Amazon, Apple, and Control of the E-Book Market

May 14, 2012

ebookA fierce battle is underway for control of the booming electronic book market. 

Amazon, Apple, and the traditional book publishers are struggling to establish pricing and revenue-sharing structures that advance their competitive interests.

The U.S. Department of Justice recently charged Apple and five of the largest book publishers with antitrust law violations, alleging that the group conspired to keep e-book prices unreasonably high.

In the early days of the electronic book market, e-book pioneer, Amazon, established a $9.99 price point for the most popular e-books. 

Later, Apple altered the e-book pricing model, negotiating “agency” pricing systems with the publishers, which permitted publishers to set prices for e-books distributed through Apple’s iBooks system if they agreed to pay Apple 30 percent of the e-book revenues.

The agency pricing approach has led to higher prices for popular e-books, now often sold for $12.99 or $14.99.

The Justice Department alleges that the collusion over pricing led publishers to favor Apple over Amazon. 

The Department also claims that consumers were harmed as a result of the resulting higher e-book retail prices.

Publishers responded by alleging that Amazon’s pricing structure sells e-books at prices that are below cost.

Apple and the publishers face a similar antitrust action launched by the European Commission.

An additional antitrust suit was also filed by 16 states.

Three of the book publishers named as defendants by the Department of Justice agreed to a settlement to resolve the claims.

The settlement permits publishers to set the retail prices and to receive 70 percent of the e-book revenues.

E-book retailers are permitted to offer discounts; however, the total annual value of the discounts for all e-books can not be greater than the 30 percent of revenues earned by the retailers from their sale of all e-books.

The Justice Department anticipates that the settlement will result in lower prices for consumers, while preventing anti-competitive below cost pricing. 

Apple and two of the other defendants have not accepted the settlement terms.

Book publishers face dramatic changes in their business model as a result of evolving technology. 

Just as the music, television, and motion picture industries are wrestling with new distribution systems and rapidly changing expectations of their customers and their business partners, so too is the print publishing industry struggling through a time of dramatic upheaval.

Expect the antitrust and competition law disputes to continue well into the future as the publishing sector works to come to grips with the new realities of creative content development and distribution in the digital environment.