By Sarah-Jane CollinsApril 20, 2012
E-book sales are set to soar in the next few years, but Apple and some big publishers stand accused of cartel capers.
The figures tell us electronic book sales are soaring. It's big business and getting bigger by the day. If e-books are the future, it's no surprise publishers want to ensure their revenue isn't compromised by discounting - and will fight to defend their margins. Even when they're accused of price-fixing.
And that is exactly what the US Department of Justice has accused American publishers of doing — working with Apple to agree on prices for e-books in an anti-competitive cartel that has forced up the price of e-books across the board.
The suit, brought in mid-April 2012, is designed to stop the companies from forming "agency agreements" with Apple, allowing them to set their own prices through the iBookstore, with Apple taking a 30 per cent cut. Three of the publishers almost immediately reached settlement terms with the US government, but Apple — also named in the suit — and two other publishers are holding out.
The agency model adopted by the publishers also included a clause that ensured they could not sell their e-books cheaper than the price they sold to Apple, and that they set the price other retailers could sell the eBooks for at the same price or higher, but never lower — what's known as a 'most favoured nation' clause.
Apple put out a brief statement regarding the case, and provided the same words when asked by The Global Mail for further comment. Just four sentences, denying any wrongdoing:
"The DOJ's accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon's monopolistic grip on the publishing industry. Since then customers have benefited from e-books that are more interactive and engaging. Just as we've allowed developers to set prices on the App Store, publishers set prices on the iBookstore."
Appearing at a preliminary hearing in New York on April 18, Apple's legal counsel said the company wanted the case to go to trial.
"Our basic view is that we would like the case to be decided on the merits. We believe that this is not an appropriate case against us and we would like to validate that," Apple's lawyer, Daniel Floyd, said.
The two publishing houses that have elected not to settle reportedly supported taking the case to trial.
All indications from them suggest they are determined to fight the dissolution of the current Apple system, which they say has allowed for better competition against the giant in e-book publishing — Amazon.
Before Apple's intervention, publishers were following the same model for e-books as for printed books: selling their e-books to retailers for a percentage of the recommended retail price (usually about half) and allowing retailers to determine their price from there.
That arrangement saw Amazon — a company with deep pockets — selling many e-books at a loss, a strategy used by companies to build market share and increase take up of new products (such as the Kindle — Amazon's e-reader).
Amazon, though, is where the publishing companies have claimed the trouble begins. In about 2008 it brought e-books into the mainstream with a big investment in Kindle technology. And when books were released, Amazon offered the electronic versions at a much lower price than the print copy.
Amazon would not comment when contacted by The Global Mail other than to make a brief statement regarding the settlement the US government had reached with three of the publishing companies named in the price-fixing suit.
"This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books," a spokeswoman for the company said.
So what does the suit allege happened?
By late 2009, e-books were gaining market share and publishers were worried. With Amazon controlling much of the access to both the wholesale side (by being the main portal for publishers, much as Coles and Woolworths are the main portals for groceries in Australia) and the retail side, what would happen if the growth continued unchecked?
Publishers, who had watched the decline in revenue of print media and the music, movie and television industries as consumers switched to online consumption, got very nervous.
Wanting to claw back some control over e-book prices, they were keen to sign up to Apple's proposed agency model prior to the release of the iPad in 2010. Through the iBookstore, publishers set a price for the books and Apple got a 30 percent cut. Sounds like a pretty standard agreement, right? Well, no, not according to the US Department of Justice.
What's alleged in the suit is that publishers and Apple got together to agree on what the prices would be, avoiding price wars and discounting, and pushing up the cost of e-books.
The publishers accused of colluding — Hachette, HarperCollins, Simon & Schuster, Macmillan and Penguin — were worried about their business model, court documents allege.
"In private meetings among their executives, Publisher Defendants complained about the "$9.99 problem" and the threat they perceived it posed to the publishing industry. Through these communications, each Publisher Defendant gained assurance that its competitors shared concern about Amazon's $9.99 e-book pricing policy," the competitive impact statement filed in the suit alleges.
So, when Apple's then-chief Steve Jobs came knocking — looking for a way into the e-book market — they were keen to hear what he had to say.
"In December 2009, Apple approached each Publisher Defendant with news that it intended to sell e-books through its new iBookstore in conjunction with its forthcoming iPad device. Publisher Defendants and Apple soon recognised that they could work together to counter the Amazon-led $9.99 price," the document says.
If that was where the discussions ended, perhaps there would have been no lawsuit. But the US government says not only did publishers meet with Jobs independently and discuss ways to counter Amazon, they also allegedly met with each other and discussed pricing and anti-competitive behaviour to ensure the model's success.
"The volume of Publisher Defendants' communications among themselves intensified during the ensuing negotiation of the Apple Agency Agreements. Through frequent in-person meetings, phone calls and electronic communications, Publisher Defendants, facilitated by Apple, assured each other of their mutual intent to reach agreement with Apple.
