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The Hot Mess That Is Apple's E-Book Legal Fight

By Chris Maxcer MacNewsWorld ECT News Network
May 16, 2013 5:00 AM PT

The U.S. Justice Department is painting Apple as the "ringmaster" of an ebook price-fixing conspiracy. The news came out in court filings made public earlier this week as the DOJ prepares to do battle with the only member of the so-called conspiracy unwilling to admit wrongdoing and take a public spanking.

The Hot Mess That Is Apple's E-Book Legal Fight

Five influential and powerful publishing companies in the DoJ's sights -- Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster -- have already settled the original charges. A reasonable assumption is that if the publishing houses all settled the charges, then Apple must be guilty, right?

Not so fast.

An embattled publishing industry doesn't have the power, money, or force of will to take on Justice Department. If you're holding a rock and facing down a giant with one eye, not very many companies are willing to do anything more than turn tail, run, or hunker down and beg forgiveness.

That doesn't necessarily mean that Apple is innocent, either.

The E-Book's Beginnings

This whole price-fixing issue really starts with Amazon, and the amazing success of its Kindle e-reader device. Maybe even before that, really.

Since its existence, Amazon has been able to fundamentally reshape -- and sometimes destroy -- the old school brick-and-mortar retail book publishing industry. Like Barnes & Noble crowding out independent booksellers (I used to work for a wonderful indy back in college), Amazon snapped up some of the world's best, most prolific readers (i.e. book buyers) and provided them with inexpensive books and fast home delivery.

Amazon, as a seller to many customers, gained freakish power in the book business.

Amazon, with print as well as e-books, could sell books at prices far lower than other sellers -- and even lose money on them as they made efforts to attract consumers.

If the measure of goodness and light for consumers is offering products at the lowest possible price, Amazon is like a bright shining sun.

However, we all know that is too simplistic. The world is far more interdependent. Someone wins, someone loses.

Never mind that Amazon felt a lot more like a bulldozer that was systematically plowing the traditional publishing industry into the ground. Whether or not you believe the old models needed fixing, Amazon was making changes fast. Heck, I liked it. If you don't live next to a big bookstore, you're options aren't good. Amazon changed that, then changed it again with the Kindle.

Enter Apple with its iPhone and iPad.

Apple looks to find a problem with an industry and reshape it to make it better, arguably so that Apple benefits. The e-book industry was a mess before Apple got involved. The publishing houses were trying to maintain control of their products to make sure that e-books didn't undercut hardcovers, that print captured opportunity but didn't result in losses, that e-books didn't destroy the book business before everyone was reading books electronically. And just a couple of years ago, this was quite worrisome.

In my mind, when Apple got involved at that time, the book publishing industry was tied up in a nasty Gordian knot. There are so many blog posts and articles on this topic, full of good guys and bad guys, that you could waste a week of your life. The only things to show for your trouble would be a headache and eyes locked into a focal point two feet in front of your face.

I believe that Apple knew it could never pick that knot apart. So Steve Jobs started hacking at it with a sword.

Enter the Agency Model

Apple is enamored with the idea that any digital product -- like apps -- can be offered to its ecosystem of customers at a price determined by the developer -- the maker.

If Apple completes a sale, the developer gets 70 percent of the selling price while Apple takes the rest. It's a reasonable business model. Apple wanted to apply that model to the e-book world.

The problem is that book sales didn't work like that. Retail stores set their own prices, and they could have sales or not at their own choosing. When high-volume book sellers choose volume over in-person quality, cheaper could rule the world.

At the same time, retail stores needed inventory to sell books, but didn't want to get stuck with a bunch of books they couldn't sell, so publishers would let them return unsold inventory. As near as I can tell, Home Depot doesn't get to return a bunch of toilets to the manufacturer if they don't sell all that well. So right off, book selling was a nasty business, made nastier by e-books which not only bypassed retail stores but bypassed print as well.

If Amazon decided to sell a best-selling novel from a high-profile author -- or multiple authors -- at a loss, just to sell more Kindles and use the e-books as loss-leaders to build its ecosystem of customers, a publisher could easily get caught holding thousands upon thousands of print books and not see profits from the e-books to deal with the mess. (And Amazon could return thousands of hardcovers, too.)

