Apple may settle DoJ e-book investigation in coming weeks

Posted:
in General Discussion edited January 2014


A possible U.S. Department of Justice lawsuit over alleged e-book price fixing may soon be settled as Apple and a number of major publishing houses are said to be ready to make concessions.



Citing two sources familiar with the matter, Reuters reported on Friday that Apple and the DoJ are closing in on a settlement deal that could take place within the next few weeks.



Apple is suspected of colluding with five major publishers to illegally inflate the price of e-books offered through its iBooks store, a matter that is already under investigation by the European Commission.



The sources say that, while negotiations are still active, Apple may concede its so-called "most favored nation" clause which blocked publishers from selling their wares through other online outlets like Amazon. The iPhone maker faced similar scrutiny over its business model in early 2011 when the DoJ and FTC looked into the App Store's terms and conditions for subscriptions.



In 2011, a class action suit was brought against Apple over e-book price fixing, and the Cupertino, Calif., company asked for a dismissal earlier in March saying that the claims were unfounded.





iBooks pricing is based on the "agency model" currently being investigated by the DoJ. | Source: Apple







One of the unnamed sources said that the alleged upcoming deal could force Apple to use a "wholesale model," and thus place pricing control power in the hands of retailers instead of publishers. Under this system, taken from the sales model used in physical distribution, publishers sell books to a retailer that then sets a price accordingly.



"It would be a positive for Amazon because the company's greatest strength is as a high-volume, low-price retailer and the wholesale model plays into that," said analyst Jim Friedland from Cowen & Co.



Amazon used the wholesale model when it first began selling e-books, allowing the company to offer publications at prices below cost to allure customers. This ended when Apple entered the market and inked the "most favored nation" agreements with five of the six largest publishers in the world.



The publishers in question, Simon & Schuster, Hachette, Penguin, Macmillan and HarperCollins entered into an "agency model" that allowed them to set e-book prices while giving Apple its traditional 30 percent share of sales.



If Apple were to settle, the company would not see much change to its bottom line e-book sales make up only a fraction of its total revenue, which was over $108 billion in 2011.



According to Cowen & Co. estimates, Amazon still leads the e-book market with a 65 percent share and is trailed by Barnes & Noble and Apple, which have a 20 percent and 10 percent share, respectively.



[ View article on AppleInsider ]

«1

Comments

  • Reply 1 of 33
    mdriftmeyermdriftmeyer Posts: 7,303member
    Quote:

    One of the unnamed sources said that the alleged upcoming deal could force Apple to use a "wholesale model," and thus place pricing control power in the hands of retailers instead of publishers. Under this system, taken from the sales model used in physical distribution, publishers sell books to a retailer that then sets a price accordingly.



    "It would be a positive for Amazon because the company's greatest strength is as a high-volume, low-price retailer and the wholesale model plays into that," said analyst Jim Friedland from Cowen & Co.



    Really? This plays right into Apple's power of the iBookstore and the roughly 200+ million users.



    Apple thusly becomes the Reseller and Amazon wishing this reality will discover Apple can discount and drive their margins into the ground, if they choose to do so, and still protect Publishers.
  • Reply 2 of 33
    Quote:
    Originally Posted by mdriftmeyer View Post


    Really? This plays right into Apple's power of the iBookstore and the roughly 200+ million users.



    Apple thusly becomes the Reseller and Amazon wishing this reality will discover Apple can discount and drive their margins into the ground, if they choose to do so, and still protect Publishers.



    Actually Amazon was the one who wanted to lower the price anytime but the deal btw the Publishers and Apple made it not doable.
  • Reply 3 of 33
    jungmarkjungmark Posts: 6,716member
    Because AMZN sells each book for a loss, other ebook retailers must do the same. Since other ebook retailers can't, this model is very uncompetitive and a win for just AMZN. How does this make sense to the DOJ?



    Meanwhile, the physical book stores will shut down because they can't sell books for that cheap. As more competition falls, AMZN will be only one left standing.
  • Reply 4 of 33
    solipsismxsolipsismx Posts: 19,566member
    Quote:
    Originally Posted by AppleInsider


    The sources say that, while negotiations are still active, Apple may concede its so-called "most favored nation" clause which blocked publishers from selling their wares through other online outlets like Amazon.



    This is the first I'm hearing of this. It was Amazon that was going to block all books, physical and digital, from their store if they offered any books to iBookstore. Apple's contingency is that they must match prices on other bookstores.





    Quote:
    Originally Posted by mdriftmeyer View Post


    Really? This plays right into Apple's power of the iBookstore and the roughly 200+ million users.



