25 Comments

Summary:

Apple says it had to cut an agency-pricing deal with publishers in order to weaken Amazon’s monopolistic control over the e-book industry. But wait — didn’t Apple behave exactly the same way towards the record labels as it is accusing Amazon of behaving towards book publishers?

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Apple finally responded on Thursday to the Justice Department’s lawsuit against it and several of the Big Six book publishers — for allegedly colluding to keep e-book prices high — by releasing a statement saying it did nothing wrong. The company says its agreement with publishers actually helped break Amazon’s “monopolistic grip” on the market, and that it always lets the companies that supply it with things like apps or books set their own prices. But wait: didn’t Apple more or less control the market for digital music in the early days of iTunes, and dictate prices to the major record labels in order to keep prices low? It sure did. In other words, it behaved more or less the same way towards the music business as it accuses Amazon of behaving towards the publishing industry.

The situations are not identical, mind you. When iTunes was first launched, Apple negotiated an agreement with the major record companies to charge a fixed price of 99 cents a track and give the labels roughly 70 percent of the proceeds (in most cases), while it kept the remainder as a commission. Before the arrival of the “agency pricing” model that Apple negotiated with e-book publishers — which allowed the publishers to decide what price Apple would charge for their books on the iPad — Amazon had deals that paid a specific wholesale price to publishers for a certain number of copies, and then it was able to charge whatever it wanted for the books in the Kindle store. In most cases, that was $9.99, a price the publishers believed was too low.

But despite the differences in these two models — with Apple’s iTunes model being closer to the agency approach, where the supplier sets the price and the retailer or “agent” gets a flat commission, rather than the wholesale model where the retailer gets to charge whatever they want — Apple’s purpose was effectively the same as Amazon’s, and so was the outcome for their respective markets.

Was Apple a monopolist or a market innovator, or both?

Apple wanted to keep the price of iTunes music low in order to stimulate the market, and because it hoped that low prices and control over the content supply chain would drive sales of iPods and other devices. And since it had the most popular portable music player at the time, it was able to dictate terms to the record labels — who had failed in virtually every attempt to launch their own digital music operations, and therefore had virtually no choice but to play ball. They protested every chance they got about the 99 cent limit, but Apple was able to hold that line until relatively recently when it changed to more flexible pricing.

In a similar way, Amazon jump-started the e-book market with the Kindle and wanted to keep prices low in order to stimulate the market — and to gain and keep control over as much of the supply chain as possible so that it could drive sales of Kindles and related devices. So for a time, it dictated prices to publishers just as Apple did, and when they balked it took steps like pulling all of their titles from its retail stores to show them who was boss. And when they charged too much, it simply discounted prices to $9.99 — a level that in some cases meant taking a loss on each book sold, something critics have called “predatory pricing.”

If Amazon had wanted to go head-to-head with Apple a few years ago — a giant who enjoyed monopoly control over both the online music business and the market for related hardware like the iPod — it might have offered record labels the opportunity to cut a deal that would have guaranteed them higher prices, just as Apple has done with publishers and the agency-pricing model. And presumably Apple would have argued that it was trying to stimulate a burgeoning market, and Amazon would have protested to regulators about the horrible monopolist who was treating content producers so poorly.

In the case of books, Apple did what it believed it had to do to try and compete with Amazon, and whether that involved collusion is ultimately for the Justice Department or the courts to decide. But it looked at things very differently when it was in charge of the music business — and the way that it treated record companies arguably benefited the music industry and music consumers in the long run. Who’s to say that the way Amazon has been trying to deal with publishers wouldn’t have similar benefits?

Post and thumbnail images courtesy of Flickr users Beverly and Mike Licht

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  1. Sure, Amazon did the same thing with e-books that Apple did with iTunes music tracks. But Apple isn’t criticizing Amazon – they are defending their practices to the DoJ. And it’s a very good analogy, because the DoJ didn’t go after Amazon or Wal-Mart when they tried to push their streaming music business by allowing publishers to set their own prices.

    I think this lawsuit is a little ridiculous. Governments should step in and protect us when companies get too big – that’s understandable. But price fixing is a side show when they should be considering bigger anti-trust measures. Personally, I’d rather see them go after the banks before they go after Apple, though.

    1. Robert Babak Rowshan Matt Eagar Friday, April 13, 2012

      Matt, agreed, I think this is mixing up the issue.

    2. Out of curiosity when do you think Apple will be too big and so justify an intervention by the government? Msoft was smaller by market cap etc when their browser behaviour was investigated, arguably it was also of less impact to a user than Apple’s iTunes etc.

      Apple has created a walled garden that almost no one else can play in. Their book policy seems to be designed similarly to their music policy, with the prime aim of getting people to buy ianything as a content consumption device. Thereby locking them into an apple only ecosystem and so locking them down pretty much forever. Not exactly an open market ideal

  2. Heh, as somebody who mostly buys albums only (and CDs from Amazon, at that), the 99¢ price was pretty much irrelevant. If I recall correctly, albums could ALWAYS be priced as the producer wanted, but Apple would get its 30% commish.

    I don’t recall a single instant where Apple subsidized sales in order to prevent other legit music sellers from getting a toehold in the market. Apple built its powerhouse business through (a) getting the producers to allow digital tunes on a per-track basis AT ALL, and (b) working with them to make the pricing transparent to users. By demanding a fixed 99¢, Apple talked the producers down from the $1.29 or higher prices that they thought they wanted, and thereby increased digital sales (good deal for Apple) and also cut Apple’s direct commission (not in Apple’s direct interest, but great for selling iPods).

