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Apple and five book publishers were using an agency sales model that raised the prices of e-books

The U.S. Department of Justice (DOJ) is planning to launch a lawsuit against Apple and five U.S. publishers for allegedly conspiring to raise e-book prices through an agency sales model.

Last December, the European Commission opened a formal antitrust investigation into whether five international e-book publishers had been practicing anti-competitive tactics with the help of Apple and its e-book store iBooks. Shortly after, the U.S. Justice Department climbed aboard the investigation as well.

After investigating the suspicious tactics, the DOJ has now warned Apple and the five book publishers that it plans to sue them for raising the prices of e-books. The five book publishers involved are Hachette Livre (Lagardère Publishing France), Harper Collins (News Corp., U.S.A.), Simon & Schuster (CBS Corp., U.S.A.), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of inter alia Macmillan, Germany).

Traditionally, publishers sell physical books to retailers for about half of the cover price, which is considered a wholesale model. Retailers then had the power to sell those books to customers for a lower price if they wanted to.

However, the e-book industry rocked this model and rubbed publishers the wrong way. Amazon started selling best sellers for as low as $9.99 in an effort to encourage Kindle sales. When Apple came along with iBooks, publishers were worried that the tech giant would take over the book industry the way it did the music industry with iTunes.



Apple then struck a deal with publishers in 2010, where they'd settle on an agency model instead. The agency model allowed publishers to set the price of the book and Apple would receive a 30 percent cut. However, publishers were not allowed to let rivals sell the same book for a lower price.

According to the DOJ, Apple and the five publishers did this to raise the prices of e-books, which violates federal antitrust laws. The publishers reacted to these claims, saying that the agency model was used to "enhance" competition in the e-book industry by helping e-book sellers to make some money out of the deal.

The DOJ isn't buying this excuse, though. The government is wondering how competition could have increased when prices were increasing.

Apple, the publishers and the DOJ are currently in talks regarding e-book prices. While the DOJ warned Apple and the publishers that it plans to sue them for allegedly conspiring to raise prices, some publishing executives associated with the talks have said that a settlement is being considered. Some solutions that have been passed around included the idea to keep the agency model, but allow booksellers to offer some discounts.

Apple has jumped heavily into the book selling and publishing business with the recent launch of iBooks 2, which is the sequel to the iBooks app that provides students with books they need as well as study features, and iBook Author, which is Mac software that allows textbook writers and publishers to create textbooks for the iPad.

Undoubtedly, e-books are an essential part of the iPad experience, and with the announcement of the iPad 3 release just yesterday, Apple likely wants to get this DOJ business figured out quickly.

Sources: Reuters, The Wall Street Journal



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About Time!
By DaveLessnau on 3/8/2012 10:39:05 AM , Rating: 3
Here's a prime example of this. On Amazon, Neil Gaiman's "Anansi Boys" is selling for $7.99 in paperback. It's $9.99 on the Kindle:

http://www.amazon.com/Anansi-Boys-ebook/dp/B000FCK...

Who's the publisher? Why HarperCollins.




RE: About Time!
By mydogfarted on 3/8/2012 11:11:33 AM , Rating: 2
You forgot to mention that the hardcover is $17.99 on Amazon. So, there are 3 price points for buying new copies of the book. Plus Apple is using a different business model for their agreement with publishers, allowing the publishers to set price, not Apple. Blame Apple for choosing a particular business model, but the publishers are the scumbags here.


RE: About Time!
By name99 on 3/8/12, Rating: 0
RE: About Time!
By GotThumbs on 3/8/2012 2:43:00 PM , Rating: 5
Apple still demands it's 30% cut, so prices may be raised to cover Apples cut and still make the profit the publishers were looking for. In the end...its the Apple fans who pay.

Apple is/has created a closed Eco-system where consumers have ZERO alternatives and can ONLY purchased through Apples portal.

I think over time.... Steve Hobs cult will breakdown as followers get tired of getting gouged time and time again.


RE: About Time!
By name99 on 3/8/2012 2:49:02 PM , Rating: 2
quote:
Apple is/has created a closed Eco-system where consumers have ZERO alternatives and can ONLY purchased through Apples portal.


