U.S. Justice Department Confirms Investigation Into eBook Pricing
Ever notice how eBooks are pretty much all priced at $9.99? And doesn't that seem a little weird, considering there's no production, distribution or storage costs?
There's a reason for that: Steve Jobs.
And you're not the only one who noticed, by the way. So did the U.S. Justice Department, which has officially confirmed it's investigating pricing in the eBook industry.
First, a little history:
When the iPad came out in 2010, Jobs decided that his biggest competitor was Amazon, with it's reputation for deep discounts. Simply put, the iPad would be less competitive if eBooks were less expensive in the Kindle store. So instead of waging a pricing war, Jobs went to five of the big six houses--HarperCollins, Hachette, Macmillan, Penguin, and Simon & Schuster--and convinced them to abandon the "wholesale model" of pricing in favor of the "agency model."
Under the wholesale model, the retailer determines the price of a product. Under the agency model, the publishing house determines the price. It was an easy sell, as this option meant higher profits after years of declining revenues (though the argument has been made that this was short-sighted and less eBooks are sold, resulting in lower profits).
Jobs even seemed proud of the scheme. According to The Wall Street Journal:
"We told the publishers 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway,'" Mr. Jobs was quoted as saying by [his biographer] Walter Isaacson.
"But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.'"
As you can see, Amazon didn't have much of a choice. If they didn't sign on, the Kindle would be DOA. The problem, though, is that this practice is anti-consumer and anti-competitive. And there are laws against the latter.
Flash-forward to today, and the news that the Justice Department is on the case. The pricing model has also attracted the attention of antitrust investigators in the European Union, as well as attorneys general in Connecticut and Texas.
This past August, eBook pricing also hit the civil court system, when consumer rights firm Hagens Berman filed a class action suit in California against Apple and the five publishers, claiming they're "in violation of a variety of federal and state antitrust laws, the Sherman Act, the Cartwright Act, and the Unfair Competition Act."
Random House, the only major publishing house not named in the suit, signed onto the agency model this past March, which means they weren't party to the original agreement.
From the suit:
Once approved, the lawsuit would represent any purchaser of an e-book published by a major publisher after the adoption of the agency model by that publisher.
The lawsuit seeks damages for the purchase of e-books, an injunction against pricing e-books with the agency model and forfeiture of the illegal profits received by the defendants as a result of their anti-competitive conduct, which could total tens of millions of dollars.
So what does all of this mean?
Right now, not much. This won't be resolved any time soon. In the long term, it could mean restitution for eBook consumers, though probably not much more than a pittance (think Ticketmaster).
Really, I see this playing out in one of three ways:
- Option One: Apple and the publishers successfully argue they're not breaking anti-competition laws. Life goes on.
- Option Two: A settlement is reached that keeps the agency model, but in a new, staggered format. Sort of like how all songs on iTunes used to be 99 cents, but now they're staggered at 69 cents, 99 cents and $1.29. It appears a little more fair, but it's really not.
- Option Three: Apple and the publishers lose. Amazon slashes their prices to bargain-basement levels as a "screw you" to Apple. And for once, in one very rare, beautiful moment, the consumer wins.
My money is on option two, because the consumer never wins.
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