    Apple thusly becomes the Reseller and Amazon wishing this reality will discover Apple can discount and drive their margins into the ground, if they choose to do so, and still protect Publishers.



    Now that iBookstore is established they anti-competitve wholesale model will benefit Apple and Amazon while leaving smaller retailers out of the loop.





    Quote:
    Originally Posted by jungmark View Post


    Because AMZN sells each book for a loss, other ebook retailers must do the same. Since other ebook retailers can't, this model is very uncompetitive and a win for just AMZN. How does this make sense to the DOJ?



    Meanwhile, the physical book stores will shut down because they can't sell books for that cheap. As more competition falls, AMZN will be only one left standing.



    I don't get it either. Apple tried to make it fair for the publishers and customers while breaking Amazon's anti-competitve monopoly of the eBook market. I think they successfully did that, but if the DoJ says that that wholesale model needs to be used then it will be Apple and Amazon that push everyone else out. So Apple wins regardless but the customer and publishers lose again.
  • Reply 5 of 33
    synergisynergi Posts: 32member
    Quote:
    Originally Posted by SolipsismX View Post






    I don't get it either. Apple tried to make it fair for the publishers and customers while breaking Amazon's anti-competitve monopoly of the eBook market.



    As a iPad owner, and a amazon customer. I'm not seeing how Apples/publisher prices were fair. I've seen hardcovers listed cheaper then ebook. 18 dollars for an ebook is to much. They don't have the same expenses as shipping and storing, and printing a physical book.



    I'm not saying sell at a loss, but an ebook should never cost more then its hardcover counterpart.
  • Reply 6 of 33
    realisticrealistic Posts: 1,147member
    Quote:
    Originally Posted by jungmark View Post


    Because AMZN sells each book for a loss, other ebook retailers must do the same. Since other ebook retailers can't, this model is very uncompetitive and a win for just AMZN. How does this make sense to the DOJ?



    Meanwhile, the physical book stores will shut down because they can't sell books for that cheap. As more competition falls, AMZN will be only one left standing.



    Quote:
    Originally Posted by SolipsismX View Post


    ...

    I don't get it either. Apple tried to make it fair for the publishers and customers while breaking Amazon's anti-competitve monopoly of the eBook market. I think they successfully did that, but if the DoJ says that that wholesale model needs to be used then it will be Apple and Amazon that push everyone else out. So Apple wins regardless but the customer and publishers lose again.



    I can't see the DOJ supporting a position that will only leave one vendor standing. The agency model appears to allow for competition but the wholesale model would appear to cede the market to AMZN. I can't see Apple or B&N selling below cost. If the agency mode is killed hopefully there will be a middle ground where everyone can play and hopefully survive.



    A single dominant vendor would hurt everyone in the long run.
  • Reply 7 of 33
    solipsismxsolipsismx Posts: 19,566member
    Quote:
    Originally Posted by Synergi View Post


    As a iPad owner, and a amazon customer. I'm not seeing how Apples/publisher prices were fair. I've seen hardcovers listed cheaper then ebook. 18 dollars for an ebook is to much. They don't have the same expenses as shipping and storing, and printing a physical book.



    I'm not saying sell at a loss, but an ebook should never cost more then its hardcover counterpart.



    What was fair was that Apple allowed the publishers to choose how much they charge and only took 30% of whatever that was.



    How can you think it's fair that Amazon could decide to charge $1 for an eBook and have no recourse because Amazon has a market dominance on eBook sales.



    What Amazon was doing was what MS did with IE. They we making it impossible for other to compete by offering substantially lower rate to customers to lock in the market. Did you think that was going to last forever? Did you think Amazon was looking out for you by not paying the publisher fairly for their content?



    As for your comment about eBooks being more than some hardcover, that's fine. That's fair. The customer has a choice. BTW, there are costs associated with digital books, including costs not typically associated with physical books, like digital theft which is and will continue to be a barrier for content owners for a long time.
  • Reply 8 of 33
    alnormalnorm Posts: 37member
    Quote:
    Originally Posted by SolipsismX View Post


    What was fair was that Apple allowed the publishers to choose how much they charge and only took 30% of whatever that was.



    How can you think it's fair that Amazon could decide to charge $1 for an eBook and give the publisher 30¢ of that with them having no recourse because Amazon has a monopoly on eBook sales.



    Because that's not how the system works at all under the wholesale model. Under the wholesale model, which is the way it was, the publishers set a wholesale price--the price to the retailer. The retailer then sets the retail price--the price to the end consumer.