I'm sorry, but do you know anything about eBooks on iOS?
You can read eBooks from Kindle on iOS. You can read eBooks from Google Books. You can read them from various small vendors, or from Project Gutenberg. (Do a search for eBook in the App Store to see just how many).
You can buy PDFs from technical societies (eg IEEE) and read those.

And, of course, you can read free PDFs, free text files, free MS Word files, etc etc--- all the usual ways to spread free written material.

Regardless of your opinion of Apple or the publishers in this case, you're not helping anyone by stating claims that have absolutely zero relationship in fact.


RE: About Time!
By Boze on 3/12/2012 11:29:05 AM , Rating: 1
LOL! No they won't! Have you been drinking the Anti-Kool Aid??

People will imitate whatever they think is "cool" so they can be part of the "in crowd", so they too can be cool, while failing to reason that genuinely "cool" people don't give a shit what the hoi polloi beneath them think... that's what makes them "cool" in the first place.

I've tried to express this to my baby sister in the past, who used to go around wearing the "cool" clothes, the "cool" shades, buying a "cool" iPod nano. In fact, the only thing she has bought in the past that wasn't "cool" is a Galaxy S phone... and those are cool now.

She finally came to terms with it when I came home for Christmas holidays 2 years ago and I went out with her and her friends to clubs and all her friends kept telling her, "Your big brother is really cool!" She was floored. She told me the next day what they were saying, and that she didn't understand why they thought I was cool. I told her its simple... I don't give a damn what anyone thinks about me. I dress how I want, I act how I want, I do what I want. That's why they think I'm cool, because I'm not doing what everyone else is doing to be "cool".

Same for these Apple zealots. You're "cool" if own an Apple. People are stupid, and they fall for marketing. Brands don't make you cool. Your style and attitude make you cool. Its a real shame people think some product they can buy will make them "cool".


RE: About Time!
By alcalde on 3/11/2012 4:32:26 PM , Rating: 2
Doing Bayesian Data Analysis: A Tutorial with R and BUGS costs $75.14 (hardcover) on Amazon, no Kindle version available. The physical book is $79.95 with B&N, and *$89.95* as a Nook e-book. I'm still trying to wrap my mind around that one, although publisher Elsevier is not looked fondly upon in the academic journal circle (for things including bundling journals).


Interesting
By Shadowself on 3/8/2012 4:15:35 PM , Rating: 3
that virtually no one seems to be getting this right... even the DOJ.

Apple has never done anything in this arena (versus others we could name) to fix prices. (Think back to when Apple killed of the Mac gray market and killed the Mac clones. Some of those tactics were truly questionable.)

Apple just asked for a long standing legal concept of "Best Customer" for Apple's bookstore customers. Apple said, "Price it any way you want, just sell to our customers at the best price you give anyone else. No matter what that is we will take 30% (not the stereotypical 50%)." Apple just asked that Apple's bookstore customer be treated as the publishers' "Best Customer". And note that Apple did not ask for "Best Customer" treatment for themselves. Apple gets a flat 30%. The Apple bookstore customers get the "Best Customer" price. (In fact by insisting on the lowest price, Apple is actually *cutting* its profit.)

And, the publisher could have 9 different prices for 10 different avenues of sale. It's just that the bottom two with regard to price are whoever is at the bottom and Apple.

The U.S. Government itself very, very, very often invokes the "Best Customer" requirement. If you sell something to the U.S. Government you must give them the best terms, conditions and prices you give to anyone else. You can have 10 different prices, but the best terms and prices you give to anyone else must also be given to the U.S. Government.

Many, many companies over the years have invoked this concept in their business dealings. Apple is just saying that the publishers must do the same thing with regard to the customers shopping through its bookstore.

The DOJ may raise a stink about this, but in the end they will lose with regard to Apple. If there is collusion and price fixing among the publishers, the DOJ may win against them, but in this ONE case, Apple is fairly clean.




RE: Interesting
By Paladin21 on 3/8/2012 4:28:37 PM , Rating: 3
Apple started this mess by letting the publishers set the prices at an absolute level, with them taking a cut. It isn't about a best customer agreement, it's about the fact that other retailers *can't* change the pricing, even if they are taking the cut out of their profit.

