If you follow the book industry, you certainly heard earlier this month that a federal court ruled in favor of the Department of Justice in a suit against Apple. The DOJ accused the loved/hated computer giant of conspiring with five major publishers to raise eBook prices for consumers—a violation of the Sherman Antitrust Act. The publishers settled before the trial, but Apple fought…and lost. The government can’t seem to get Apple to pay corporate taxes, but they got a rare victory against big business on this fight.
While this ruling sounds like a clear victory for consumers, the post-decision spin has been split over whether consumers will benefit in the long run. On the one side, you have a vocal, media-friendly group making the counterintuitive claim that this is in fact a victory for Amazon (quite the feat considering they weren’t a part of the case) which will be harmful for the book industry, and will eventually cause pain for consumers. A different camp sees publishers and Apple guilty of fleecing consumers and trying to blame Amazon for problems of their own making. Most people in publishing have described the case as a blow to publishers and the health of the book business. But I am not in that camp. I’ll tell you why in a moment.
As far as the case itself goes, it doesn’t appear to have been difficult to prove that Apple brought publishers together on a model that raised many eBook prices in the short run (although they did it by forcing Amazon to stop selling eBooks at below-cost). Some commentators have argued that since the DOJ has wide latitude on which cases to pursue, they should have chosen to look the other way at these transgressions on the assumption that Apple’s entry into the eBook marketplace was ultimately a positive thing for consumers and that Amazon’s loss-leader approach to pricing was harmful in the long run. (Enjoy for a moment the notion that the company which has a stranglehold on the music retail business was to be the potential white-knight trust-buster for the book business.) But Apple’s angle of entry to the business was too steep. Rather than developing a superior offering of devices and online store (which many believe they already had), Apple insisted on changing the rules of the game (the new “agency” model), albeit in a way that publishers favored. They could have competed successfully with Amazon on a level playing field, even with slightly higher prices. People wax poetic about their Apple devices. Kindles, on the other hand, strike me as the IBM-286’s of the device world.
One of the ironies of the Apple agency model was that publishers actually received less income for each sale than they did on the wholesale model from Amazon. So why were the publishers so eager to embrace this new, less lucrative model? It was out of fear that Amazon (which was at 90% market share for eBooks when Apple introduced the iPad) was too big; they were devaluing publishers’ product by pricing many books at $9.99 (although that’s somewhat of a mythical number as the vast majority of eBooks are much more expensive than that in the Kindle store) and that Amazon’s profit-free short-term model wasn’t sustainable and would lead inevitably to a day of reckoning when either prices would go up or Amazon would demand greater margin from publishers.
So why I am not worried?
There are studies showing that eBook consumers are migrating from dedicated reading devices (e.g., Kindles) to multifunctioning tablets. The tablet marketplace is becoming robust and diverse, which should lead to an equally diverse eBook marketplace within those native environments. The barriers to entry for eBook vendors is very low and there will be plenty of opportunities for low overhead start-ups to enter the field…especially if the publishers’ fear that Amazon will eventually raise prices actually happens. Unless Amazon suddenly becomes dominant in tablet production, it will be difficult for them to retain long-term dominance of the eBook market. People tend to buy a device first, and then shop in the digital bookstore associated with the device.
Additionally, the eBook business appears to be stabilizing. After several years of triple digit growth and prognostications that eBooks would take over up to 80 percent of the book market, we just saw a report from the Association of American Publishers that for March of this year (the last month for which we have full accounting), eBook sales compromised 25.5 percent of the overall trade market, up a mere 1.5 percent over the previous year. It now appears pretty clear that the old codex is going to be a more durable format than the compact disc, or the VHS cassette, or even the newspaper. As the New Yorker’s James Surowiecki pointed out in a recent column, “the truth is that the book is an exceptionally good piece of technology—easy to read, portable, durable, and inexpensive.” As long as physical books make up the considerable majority of the market, bookstores will survive and some will even flourish, giving publishers the type of robust marketplace they need to keep their businesses healthy.
Oh, and there’s the funny little secret about the damages Apple may have to pay. It’s the same with the publishers’ settlements levied by the court in the spring (thank you to Publishers Marketplace for pointing it out). If the court determines that Apple’s remedy should be consumer restitution, the sums could be in the hundreds of millions of dollars—but it would likely be structured as credits that consumers would redeem in the future purchases of books. This means most of the dollars paid out in fines will come back again as new business. Book publishing for the win!
John Sherer, Director