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Summary:

Apple didn’t want to compete with Amazon on ebook prices. But it is already showing that it is more than willing to do so. And if customers are drawn to Apple’s new low prices on ebooks, it’s possible to envision the company’s ebook market share rising.

Using iBookstore On iPad

Apple would prefer agency pricing on ebooks — that, we know. In fact, Apple is likely to appeal the DOJ’s ebook pricing settlement with HarperCollins, Hachette and Simon & Schuster, which was approved last week. Turns out, though, that doesn’t mean Apple won’t play the price-drop game on their ebooks in the meantime.

We saw yesterday that HarperCollins has already entered into new contracts with ebook retailers like Amazon, Barnes & Noble and Google. Now Apple has a new deal with HarperCollins too. This morning I compared the prices of 12 HarperCollins titles across ebook retailers. Like Amazon, Apple is selling new bestselling ebooks for $9.99. (I’ve asked Apple for a comment on its pricing strategy for ebooks and will update this post if I hear back.)

Amazon is already dropping its ebook prices to match Apple’s, in the cases where Apple had priced a book lower than Amazon did. For instance, James Rollin’s Bloodlines and J.A. Jance’s Judgment Call were each $10.94 in the Kindle Store this morning and $9.99 in iTunes. Just a few hours later, both books are down to $9.99 at Amazon as well.

Sure, we can’t draw major conclusions about Apple’s new ebook pricing strategy based on what it’s done with one publisher’s books. But in the case of HarperCollins, we’re already seeing that even if Apple would prefer agency pricing, price bands and MFNs for books, it’s willing to compete on price in the absence of those things. And it has a lot more money to do so than other ebook retailers like Barnes & Noble and Kobo.

Under agency pricing, Apple’s ebook market share hovered around 10 percent. But if customers are drawn to Apple’s new low prices on ebooks, it’s actually possible to envision a world in which Apple’s ebook market share rises — under the terms it didn’t want.

  1. I’m not convinced Apple even cares that much about ebooks, or at least not till the DOJ intervened. And even though they have very deep pockets I doubt Apple would have bothered to price-match Amazon in the wholesale model. It’s just not Apple’s style to sell anything at a loss. Amazon, OTOH, is more than willing to lose money on the sale of certain ebooks if it helps build their customer base.

    Steve Jobs talked about going “thermonuclear” on Android/Google. Perhaps the DOJ intervention changes things but I figure Apple is as likely to completely abandon ebooks and the iBookstore as they are to play a long-term game of price-matching Amazon and losing money on most transactions.

    1. Thanks for the comment, Joe. I guess we’ll see in the long term. Right out of the gate, they’re playing the price-matching game (at least on new bestsellers) but we’ll see if that continues. It’s going to be very interesting to watch over the next few weeks, and as Simon & Schuster and Hachette sign new contracts with retailers.

      1. Doesn’t Apple get 30% no matter how it is priced? What difference does it make to Apple?

        At any rate, perhaps I do not understand iBooks. I thought, the publishers are selling directly through to the consumer and Apple takes 30%. Isn’t that how it works for record labels? Apple, the only middleman, reviews the book to make sure it meets the file standard and stores the copy for download.

        I presume that Apple merely “accommodated” the publishers to limit pricing, in order to have a limited number of price categories, something Apple likes aesthetically. Now that has been ruled invalid, Apple has no price categories and the publisher puts it up at whatever is competitive. Does Apple care if the book sells at $1 as long as Apple gets its 30 cents?

        Again, maybe I am wrong. I thought the whole point of iBooks was that Apple was merely a transit point, not a retailer like a bookstore.

  2. I can never see my buying my books on Apple. If I lose my Kindle, I can pick up a new one for $70 or read my books from a web Browser. If I lose my iPad, I’m locked out of my content until I spend several hundred dollars on an iOS device. Amazon’s efforts to put their Kindle App on as many platforms as possible, not just their own hardware, is what wins my business.