For example, the publisher's set the price of a book at $10, they get $7, Apple gets $3. Amazon decides that they're OK with getting $2 per copy, and still giving the publishers $7, for a sale price of $9. This is how competition is supposed to work. Instead, the publishers said to charge the $10 price or they'll cut off all your books, you aren't allowed to go below the price floor for any reason. This is what the investigation is about.


RE: Interesting
By Shadowself on 3/8/2012 5:21:25 PM , Rating: 2
That really is the point.

Apple says that if you sell it to the *end customer* through Amazon for $9.00 then you must sell it to the *end customer* through Apple at $9.00.

It is up to the publisher to negotiate with Apple for something other than 30%. If Apple insists on 30% and the publisher does not like it then the publisher can either decide to sell that book through Apple or not.

Hell, all the publishers could walk away from Apple until Apple lowers its cut to 5%. Effectively that would kill Apple's bookstore as I doubt Apple would run the store on such thin margins. With Amazon and others out there, the direct impact to the publishers would be very small in the short term. They are just choosing to not put up a stink about Apple's 30% request. Why is Apple asking for 30%? Because that is what the major record labels agreed to for music. Apple just hit "copy and paste" on that.

And it's not true that other retailers "can't" change the pricing. It's that if they change the pricing to the end customer then Apple gets to sell it to the end customer at that lower price too.

Think of it as the exact opposite of price fixing.
Apple sells the item for $10.00, the publisher gets $7.00 and Apple gets $3.00.
The publisher lets another company sell that item for $9.00.
Apple requires that the publisher allow Apple to sell it for $9.00 too. Then the publisher gets $6.30 and Apple gets $2.70 (unless the publisher gets Apple to take less). Apple gets less by going to the lower price too.

Where is the "price fixing"?

In your own words, "Apple started this mess by letting the publishers set the prices..." The publishers are setting the prices, not Apple.

Again, this has nothing to do with price fixing. The price to the end customer is always the best price available.

Finally, you state, "Instead, the publishers said to charge the $10 price or they'll cut off all your books, you aren't allowed to go below the price floor for any reason." This is the **Publishers** dictating prices, not Apple. If the publishers wanted to go to $0.99 or even FREE Apple would still sell their books.(As I understand, it there are lots of FREE books on the Apple store for which Apple's 30% is ZERO.)


RE: Interesting
By ALNorm on 3/8/2012 6:47:33 PM , Rating: 2
quote:
And it's not true that other retailers "can't" change the pricing. It's that if they change the pricing to the end customer then Apple gets to sell it to the end customer at that lower price too.


You were spot on until this comment. The agency pricing model and how it came to be is what is under question in this suit.

Under the agency pricing model, the retailer has ZERO control over the price. Amazon cannot change the sales price of a title that is priced using the agency model, else it would probably still take a loss on several titles to push more Kindles.

The price-fixing issue should probably be called pricing system collusion.


RE: Interesting
By The0ne on 3/8/2012 6:55:37 PM , Rating: 2
That is one reason amazon wants to become a publisher itself :) yay or run for your life, it's up to you. Me, it's RUN FOR YOUR LIFE!


RE: Interesting
By rsmech on 3/12/2012 12:40:44 PM , Rating: 2
You are missing the point of business. Apple just wants to at least match others lowest price but retain 30% cut. what if Amazon only wants 20% cut. Why should the book stores charge Amazon more when Amazon only wants 20%. Apple is telling publishers you will charge every e book seller more than us if they choose a lower profit margine per ebook. Apple is setting the publishers prices to all others. That is the problem. That is a monopoly. You not only contractually control your price but contractually control all others. There is nothing wrong with asking a publisher to sell to you at the lowest price and increase your cut for whatever you want. this isn't the case they are setting retail prices for all not wholesale prices for themselves. the difference is obvious.


Umm...
By MrBlastman on 3/8/2012 10:34:45 AM , Rating: 5
I don't think this article is exactly about raising prices, but instead about how Apple was using its size as leverage towards enforcing anti-competitive practices.

quote:
However, publishers were not allowed to let rivals sell the same book for a lower price.

According to the DOJ, Apple and the five publishers did this to raise the prices of e-books, which violates federal antitrust laws. The publishers reacted to these claims, saying that the agency model was used to "enhance" competition in the e-book industry by helping e-book sellers to make some money out of the deal.


