DOJ collusion lawsuit ignites discussion about e-book pricing model strategies

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Apple and Amazon.com differ greatly in their e-book retail pricing practices
Apple and Amazon.com differ greatly in their e-book retail pricing practices

When the U.S. Department of Justice (DOJ) sued Apple and five major New York City-based book publishing companies in April for allegedly colluding on prices, it called into question the future of the e-book industry and the potential impact on prices for the everyday consumer.

The five e-book publishers are familiar names — HarperCollins Publishers Inc.; Simon & Schuster; Hachette Book Group; Pearson Plc's Penguin Group (USA); and Macmillan — and all declined to comment for this story.

“It's hard to imagine this investigation not leading to some type of change in e-book prices,” says Paul Verna, a senior analyst at eMarketer. “It's going to be disruptive.”

At the heart of this issue is a difference in sales philosophy between e-book retailer titans Apple and Amazon.com, Verna says. When Amazon began selling e-books it turned to a wholesale model, retaining control over the price of titles purchased from the publisher.

Apple's “agency model” gave publishers more control by setting a price with the publisher and taking a cut of the profits, much like Apple's app store does with developers, Verna says.

“Amazon was placing unrealistic expectations in the minds of consumers as to what books should cost,” explains Mark Coker, CEO of e-book publisher Smashwords.

“Publishers were excited that they finally had a white knight,” Coker says of Apple's agency model, which some saw as a welcome alternative to Amazon's tack. “They were excited Apple could provide another side to Amazon's dominance in the market.”

Though Amazon controlled about 90% of the e-book market in 2010, publishers were able to strong-arm Amazon into adopting a form of the agency model. Amazon now has greater control over the e-book marketplace and a stronger voice on how books are priced. From a business perspective, the ability to set their own prices to maximize profit is a big win for publishers.

Since Amazon relies on such a wide variety of product sectors to make money, it can stand to lose a little on e-books, if necessary, to grow the market for its Kindle e-readers, Coker notes.

“Publishers are using price as a marketing tool to attract readers,” Coker says. “I recognize that retailers are good at pricing, but I still think that authors and publishers need to have control over their books.” This will ultimately allow more book publishers to remain in business, he says.

Digital books consultant Mike Shatzkin, founder and CEO of The Idea Logical Company, Inc., says it's too early to tell what, if any, impact the DOJ's lawsuit could have on e-book prices, though he predicts prices will generally decrease based on the laws of supply and demand. “The supply of e-books is going to go up because it doesn't take much capital to publish” them as compared with traditional books, he says.

However, if the DOJ finds Apple and its peers guilty of collusion and outlaws the agency model, Amazon will earn a monopoly on the e-book business, which, Shatzkin says, is not good for anyone.

Verna says prices will drop because consumers view digital media as cheaper, or generally less valuable in terms of cost than traditional media.

Still, he says, “prices have gone up somewhat … it's really going to come down to how well the case plays out for either party — if it's a modest settlement then you would see a similar market to what we have now.”

As of press time, the lawsuit had not been resolved.

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