There appears to be progress in the Department of Justice’s probe into possible collusion between Apple Inc. and publishers to raise the price of e-books. The probe, announced at the end of 2011, has been investigating whether or not Apple entered into agreements with publishers that resulted in cost increases for e-books. The alleged motivation behind these agreements was to undermine Amazon Inc.’s vast monopoly on the e-book business, which it holds due to its line of e-book readers (the Kindle).
Before the price increases, Amazon had offered digital version of popular best sellers for as low as $9.99 in order to boost sales of their line of Kindle products. However, these prices rose to $12.99 and above after Apple and publishers came to an agreement about an “agency model” of pricing. Under the agency model, the publishers would set the price of the book, and Apple would take a 30% cut of the profits. The agency model stands in contrast to the wholesale model, in which the publishers sold books – or in the case of e-books, digital versions – to retailers at roughly half price, and then allowed vendors to resell the books at a lower price than suggested. Wholesale pricing is still the norm in the world of brick and mortar booksellers. After the alleged agreement to move to the agency model, the publishers were able to go back to other e-book vendors such as Amazon and implement similar pricing schemes.
The publishers (including Simon & Schuster, HarperCollins, Hachette Book Group, Penguin Group and Macmillan) have fired back at the claims of collusion, stating that the agency model actually encourages competition among the sellers of e-books by reining in the ability of vendors to set artificially low prices in order to bring about a monopoly. Since e-books are specific to a particular model of e-book reader, a commanding market lead in one sector translates to the other. In other words, while vendors might lose money on offering e-books at very low prices, they more than make up for it with sales of their devices and continued customer loyalty.
E-reader manufacturers aren’t the only ones with a dog in this fight. Brick and mortar booksellers, which have had an increasingly difficult time competing with e-book vendors, worry that consumers will grow accustomed to the price cuts offered by retailers like Amazon. Coupled with growing consumer preference for buying books online rather than by stopping by a store, it could definitively spell the end for generic chain bookstores. While smaller boutique stores will continue to have a place offering unique, rare, or antique products that cannot be found online, it is unclear what the place of companies who maintain a physical storefront will be.
In the latest update, as reported by the Wall Street Journal, it appears that while Simon & Schuster, HarperCollins and Hachette Book Group are amicable to settling, Apple, Penguin Group, and Macmillan are not satisfied with the terms currently being offered. Of course, these positions might change if the Department of Justice brings a formal antitrust suit against the parties.