    None of the Apple behavior was what an economist would call “predatory pricing,” as the book publishers have alleged that Amazon has engaged in, from its inception.

    That strikes me as the big difference between the two models, and it is indeed a HUGE difference. Apple created a market for digital music that any competitor could enter (and indeed, many did), whereas Amazon created a market for digital books that was designed to knock out competitors: just look at how B&N responded to the news that Amazon looks like it’ll be able to go back to its old tricks. Both approaches appear perfectly legal to me (from my limited knowledge of competition law) but the Amazon one seems intended to form a monopoly on book-selling that will be allow them excess profits, until the industry transitions to a brand new way of connecting authors, editors and trusted recommendations, together with readers.

    1. That’s a nice try, Walt — but the reality is that whether it was predatory pricing or not, Apple cut deals with the record labels that virtually no one else had a chance to duplicate, and as a result it enjoyed for years a monopoly over digital music that was even more iron-clad and lucrative than anything Amazon could dream of having with books. Thanks for the comment though.

      1. Mathew, why did virtually no one else have a chance to duplicate the deals that Apple cut with the record labels? What would stop the others?

      2. Actually, you are being disingenuous here.
        It is AMZN, WMT and others that have been trying desperately to undercut iTunes by offering special deals and cheaper prices.

      3. Say what? Apple stoped no one from cutting their own deals with the labels. Matter of fact many got to undercut Apple’s .99 model. Amazon for instance got special favorable deals from the labels as an attempt to prop them up against iTunes.

      4. Nice try yourself trying to distort things. Apple’s share of downloads came from providing the music industry market access through their hardware, not because of any sly deals with the labels. Apple makes a few cents per sale and consumers were not going to pay more than a buck without being tempted to download illegally. What other genius solution can you offer?

    2. They created a market anyone could enter….so long as the new kid on the block charged the same for the product as Apple. While it might be cynical to assume collusion between Apple and the labels…it may well be very accurate. The entertainment industry has operated as a monopoly for quite a while. By controlling the product at the entrance to the pipeline…there is no real way for market forces to prevail. Movies cost the same where every you go in the same area. Music..streaming or physical is priced with little deviation likewise. Print..at least until the media has exhausted reader interest…same thing. I don’t know what the answer is…but to claim that Apple or Amazon is more or less culpable…that one is less corrupted than the other…is splitting pretty fine frog hairs.

  3. This all seems silly and trivial when you consider (as someone else mentioned) some of the far worse methods of corporate abuses against customers. Banks are an obvious culprit but IMO telecoms are some of the worst offenders of this. Notice how every year prices go up and up while data caps continue to drop.. And the companies that in the past were offering more reasonable rates/caps are steadily matching with the competition. These companies have a history of doing whatever they can to gouge their customers; the fact that they hardly even try to hide it (I.e. the lame network congestion excuse they use to justify lower and lower caps) is infuriating

  4. If Apple sold CDs, as Amazon sells paperback books, I could see a better argument here. As much as the music industry might have complained publicly about pricing, I doubt any of them felt cheated as CD sales plummeted yet they were making profits (better profits?) per unit on iTunes.

  5. Eh, a bit of history is needed for context. At the time iTunes was created, digital versions of music was in heavy circulation…largely for free. iTunes represented one of the first legitimate ways to acquire digital only copies of music. So the pricing of 99 cents per song was actually a huge step in the right direction to the benefit of the music industry. Amazon instead has been aggressively building vertical control of the ebook sales, creating a false price by subsidizing a consumer surplus where there was no widely traded free versions. But calling Amazon a monopoly is also a mistake: the real situation was a monopsony (many sellers, one buyer), in this case uniquely producers to dealer. Each Kindle unit is a point of purchase store, and there was no other way a producer could get there except through Amazon. When the iPad came on the scene, it was suddenly a changed market, a duopsony (my invented word), where the producers didn’t set the price as customary in duopoly markets. The firms responded to the change, and Amazon had to abandon the subsidy program.

    1. Thanks, David — you are right that the state of the digital music landscape was very different when iTunes came along than the ebook market was, but in each case a provider effectively took control of that market and set prices. And while 99 cents may have been a big change from free, it was still a lot cheaper than the record labels wanted, which was my central point.

      1. Point taken, but compromise is the true goal of negotiation: win-win is preferred. Amazon historically settles for nothing other than win-lose, and its actions against its vendors, both in e-book pricing and other areas are unequivocally hostile and aimed at total domination. I don’t see the parallel with Apple and the music industry. Its a different beast.

  6. This article is great. But it leaves out one very important thing about today’s technology world: It’s OKAY when Apple does it. But if someone else does something like it, it’s monopolistic, stealing, evil, etc.

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  8. Interested observer Saturday, April 14, 2012

    I’d like to know how having 10% of the market is monopoly power or a trust.

    DoJ might get someplace with the book companies, but seriously(!) Apple has like 10% of the e-book market. This is bogus. I was around for the AT&T, IBM, and MicroSoft suits, and this one doesn’t _begin_ to measure up.

    1. Because if there as been pricing collusion between suppliers and the market stall holder then surely there is a problem?

  9. Whatever the writer wrote is not true, Apple do not puchase music frm the labels to sell them at a loss. They ensure that everyone makes something and the labels made the most.

    Nice try but fail,

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