The U.S. Government filed an antitrust suit against five book publishers and Apple Inc. for collusion on setting the price of books. Yikes! What are they doing? As Yogi Berra famously said, “This is déjà vu all over again.” The U.S. Government took antitrust actions against IBM and Microsoft when they were market leaders and innovators in their respective fields. What was the result? After wasting untold billions of company and taxpayer resources, the cases were either dropped (or had consent decrees expire) without having any apparent beneficial affect for consumers, competitors, or the Government. In business, we strive for win-win, and this was lose-lose. The people that benefitted are the law firms that represented the defendants.
Now that Apple is firing on all cylinders, the Government is doing it again — suing them for antitrust violations.
Here is what Gary Shapiro, CEO of the Consumer Electronics Association had to say about the law suit in a press release, “Sadly, we’ve seen this before with absurd legal U.S. government challenges to Google, Intel, Microsoft and Qualcomm – world-class American innovators. Each time, no real harm was found, but our government’s attacks enabled others to extract billions in fines or foolish remedies.”
The digital revolution has provided opportunities and threats to businesses and all segments of society. One area that has been impacted greatly is the distribution of goods and services. Businesses that have understood the opportunities and threats and made adjustments to their added value have thrived. Those that have not have been seriously harmed.
Distribution is the convenience function, and nothing is more convenient than downloading digital content 24/7 whenever and wherever people want it.
Apple astutely anticipated these changes and made adjustments to take advantage of them. The Company created the iTunes online distribution system to legally distribute music when many were illegally downloading and sharing music online without paying for it. Steve Jobs miraculously convinced a reluctant music industry to sell their content via iTunes. Many credit Apple with rescuing the industry since record companies were bleeding badly from the collapse of traditional music store distribution and illegal downloads.
The book publishing industry was similarly imploding because traditional distribution was finding it difficult to compete with online booksellers, such as Amazon, which had virtually unlimited shelf-space without paying for the shelves. Moreover, before introducing the Kindle e-reader, Amazon convinced major publishers to release digital books simultaneously with hardcover versions. This simultaneous release strategy, which went against longstanding practices of not even releasing paperback versions until some time after hardcover books are sold, was followed by Amazon’s introduction of the Kindle.
Amazon e-book pricing
With the Kindle introduction, Amazon announced they would be selling e-books for $9.99, which blindsided publishers and caused many to surmise that Amazon is selling them at a loss. If true, this is a predatory pricing strategy, which is illegal in the US but difficult to prove. Whatever its real motives, experts, such as Scott Turow (author, lawyer, and head of the Authors Guild) believe Amazon’s e-books pricing strategy has destroyed bookselling through bricks and mortar stores and has handcuffed e-book competitors.
Apple’s iTunes pricing models
When it created iTunes, Apple recognised that people would share digital content without paying if they could unless they were given a better alternative. Apple developed the iPod and initially offered songs on iTunes for $.99. Steve Jobs wanted a set price for songs because, unlike books, individual songs are not as variable in length or format as books. Moreover, there was a precedent for $.99 pricing. Single records were sold in the physical world for $.99 going back more than 50 years. Today, iTunes pricing has evolved into a 3-tier pricing system – $.69 for oldies, $.99 for most songs, and $1.29 for the top hits. The iTunes model gave music copyright owners an opportunity to be paid for their songs rather than receive nada from illegal sharing and downloads. The added value for those that pay is that they get legal copies of songs that they can play on devices without worrying about compromised quality or viruses.
Apple’s iBooks pricing model
When the publishing industry was in the throws of the same disruptive revolution as the music business, Apple came along again with a device that delighted its customers – the iPad. It created a distribution system called iBooks that was to book publishers what iTunes was to music publishers. Instead of using a traditional reseller distribution and pricing model where it set the price, Apple uses an agency model. With the agency model, publishers set the price of their books – typically $12.99 to $14.99, and Apple charges a 30% commission to sell them. This makes sense since books vary in size and other attributes, and publishers have significantly different contractual arrangements with authors.
What’s wrong with this picture?
While the Apple pricing model enables publishers to make money to cover their publication costs and Apple to make money selling the e-books, the Government presumes that customers suffer because they are paying $3 or more for e-books from Apple (when compared with the Amazon loss leader price). Meanwhile iPad owners are not complaining. Most love their iPads, and they seem willing to pay for e-books to run on them. Consumer Reports has even rated the iPad as the number one tablet.
Apple and book publishers are being sued by the Government for collusion at the same time the Government is allowing Amazon to sell books at a loss, which many believe has the effect of driving traditional and small e-book resellers out of business. If the Government looks at the data, they could just as easily conclude that the Amazon approach, which is being allowed, is the one that is stifling competition. If the Government wants to find collusion, it should investigate the traditional industries that it is subsidizing (or bailing out) as they make outsized profits, pay themselves large bonuses, and fail to pay their fair share of taxes. It should leave innovative technology companies, such as Apple, alone. If they don’t, they could stifle innovation and competition. Customers don’t have to buy Apple products or content from Apple. They buy these products because they want them. This should not be suppressed. It should be encouraged – especially at a time when we do not have enough healthy companies that are growing and employing more and more people.
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