    Example: Publisher X sets the wholesale price on a ebook at $12. Retailer Z sells the ebook at $13. Publishers X gets $12 and Retailer Z makes $1. If Retailer Z decides to sell the ebook at $10, Publisher X still gets $12, and Retailer Z takes a $2 loss.



    The agency model of pricing and wholesale model of pricing are two different approaches.
  • Reply 9 of 33
    alnormalnorm Posts: 37member
    Quote:
    Originally Posted by mdriftmeyer View Post


    Really? This plays right into Apple's power of the iBookstore and the roughly 200+ million users.



    Apple thusly becomes the Reseller and Amazon wishing this reality will discover Apple can discount and drive their margins into the ground, if they choose to do so, and still protect Publishers.



    No. This is exactly what the publishers do not want. If it was simply about volume and money, they'd have never gone to the agency model--they actually made more per ebook under the wholesale model. The publishers fear that placing a standard low price in the minds of the consumer will make the consumer expect that price...then those margins will shrink for the publisher in the future.



    Publishers do not want an ebook price war.
  • Reply 10 of 33
    swssws Posts: 44member
    It's a free market.



    I use both iBooks and amazon's kindle app on my iPad. There are a few other reader apps for the iPad also like nook, kobo, ect. . . .



    It's not like we ONLY have iBooks.



    I am not getting the "price fixing" part. What is the complaint?



    Apple can set a price, we choose if we want to pay it. .
  • Reply 11 of 33
    tylerk36tylerk36 Posts: 1,037member
    Heaven forbid we come up with something that others haven't thought of and there for threatens the competition. Thats like repainting your house and it raises its value and the neighbors complain that your house looks better then theirs and they sue you to make it look worse than theirs. Stupid. Apple is showing how things should be done. Others just sit in the corner and point fingers and cry like a baby.
  • Reply 12 of 33
    alnormalnorm Posts: 37member
    Quote:
    Originally Posted by SWS View Post


    It's a free market.



    I use both iBooks and amazon's kindle app on my iPad. There are a few other reader apps for the iPad also like nook, kobo, ect. . . .



    It's not like we ONLY have iBooks.



    I am not getting the "price fixing" part. What is the complaint?



    Apple can set a price, we choose if we want to pay it. .



    The price fixing claim muddies the whole deal. If what is alleged is correct, I guess you could get to that claim in a roundabout way.



    Here are the allegations in a nutshell: Apple gathered the largest 6 trade publishers (this is legal). Apple wanted agency pricing (this is legal). Apple wanted what is known as the most-favorite nation clause, which basically says that the publishers cannot sell to anyone else for a cheaper price (pretty common in business, too, and legal, although some courts will raise an eye to it).



    Where the antitrust bit comes in is this allegation. No single publisher would tell Amazon to accept the agency model or else. Amazon was so large, a single publisher would be shooting itself if Amazon called the bluff. So five of the six publishers allegedly A) got together at the behest of Apple and collectively threatened Amazon (straight line collusion) or B) Apple presented this plan to each party individually (hub and spoke collusion).



    Price fixing gets claimed because ebook prices went up after the agency model took place of the wholesale model. What confuses many people is that they think the agency model is the problem. It isn't and is very legal. The matter under investigation is how all the companies came to an almost identical business plan over a few day period and presented it to Amazon.
  • Reply 13 of 33
    As someone who is intimately familiar with all the contracts in question, I'd like to comment:



    1. Regarding the alleged "so-called "most favored nation" clause which blocked publishers from selling their wares through other online outlets like Amazon."



    This clause does NOT block publishers from selling their books through other online outlets. In fact practically every title for sale in the iBookstore is for sale elsewhere. The clause says that if a book is sold for a lower price elsewhere Apple may match that price. (Which they never take advantage of in my experience.) Further, Amazon has such a clause, and in fact uses it to beat up small suppliers. And check out Amazon's clauses in the Kindle Publishing program for authors, and their Android app store: they reserve the right to sell the author or developer's work for whatever they feel like, and pay accordingly.



    2. Regarding the wholesale model: Amazon uses its market power to beat up suppliers large and small. If a supplier will not agree to Amazon paying a lower and lower wholesale price for the publishers product, Amazon will remove the publishers titles from sale. Because Amazon has huge market share, it can do this with impunity. There is a current very public case of this involving the distributor IPG, which represents small publishers. (See http://www.ipgbook.com/kindle-update-news-29.php).