    1. I agree that it is an odd and inconvenient decision for Apple not to develop a desktop component to iBooks. But your last statement is a bit curious: iPad is open to all reader apps including Kindle, etc. Kindle is closed to anything but Amazon (for reading and purchasing). Yes, both tablets and readers can read PDF files. Isn’t iPad simply more valuable as a consequence? Also, I would argue that comparing dedicated readers to dynamic tablets for cost isn’t a good discussion.

      1. @David Thomas:
        No, Kindle is not closed to anything but Amazon. It’s true you can’t install APPS to read other formats on a Kindle, (but who needs them)? You CAN buy books from other sources in .mobi or .prc format, which the Kindle does read. Smashwords.com is one of those sources. Authors and publishers also often provide files in mobi format. The vast majority of the other sources do not apply digital rights management to the files. You can now also get public domain books in mobi format free from Project Gutenberg and other sources.

        There are also conversion apps that will take an unlocked (no digital rights management file) and convert from one format to another, for those who know or can figure out how to work with such apps.

      2. @David Thomas
        Good point, and I agree that the iPad is more valuable, which is why it costs more. However I was talking about buying content, not hardware. I will happily buy the iPad for the reasons you describe, but I don’t like being locked into it in order to get my content. If I lose my iPad, I do not want to have to immediately spend several hundred dollars just to see my stuff again. The Amazon model gives me far more flexibility and is much more customer friendly.

  3. It is interesting to note that the article is locked in to Apple and Amazon while Barnes & Noble and their Nook library of content is not even being considered as a pricing alternative.
    http://entertain247.blogspot.com/2012/09/apple-and-amazon-competition-heating-up.html

    1. Thanks for the comment, Andy! I considered the other retailers more thoroughly here and also linked to this post above: http://paidcontent.org/2012/09/10/that-was-fast-amazon-is-already-discounting-harpercollins-ebooks/

      The reason I am focusing on just Apple and Amazon in this post is that Apple really hasn’t had to compete on ebook pricing up to now, because it hasn’t sold ebooks through a non-agency, MFN model before. To @Yacko’s point above, we don’t know exactly what types of contracts Apple is going to work out with Hachette, HarperCollins and Simon & Schuster now but the settlement rules that those three publishers cannot have sign new agreements that include MFN clauses for five years. They can’t guarantee Apple that it will have the lowest price on their ebooks as they were able to do before the settlement. That means that Apple has to start actively competing on ebook prices.

      TOC’s Joe Wikert, above, is arguing that Apple really is not interested in doing this long-term; he thinks Apple won’t want to be in price-matching wars with Amazon forever. We’ll have to see what happens, but the reason I chose to focus on the two companies in this post is that it’s a new dynamic for them. (Sites like B&N and Kobo and Google have been competing with Amazon on wholesale books all along.)

  4. While I agree with Mr. Wikert — Apple will just cede bookselling to Amazon rather than subsidize e-book prices to compete in the long run — it is most important to bear in mind that price alone does not dictate higher book sales. Just because a book now costs a few dollars less through the iBookstore doesn’t mean it will sell more copies. Demand (for books) is primarily created by forces outside of price. And before cranks jump all over me answer this: does an increase in demand *lower* the price of an e-book? Sure, hitting a bestseller list will make that happen, but all discounting is a dealer discretion — its not the vendor that reduces the prices. Price will make a consumer choose *where* to purchase a specific title, or *when*, but variations of a few dollars between asking and purchasing costs does not necessarily influence the volume sold. I hear the opposite argument a lot, and the tendency is to point to an anecdotal outlier rather than consistent identifiable evidence.

  5. Michael W. Perry Tuesday, September 11, 2012

    It just came to me that Amazon may live to rue the day it met with DOJ lawyers and sent them after Apple.

    Why? Keep in mind the differing market dynamics.

    1. Amazon feels it has to meet or beat any price that Apple sets. This gives Apple the ability to control Amazon’s pricing. If Apple sells at a loss, then Amazon must do so too. In the past, that’s been Amazon strength. Now it’s their weakness.

