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Summary:

In the mushrooming controversy over e-books, it’s easy to understand the publishers’ motives. But what about Apple? (NSDQ: AAPL) Did the com…

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In the mushrooming controversy over e-books, it’s easy to understand the publishers’ motives. But what about Apple? (NSDQ: AAPL) Did the company want to raise book prices in order to protect its iPad and blunt the rise of Amazon?

These questions will figure prominently in two regulatory investigations and in the more than two dozen class action suits that have been filed in the US since August.

Recall that, according to the accusations, big publishers colluded to impose “agency pricing” on Amazon (NSDQ: AMZN). This pricing model is a commission scheme that lets publishers control the minimum amount that retailers like Amazon and Barnes & Noble (NYSE: BKS) can charge consumers for e-books.

The origin of the scheme, and Apple’s role in it, was described in a prescient 2010 New Yorker article by Ken Auletta. The author describes how the publishers despaired over Amazon’s pricing tactics but feared that standing up to the Seattle giant together would invite an antitrust investigation. The impending arrival of the iPad promised salvation. The tablet appeared to offer an alternate e-book platform and, better yet, it was controlled by a partner who was willing to along with the scheme to raise prices.

The alleged conspiracy was afoot. The smoking gun moment, according to the lawsuits, occurred when Steve Jobs told a Wall Street Journal (NSDQ: NWS) reporter at the iPad launch in January of 2010 that publishers might withhold their books from Amazon because they were “unhappy.”

What was Jobs’ motive in going along with the scheme? Auletta suggests that Jobs saw an opportunity to help the publishers and to muscle in on the e-books market at Amazon’s expense. But the class action lawyers see a deeper strategic motive:

Apple conspired with the Publisher Defendants … in order to cut into Amazon’s substantial share of the markets for eBooks and to prevent Amazon from emerging as a serious competitor to its mobile platforms for the distribution, storage and access of digital media.

The lawyers’ theory is bolstered by recent events. This Christmas, Amazon’s multi-media Kindle Fire is flying off the shelves and may pose the first real threat to a tablet market that has been utterly dominated by Apple (even though the Fire is reported to be a “miserable” experience). In retrospect, then, Jobs had every reason to weaken Amazon in 2010 by undercutting its e-book business.

The one problem with this grand conspiracy theory is that it overstates the importance of e-books in the larger consumer market. Remember that, in 2010, Apple was raking in fabulous profits from its iPhone and starting to tangle with Google (NSDQ: GOOG) in the great game for control of the smartphone market. As this terrific graph from Asymco (via Felix Salmon) shows, Apple’s business is driven by sales of devices not content. In other words, the e-book market is inconsequential to Apple if you consider that the company’s overall earnings could allow it to buy the entire publishing industry several times over.

In light of these facts, the price-fixing conspiracy does not make a lot of sense unless Jobs’ deal with the publishers was indeed part of a far-sighted strategy to keep Amazon out of the tablet market.

Apple is likely to argue that it did not create any special deal with the publishers but simply engaged in its usual pricing practices. After all, the agency pricing that has been so controversial in the publishing sector is simply common practice for Apple which imposes a 30 percent commission on everything it sells in its app stores.

As it typically does when it comes to legal issues, Apple declined to comment for this story.

Apple has yet to file an answer to the class action claims. Its only significant court filing so far has been a brief (embedded below) in favor of consolidating the dozens of cases in the antitrust affair. In the filing, the company states that it is indifferent to whether the case takes place in New York or California.

Finally, the Apple filing provides a window into the scale and complexity of the impending litigation:

Two of the complaints name Amazon.com, Inc. as a defendant … the Burstein complaint also names Barnes & Noble as a defendant and is the only complaint to do so. Meanwhile, not all of the complaints name all six publishers. Eight of the 15 complaints do not name Random House, Inc. as a defendant .. whereas the Greene complaint also omits Simon &Schuster, Inc. as a defendant.

Apple in support of multidistrict litigation
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  1. “As this terrific graph from Felix Salmon shows…”

    The “terrific graph” you refer to, above, was actually created by ASYMCO. ASYMCO is one of the best analytical sites on the web and credit should go where credit is deserved.

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    1. FalKirk: thanks for calling attention to this. I didn’t mean to suggest Salmon had produced the graph. I’ve updated to provide better attribution. rgds, Jeff

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      1. No problem. I could tell it was an innocent mistake.

        I applaud Felix Salmon for including the graph in his article, but I admire the ASYMCO site so much that I wanted to make sure that they received the credit due to them.

        Thank you for the prompt reply and thank you for the informative article.

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  2. Sorry, but Amazon already has too much influence over the price of e-books. Why should anyone hand them a monopoly especially when they are trying to cut their publisher partners out of the equation by starting their own imprint?

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  3. The interesting thing about this is that Apple has the rider that they get the best price regardless of the methodology used to sell the books.

    Amazon uses wholesale/retail pricing structure.  Amazon buys x copies of the book at a discount and sells them to people.  If Amazon buys lots of books, they get a deeper discount.  So, for example, let’s say a book costs $15.  Amazon negotiates with the publisher and agrees to buy 5,000,000 copies for a 75% discount.  So Amazon pays $3.75 for each copy of the book, meaning the publisher gets $18,750,000.  It’s up to Amazon to move those 5,000,000 copies.

    Apple uses an agent structure.  That means the publisher decides on the price, so they can sell the book for $15.  Whenever Apple sells a copy of the book, the publisher gets 70% of the money, $10.50, and Apple gets 30%, $3.50.  There’s no upfront payment or anything like that, but the publisher gets more of each sale.

    Both are legitimate ways of selling things.  The problem is that Apple’s agreement with the publishers says that if the publisher gives Amazon a 75% discount, they also have to give Apple equivalent terms, even though the methodologies used are completely different.

    That’s where I think there is a problem.  I’m not sure Apple should be able to insist on this.  It reminds me, way back when, of Microsoft insisting that they get paid for a PC sold, regardless of whether or not it has Windows installed on it.  Microsoft had the market clout to do that.  The question is whether or not iTunes has the clout to do that.

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    1. Thanks for the insightful post, RedMercury. You make a good point that agency pricing is hardly a new idea and that both the agency and the wholesale model are “legitimate ways of selling things”

      Re Apple’s market clout, I’ve wondered about that myself. The company’s influence combined with its ’30 percent, take it or leave it’ rule can seem especially heavy handed when it comes to things like subscriptions.

      Finally, you’re exactly right that these issues turn on Apple’s ‘best price’ clauses — I’m hoping to do a post on this soon.

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  4. What it comes down down to for us is this. Ther ends up being *no* competition. In almost all (say, 95%) of the books in which we’ve been interested, the price on iBooks has turned out to be *identical*, to the penny, to the price on Amazon! It doesn’t make a hill of beans’ difference where we buy, so the choice is one of reading GUI. Neither vendor seems willing to lose a penny to compete. Imagine that.

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