    3. Amazon has stated publicly its desire to disintermediate publishers. This is actually not practical, because the services that a publisher provides are not scalable to the extent that Amazon could actually produce enough quality titles to supply its own store: it depends on six large publishers with long experience in publishing and thousands of small publishers. Because this goal is not practical has not prevented them from taking steps to damage publishers.



    4. Amazon has used its market power in other anticompetitive ways. It owns a print-on-demand printing operation, and a couple of years ago threatened that it would not accept stock from any other print-on-demand operation, in order to force business to its own (low quality) operation. This was utterly impractical, and the effort failed, but it shows how far they will go if they can.



    5. Before commenting that the pricing for ebooks is too high -- a meme that Amazon encourages: the "greedy publisher" -- please consider that MOST of the cost of publishing a book is not in printing it, or, obviously, reproducing ebooks. It is designing, editing, proofreading, and marketing the book--"sunk costs"--as well as giving up revenue to wholesalers and the retailers. A tiny proportion of the price actually comes back to the publisher to cover these sunk costs. Currently publishers must publish both in print and as ebooks because most books are still sold as printed copies: the sunk costs must be amortized over all copies sold.
  • Reply 14 of 33
    galbigalbi Posts: 968member
    Money always talks.



    Budget deficit? Sue a rich company. Get your share and move on to target two.
  • Reply 15 of 33
    hill60hill60 Posts: 6,992member
    Apple could easily afford to drive Amazon out of business by undercutting everything they sell.



    Apple could afford to "buy" a monopoly in ebooks with an investment of a few billion a year for how ever many years it takes for Amazon to go under.



    Apple can make it very hard for Amazon to recoup the cost of hardware subsidised via content sales.



    The best thing is it is above board and legal and not only condoned by the DoJ but actually enforced by them.



    Unbelievable.
  • Reply 16 of 33
    mdriftmeyermdriftmeyer Posts: 7,303member
    Quote:
    Originally Posted by ALNorm View Post


    No. This is exactly what the publishers do not want. If it was simply about volume and money, they'd have never gone to the agency model--they actually made more per ebook under the wholesale model. The publishers fear that placing a standard low price in the minds of the consumer will make the consumer expect that price...then those margins will shrink for the publisher in the future.



    Publishers do not want an ebook price war.



    The Publisher will not become a victim of the scenario I described. Apple can drive Amazon into the ground and by sheer volume way beyond Amazon's own will discover they'd have been better off with Apple and the Publishers agreeing on a fair market price structure.



    Apple can indeed help subsidize the Publishers when Amazon attempts to strong arm the Publisher simply because the Publisher doesn't have to provide their products to Amazon's digital solution when they have hundreds of millions of iOS Users available to them. With the growth of the new iBooks initiative, the Publisher is not bound to provide current textbooks for Amazon or anyone else's platform, including standard EPub 3.0. They can produce only a .ibooks version all they want and by doing so the Publisher can differentiate it's market into tiers.



    What do you prefer? Apple's current compromise or one where Amazon bites off more than they can chew?



    I personally don't care. Amazon doesn't care about traditional print and it's clear by the current focus on Kindle and the pricing of print textbooks going through the roof, thus Amazon isn't working with Universities and more to be a point of sale for them.
  • Reply 17 of 33
    mdriftmeyermdriftmeyer Posts: 7,303member
    Quote:
    Originally Posted by hill60 View Post


    Apple could easily afford to drive Amazon out of business by undercutting everything they sell.



    Apple could afford to "buy" a monopoly in ebooks with an investment of a few billion a year for how ever many years it takes for Amazon to go under.



    Apple can make it very hard for Amazon to recoup the cost of hardware subsidised via content sales.



    The best thing is it is above board and legal and not only condoned by the DoJ but actually enforced by them.



    Unbelievable.



    You get my original observation, unlike ALNorm who sees the Publisher getting screwed under agency v. wholesale when he clearly doesn't grasp that the Wholesale model breaks down when their is only one major Wholesaler dictating the pricing terms.
  • Reply 18 of 33
    buzzzbuzzz Posts: 84member
    All I want to know about Apple's iBooks is why I can't get The Hunger Games trilogy. LOL
  • Reply 19 of 33
    asciiascii Posts: 5,941member
    I hope this doesn't mean Amazon massively undercuts iBooks. It seems really weird to complain about price drops but I really love the iBook reader and don't want Apple to give up on it.
  • Reply 20 of 33
    Only on the text. Apple wouldn't bother much with the outcome as they earn from hardware sales. It is the publishers as always who needing the 'fix'.
Sign In or Register to comment.