In April, the US Department of Justice filed an antitrust complaint against Apple and four major book publishers, alleging that they colluded against Amazon by setting prices. As the New Yorker points out, that’s hard to prove, but it looks like their cooperation may have broken Amazon’s early monopoly on ebooks. This lawsuit could give Amazon its power back.
Back in 2010, when Apple was about to launch the iPad, publishers were very worried about Amazon. Since the launch of the Kindle in 2007, Amazon had grown to dominate the entire ebooks market. Sure, publishers were making money off Amazon, but they were worried about Amazon’s pricing strategy. You see, Amazon was buying ebooks from publishers at about $US15 apiece, but in an effort to help the Kindle catch on, the company was then selling the books at $US10. Big deal, right? Well, in the process, publishers were worried that Amazon’s strategy was devaluing books. And because Amazon was the only game in town, there was nothing the publishers could do about it.
Just before the iPad’s launch, though, Apple offered the publishers what seemed like an attractive alternative: subscribe to an iTunes-like pricing model. Under this agreement, publishers set the price of the book, and Apple would take 30 per cent of the revenue. That way, the publishers would retain control. The catch? Four out of six of the publishers would have to sign on or no one would get the deal — five publishers signed on in the end. Faced with this new alternative and newly emboldened publishers, Amazon was soon forced to accept the agency model as well.
The result is that publishers actually made less money per book in many cases, but Amazon’s monopoly was effectively broken. Indeed, in 2012, Amazon controls 60 per cent of the ebook market instead of the 90 per cent share it held in 2007. The New Yorker article argues that if it hadn’t been for Apple’s agency model play, Amazon competitors, such as Barnes & Noble, wouldn’t have had a chance.
That’s a good thing, right? Monopolies tend to be bad for consumers in the end. Well, according to the Department of Justice, the book publishers actually colluded to set prices while sorting out the details of the deals with Apple. There’s enough evidence to this effect that three of the five publishers settled with the Department of Justice. These publishers now can’t set the bottom price for their ebooks anymore, because companies like Amazon can now discount everything but the publisher’s commission. Remember, the whole point of switching to Apple’s agency model was for publishers to retain control of their pricing. Now, if Apple and the two remaining publishers lose their pending cases, Amazon could regain its death grip on the market once again — but at least the competition had some time to establish itself. [The New Yorker (subscription required)]