    2. Apple, with its large profit margins, has far deeper pockets than Amazon. This means that, all other things being equal, Apple can afford to sell at a loss for much longer than Amazon.

    3. All things aren’t equal and the differences favor Apple, specifically:

    a. Ebooks purchased from Apple can only be displayed on its iDevices (not even Macs). That means that, while Apple can force Amazon to sell to everyone on any platform at a loss, Apple only loses money on customers who’ve already bought one of their iDevices.

    Assume, for instance, that Apple has a 10% market share for below cost ebooks and Amazon a 70% market share. That means that for every $10 million that Apple looses, Amazon will loose $70 million. It’s not hard to figure out who can play that game the longest.

    b. Apple makes a hefty profit on each ebook-ready iDevice it sells. It can treat its losses on ebooks as simply one of the costs of selling iDevices much like it gives away apps such as iPhoto for free. On the other hand, Amazon either loses money or just breaks even on its digital readers and has to distribute its iDevice and Android readers for free.

    Amazon’s marketing scheme, selling hardware at or below cost and making up the difference by selling ebooks for a nice profit, completely collapses if Apple forces them to sell many popular titles below cost. Amazon loses money on both its hardware and its ebooks. That’s no way to run a company.

    Amazon’s only remaining move, as I see it, is to concede to Apple the lowest price in many cases, particularly on bestsellers. It will then try to make a market on those who can’t or won’t buy an Apple iDevice.

    *****
    Since this Apple Contingency Plan just came to me a few minutes ago, I finally understood what’s perhaps the reason why Apple hasn’t created a way to view their ebooks on anything but their mobile devices. If you’re interested in profiting on hardware and not ebooks, it’s a sensible move.

    In a pinch, this lets Apple sell ebooks below cost without bearing the frightful burden in losses that Amazon will face. And if Apple wins, the generally, lower-than-Amazon ebook prices will become another selling point for iPads, particularly among rabid readers.

    And that cheers me up a bit. I really don’t like the idea of Amazon, Apple or anyone owning this market. As a writer, I’d rather they all be eager to do my bidding and not vice-versa.

    1. I’m not a fan of either Amazon or Apple (Apple’s recent lawsuit about rectangle phones with rounded corners and other such generic things annoyed me as someone who chose to buy an Android rather than an iPhone, and I hate Amazon’s attempts to destroy physical bookstores and marginalize print books, when I prefer bookstores and read print exclusively) so this could be amusing to watch…. I do love Barnes & Noble and the publishers and hope they don’t die in the process. :(

    2. That is indeed a intriguing line of thinking and you may be right. Interesting times ahead.

    3. Which makes you wonder why Apple was (still is) so adamant on the agency model in the first place eh?

  6. No retailer can compete on price with Amazon, even the mighty Apple…so in this regard I agree with @Joe Wikert. It’s not Apple’s style to sell at a loss…well, at least not their devices. But they were a major force in changing the economics of the music industry. What must always be remembered in these discussions is the fact that all the major online book retailers are also device makers. How much time a user spends shopping and enjoying content on a device is as important to this new breed of retailer as what the reader paid for the content. No device maker can ignore the necessity to keep its hardware loaded with all types of fresh, affordable and engaging content. Amazon’s movement into ad subsidized eReaders is another examples of ways retail/device makers can monetize content. In my opinion, the only way Apple or any content retailer can take on Amazon (and reverse the downward pressure on the price of books also caused by the economics of abundance) is to create an online shopping experience that changes the value proposition for books. The place readers buy their books must also become the place where readers gain access to authors, bonus content as well as other readers interested in the similar genres and topics. A new type of social commerce must emerge where relationships and dialogue enhance the storytelling experience and add value to the “book.”