If you're a publisher, it's kind of a scary position to face. Would you trust your entire business to the whims of Amazon?

Apple's proposal was to ask publishers to sell to them in its agency model where the publisher set the price and Apple took its cut. Seems simple, right?

But what if a publisher said an e-book is US$15, but Amazon goes and offers it for $9.99? In a digitally connected world, Apple can't sell against that -- hence Apple's requirement that publishers not offer the same product at a lower price anywhere else. That makes sense, right? If Apple isn't setting the price and can't control it, how can Apple invest and compete with e-books when there's an Amazon always willing to undercut the price, never mind so-called profitability?

Is your head spinning yet? It gets worse.

If the publishers really decided to accept a percentage -- but could not set the street price -- Amazon could offer a hot title for $0.99, leaving the publisher with a paltry $.70. Devastating. So the publisher has to do something to avoid that, but that's not how regular wholesale/retail works.

Why can't the publishers just say, "OK, for all e-books, we're going to charge the seller $7 or whatever the wholesale price is." Sounds nice and simple, right? That means a bookseller could offer the e-book title for $12 and make a $5 profit. Or $11 and make a $4 profit. And the publisher still gets $7 either way.

The problem here is that Amazon could sell the book for $7.01, or even $6 and take a loss, again and again, driving other book-selling businesses out of business. Amazon could easily weather the effort to create an e-book monopoly.

Scary stuff. And we haven't even gotten into the vagaries of author royalties.

Guilty or Not?

Apple may or may not have had good intentions. Apple may or may not have worked hard to twist the arms of publishers. But at the time, the publishers didn't really have a choice. They needed alternatives to Amazon, real competitors, to ensure a fair market value for their work. The question is, did they collude to set prices?

I think it's pretty clear they agreed to set prices at $12.99 and $14.99. Whether or not they were working together in the same room didn't matter. They knew that this was Apple's program and it was going to be the same for everyone. So, sort of price fixing.

Yet how do you extract yourself from a bad relationship when your ability to pay the bills -- the mortgage -- is intricately entwined with a capricious and possibly unstable spouse?

There were no good choices. But I'm betting that Apple knew that the way forward was to reset customer expectation on the value of an e-book at a reasonable and stable price. This worked with music and movies. Why not with e-books too?

However, this price was higher than what Amazon (and the e-book average selling price) was at the time. Effectively, Apple's entry raised the price of e-books for consumers -- hence the gaze of the DoJ.

As a consumer, my sweet spot for a new novel is $9.99. For an older novel, doggone it, I want to pay a bit less -- let's say $7.99. That's comfortable, even though I'm saddled with DRM that makes it quite difficult for me to lend "my" e-book to a friend. (That's another hot mess altogether.)

What if a publisher wanted to offer a hot new e-book at just $5.99? If the publisher could really set the price -- like app developers -- the publisher could do that. I get the impression that move, wanted or not, wasn't possible. Apple somehow made it clear that it could not happen. Alternately, what if the publisher wanted to sell a hot new e-book for $19.99 -- well above Apple's sweet spot pricing? If Apple didn't allow that pricing choice, it sounds a lot like price-fixing to me.

In which case Apple deserves a good spanking by the DoJ.

Asking the book industry to shift to an agency model is fine and fair enough, but then controlling the pricing, too? Up or down? Not cool.

Unfortunately, the saddest thing in this entire twisted plot is that right now, I feel better about the e-book industry than ever before. A lot of people are reading more than they have in the past -- on their iPhones, iPads, and Kindle Fires. As a consumer, I now have more choice and I'm better off than before -- I'm reading far more books each year than I have the year before, all because of e-books.

But does the end justify the means?

I sure hope not. If you're going to let a manufacturer set the price, then you sure as heck better let them set the price.

Anything different is just a finely tuned lie.

MacNewsWorld columnist Chris Maxcer has been writing about the tech industry since the birth of the email newsletter, and he still remembers the clacking Mac keyboards from high school -- Apple's seed-planting strategy at work. While he enjoys elegant gear and sublime tech, there's something to be said for turning it all off -- or most of it -- to go outside. To catch him, take a "firstnamelastname" guess at WickedCoolBite.com.

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