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04/25/2012

Apple and Amazon: A Goliath and Goliath story

 

Have you been paying too much for ebooks? According to both US and Canadian lawyers, you have – and now, they're trying to get that money back.

Earlier this month, the US government sued Apple and five book publishers for colluding to keep the price of ebooks high (read the complaint here). The companies had all worked together to change a century-old way of selling books. They did it in response to Amazon, which had been selling ebooks for less than the wholesale price.

Amazon was pricing its ebooks at $9.99, which was less than it bought them for. It did this because it wanted to build an immense market share for its ebook business. It annoyed publishers, who wanted to charge more for their books. It also annoyed Apple, which was preparing to launch the original iPad while all this was going on, and which wanted to take a stab at the ebook market itself.

Apple privately teamed up with five of the six largest book publishers to introduce a new way of selling ebooks that would stop Amazon from discounting. Instead of letting retailers such as Amazon or high street book stores set the price, the new model (called the “agency" model), let the publishers set the price themselves. This meant that publishers could decide what prices Amazon would sell their books at.

If Amazon refused to deal with the publishers under the agency model, they would all stop selling their books through Amazon, which would make Apple's iPad even more attractive to consumers.

Amazon tried to reject the agency deal, offered by Macmillan (one of the publishers being sued). The other five publishers made it clear that they were all now selling books the same way. If Amazon refused to sell Macmillan's books, it would effectively cut itself off from all of them, and lose half of its book revenue. Amazon backed down and accepted the new terms.


Governments don't like companies colluding like this, because it eliminates competition (which generally works in the favour of the consumer by keeping prices low). Instead, it keeps prices artificially high, which is what the lawsuits claim happened with ebooks.

In the US, three publishers have reached a settlement with the Department of Justice and agreed to stop selling books this way. But the remaining two publishers, together with Apple, are refusing to settle. That will force the US government to continue litigation with them.

In Canada, there are three lawsuits against the group. They are class-action lawsuits, in which a large collection of people come together to sue a defendant in a single case. The lawsuits have been launched in Québec, Ontario, and British Columbia.

If the lawsuit are successful, there will probably be damages awarded in favour of Canadian consumers, meaning that if you purchased an ebook since April 2010, you might be eligible for compensation.

A successful case would also give Amazon the chance to sell retailers' books for lower prices once more. But some believe that this would set a dangerous precedent.

Amazon dominates the ebook market in almost every country where it maintains a local ebook store. If the company continues to sell its product for bargain basement prices, its already healthy market share will will continue to grow, edging out competitive ereader platforms and retailers.

What happens when Amazon gains increasing dominance in the ebook market? Will it keep prices low when there is no one left to compete with? No one likes a cartel - but no one likes a monopoly, either.

On the other hand, Apple's market attitude and pricing practices are notoriously inflexible. Apple could happily have priced ebooks at $9.95 on the iPad, but it uses a model where it takes a 30% share of everything selling through its App Store - including books. As one Apple executive reportedly said: "We can't treat newspapers or magazines any differently than we treat FarmVille."

Can't, or won't? Amazon sells books at a loss because it can - but Apple has $10bn in cash and equivalents on its balance sheet - that's twice as much as Amazon. If it really wanted to take on Amazon at its own game, it could, rather than conducting secret meetings with publishers at Manhattan restaurants to manipulate market prices.

So, was Apple keeping market prices artificially high? Or was Amazon keeping them artificially low? Both statements are true. The question is, which of them should be allowed to get away with it?

Danny Bradbury, MSN Tech & Gadgets

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Danny BradburyDanny Bradbury

Danny Bradbury is a technology journalist with 20 years' experience. He writes regularly for publications including the Guardian, the Financial Times, the Financial Post, and Backbone magazine. Danny also writes and directs documentaries.

Maurice CachoMaurice Cacho

Maurice Cacho is a Toronto-based journalist mixing his love for tech with a passion for news. He's also CP24's Web Journalist and appears daily on CP24 Breakfast and weekly on the channel's tech show, Webnation, discussing tech news and trends.

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