  7. New Kindle Fire HD Tuesday, September 11, 2012

    I think the fight with amazon tablet its self is not easy at all
    check it’s specs right here
    http://newkindlefirehd.blogspot.com/2012/09/why-new-kindle-fire-hd-4g-is-best.html

  8. Apple is never known to compete on selling the “cheapest” anything. I think Apple would rather focus on textbooks than competing with Amazon if pricing war gets really silly. It’s a much bigger challenge for B&N than it is for Apple to keep pace.

    1. Well, you’d be wrong then.

      Apple be price-cuttin’. It’s happening.

      Barnes and Noble, OTOH, doesn’t need to keep pace with these two. Apple prevents their ebooks from working on the Nook. Amazon prevents their ebooks from working on the Nook. That means Barnes and Noble can sell ebooks to their own customers at a profit.

      Then they can use the proceeds from that to keep undercutting Amazon and Apple on hardware prices, creating even more profitable customers.

      The battle for low ebook prices is silly- piracy is free regardless of whose “ecosystem” you are locked into. Amazon and Apple are just throwing money away when they sell at a loss.

    2. Apple has made it clear that it will not leave a price umbrella below which competitors have safety from Apple’s competition:
      http://seekingalpha.com/article/842641-apple-pricing-policy-pricing-power-and-profit
      Look at how low pricing has become on the lowest-end iPods, and the fact iPhone 4 is now “free with contract”. Apple is more than willing to compete at lower and lower prices. With the world’s largest online store (iTumes, App Store, Apple Store) Apple may even be in a position to achieve lower per-transaction costs than Amazon. Electronic content may not be a field in which Apple is doomed to sell second behind a “wholesaler”.

  9. “Doesn’t Apple get 30% no matter how it is priced? What difference does it make to Apple?” @Yacko

    Exactly. Apple will not care if all eBooks are sold for three dollars. They get their 30% share. Apple has never been a company driven solely for profit. That was not the ethos which was created by Jobs and has been passed onto Ive.

    Apple is not a company controlled by salesmen. It is driven by innovators. Apple iBook’s content is not merely supplied by large publishing companies.

    _______

    1. “Exactly. Apple will not care if all eBooks are sold for three dollars. They get their 30% share… Apple is not a company controlled by salesmen. It is driven by innovators. Apple iBook’s content is not merely supplied by large publishing companies.” @Ron Taylor
      Apple’s 30% transaction fee surely only works under the agency model where the publisher sets the price… if Apples is now setting customer prices themselves AND taking a third of that price then that just allows them to set prices artificially low without any penalties – which would be an innovation, but not a good one.

      1. Apple’s new wholesale contract with HarperCollins isn’t for 30%, which is why it can discount the book without impacting HarperCollins’ business. HarperCollins can’t allow deep discounting without limits, or it’d go broke on vendors selling its content for peanuts while it bled marketing funds and editorial overhead. The move from agency to wholesale included a move from fixed retail pricing to fixed wholesale pricing. Apple can’t price it below wholesale without a loss, and why would Apple do that? Apple’s money is in the device, not the content.

    2. No. That pricing scheme is only apps. They don’t make the 30% on music or books. Just apps.

  10. Spot on, Laura. I’ll take it one step further. I think Apple has a good shot of being #1 in ebooks within three to four years. Apple rarely celebrates their ebook accomplishments or brags about their progress, yet behind the scenes they’re ripping up the ground and earning market share. They’re poised to earn much more. They have a lot of dry powder to bring to bear at the time of their choosing, and I’m not talking cash and balance sheet. They, like Amazon, are the patient chess masters. They tolerate being misunderstood and underappreciated (and benefit from it). They know where they’re going and how to get there.

    1. Don’t see how Apple can possibly win here. “Let’s sell at the same lower price so people will buy more expensive devices upon which to read!” Apple cares nothing about books–they just played the agency game for the publicity, which is less important now. And when Amazon is giving away a free Kindle with a year’s Prime membership–which will certainly happen by next year if not by this Christmas–it’s hard to see where Apple even stays in the game on books.

      Then again, Apple has never really pretended to be an ereader.

      Scott Nicholson

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