I'm glad the DOJ has jumped all over them for this if it is the case. The only way it would not be anti-competitive is if Apple signed an exclusivity agreement with the publishers, thus limiting the books only to Apple's platform, which they didn't... and couldn't because what publisher in their right mind would do so?

You aren't enhancing competition if you are restricting the price floor to one large retailer--instead, you are giving the retailer a competitive advantage through economies of scale rather than letting the small guys compete creatively to niche themselves some business. The reality is though most of the time the small guys can't charge less... but, in the online marketplace, the smaller guys might agree to a smaller cut of the revenues in turn for a lower price and higher volume.

This stinks much like the Nintendo price fixing back in the early 90's.




RE: Umm...
By NellyFromMA on 3/8/2012 1:01:32 PM , Rating: 2
A trivial detail, but if these businesses are colluding with one another to set prices, and are bound to not allow rivals to price lower the same items for sale, this has effectively raised the price.

That's my interpretation anyways.


RE: Umm...
By The0ne on 3/8/2012 2:36:07 PM , Rating: 2
You're already at 5 so can't +rep you :) I agree with your comments. As someone who reads plenty yearly I would hope that this gets shutdown really fast. It does nothing good for the consumers like me. I would never go to Apply because of how they run and sell their products. I think it's rotten and shameful, to be nice.

I have the same worry about Google when they garner more market-share in everything that they are trying to dominate. Free and open source can only last so long when greed comes a-knocking. It's only a matter of time before Google snaps.


When business grow large
By masamasa on 3/8/2012 11:05:40 AM , Rating: 3
This is exactly what happens when business control too much of the market. They become arrogant and greedy, just like Apple now and the Microsoft of past, until the DOJ or some other legal entity steps in to slap their wrists. Bad for consumers any way you look at it.




By Bettor Off Single on 3/9/2012 8:00:45 AM , Rating: 2
Figures the DOJ would get it wrong.

For smaller publishers, Amazon wanted to keep the price of e-books DOWN at $9.99. They didn't do this by requiring publishers to sell at that price, but simple math shows why most will:

Amazon's publishers make the following "royalties":

1. For a slae price of under $2.99, 35 percent of the sqale price.

2. For a sale price of between $3.99-9.99, 70 percent of the total sales price.

3. For a sale price abvoe $9.99, 35 percent of the entire sale price.

This makes it LESS profitable to sell an e-book for between $10.00-20.00, as the royalty is lower in that range, breaking even again only at $20.00. Even above $20.00, to make a greater royalty than with a $9.99 price tag, the author must pass the cost of the reduced royalty to the public.

An alternative would be to just pay 70 percent of the first $10.00, and 35 percent of any amount over that. The way it stands now, there is tremendous pressure on e-book publishers to price their work within the 70-percent window.

Ray Gordon




By ajcarroll on 3/12/2012 3:59:54 PM , Rating: 2
Interestingly, some prominent authors have spoken out strongly against the DOJs investigation, including Scott Turow, president of the author's guild.

http://blog.authorsguild.org/2012/03/09/letter-fro...

and Salmon Rushdie. http://www.guardian.co.uk/books/2012/mar/12/salman...

Both claim the agency model is much fairer to authors as it protects their lively hood. Will be interesting to see if this grows.




By Bettor Off Single on 3/9/2012 8:00:45 AM , Rating: 1
Figures the DOJ would get it wrong.

For smaller publishers, Amazon wanted to keep the price of e-books DOWN at $9.99. They didn't do this by requiring publishers to sell at that price, but simple math shows why most will:

Amazon's publishers make the following "royalties":

1. For a slae price of under $2.99, 35 percent of the sqale price.

2. For a sale price of between $3.99-9.99, 70 percent of the total sales price.

3. For a sale price abvoe $9.99, 35 percent of the entire sale price.

This makes it LESS profitable to sell an e-book for between $10.00-20.00, as the royalty is lower in that range, breaking even again only at $20.00. Even above $20.00, to make a greater royalty than with a $9.99 price tag, the author must pass the cost of the reduced royalty to the public.

An alternative would be to just pay 70 percent of the first $10.00, and 35 percent of any amount over that. The way it stands now, there is tremendous pressure on e-book publishers to price their work within the 70-percent window.

Ray Gordon




"Nowadays you can buy a CPU cheaper than the CPU fan." -- Unnamed AMD executive














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