss for Amazon - was harming competitors, but the online retail giant was prepared to accept the short-term pain in order to win new customers to its Kindle e-reader.

The 2009 deal lays bare the cut-throat business practices of Apple's late co-founder Steve Jobs. As part of its case, the Department of Justice refers to an episode described in Walter Isaacson's biography of Jobs, in which the then-CEO of Apple said:

"Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. Publishers hated that - they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30 per cent, and yes, the customer pays a little more, but that's what you want anyway.'

"But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. 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.'

"We were not the first people in the books business. Given the situation that existed, what was best for us was to do this aikido move and end up with the agency model. And we pulled it off."

It is this "aikido move" for which Apple is now being sued.

Lance Ulanoff points out on Mashable that Jobs probably saved more than one business. "Without Apple to force Amazon to rethink its pricing model, book publishers might have had to resort to draconian measures to stay afloat," he writes. "Authors might have seen their publishing and sales platform opportunities shrink as fewer publishers took risks on unknown or no-name authors. Oh, and surely Amazon would be making less money on ebooks than it is today."

But the LA Times is less forgiving. In an editorial, it says the argument that Apple's 'agency model' promoted competition in a market that was until then dominated by Amazon is "irrelevant".

"The Supreme Court ruled long ago that companies can't fix prices just because they're worried they can't survive otherwise. If the Justice Department has evidence that Apple and the five publishers colluded on a plan to raise the price of ebooks, it's right to seek a remedy."

Sign up for our daily newsletter

Disqus - noscript

The trouble is it is a price fixing cartel, the same as if the petrol companies all got together and decided what you are going to pay. Or the large supermarkets did the same thing with the food you buy, it's against the law and unfourtunately or not you cannot circumvent the law to suit your company. I personally think it's going to cost book publishers a lot of money and some could go out of business and that is a terrible thing to happen, and I would rather have a book than an e-reader anyway. Unfortunately what Apple did was wrong.