"After each round of negotiations with Apple over the terms of their agency agreements, Publisher Defendants' CEOs immediately contacted each other to discuss strategy and verify where each stood with Apple," the court documents allege.
In the end, the Hachette, HarperCollins and Simon & Schuster publishing houses all elected to settle the suit, without admitting wrongdoing. In a statement, Hachette said the company had "reluctantly agreed" to the settlement.
"Hachette was not involved in a conspiracy to illegally fix the price of e-books, and we have made no admission of liability," the statement says.
Hachette's unilateral adoption of agency was designed to facilitate entry by a new retail competitor and to increase the diversity and health of retail booksellers, and we took these actions knowing that Hachette itself would make less money than before the adoption of agency."
So Hachette, like the other publishers, claims it wanted to see less dominance in the market by Amazon. And, they settled the case only because they were facing long and expensive litigation against "virtually unlimited resources".
But they also had this to say:
"Two years ago, Amazon effectively had a monopoly on the sale of e-books and e-readers, and was selling products below cost in an effort to exclude competitors. Today, consumers have multiple sources to choose from, and the price of dedicated e-readers has fallen dramatically. And the fact that 82 per cent of Hachette's e-books are currently priced at $9.99 or less — including many books by our bestselling authors — belies any notion that we increased prices on all e-books."
And there was a dig at the US government as well.
"In the wake of this settlement, we believe the DOJ and the State [Attorney General's office] have a responsibility to consumers to ensure that the market for e-books remains diverse and competitive, and that we don't return to the days of monopoly, with one company controlling what and how people read e-books," the statement ends.
Simon & Schuster would not comment when approached by The Global Mail.
HarperCollins's statement on the suit was similar to Hachette's. Again, the company emphasised that settlement did not mean wrongdoing, and said the e-book market had "exploded" following the adoption of the agency model in 2010.
Just how big the e-book market is, is slightly unclear. Some media reports say it has grown from less than one per cent of the book market in 2008 to what will be 40 per cent by the end of 2012, with Amazon owning 85 per cent of that market in 2010. But other estimates are lower.
A 2011 report into the American publishing industry indicated growth was significant for e-books, but nowhere near a 40 per cent share in that country.
"E-books and enhanced e-books saw significant growth as a percentage of overall industry revenue during the past three years, going from less than 0.5 per cent in 2008 to 5.5 per cent in 2010," the report says.
"Total e-book revenue growth was 131.9 per cent for the three-year reporting period. Total net revenue for e-books (including enhanced e-books) in 2010 was almost [USD]1.62 billion. Unit-sales growth for e-books was equally impressive, posting a three-year net growth rate of 347.4 per cent from 2008 to 2010. By 2010, e-books represented 5.35 per cent of the overall market share."
The Department of Justice court filing in the price-fixing case says e-books "conservatively now constitute 10 per cent of general interest fiction and nonfiction books (commonly known as "trade" books) sold in the United States and are widely predicted to reach at least 25 per cent of US trade books sales within two to three years."
So by all accounts the industry is big money, and the market has been expanding fast.
In Australia, Maree McCaskill, the head of the Australian Publishers Association, wouldn't comment on the price-fixing allegations in the United States but said the local industry was excited about the prospect of e-books.
"The trade publishers are the ones that are now making the transition from print to digital and it isn't from one to another it's a combination of both. Because currently, and for a while yet, the market is still — probably for the next five years most likely — still to be dominated by print," she said.
"You might ultimately see 50/50 with print, but currently it's probably about 70/30, 80/20, something like that - depending on which publisher you're talking about.
"Some of the publishers in Australia have been working on e-books for the past two years their sales are probably 10 to 15 per cent e-books, so it's still new territory. They aren't afraid of it at all, they understand it as being just another channel to market and they are putting their content in a different to market."
But McCaskill said every market is wary of monopoly situations, and that arrangements ensuring there is good competition among retailers delivers better outcomes for consumers.
"That is always a concern for anyone who is providing a product for retail. No one likes to see monopolistic behaviour, because once you get monopolistic behaviour, then you are very much as a supplier of products and services … at the mercy of their dictates," she said.
McCaskill says the prices consumers pay through Amazon and the iBookstore are unrealistic, with most of the production costs of e-books incurred before a book even goes to print.
"Everyone says, 'But the e-format is cheaper'. No it isn't. The largest parts in the cost of the production of a book are right up to the production phase. Then they go and get it printed, or then it turns into an e-book. The editing and the layout and the design and all of that is the most expensive part," she says.
"Everyone focuses on what they pay for the e-book through Amazon and Apple, but they are loss-leaders."
McCaskill believes that over time the cost of e-books will rise, as publishers and retailers transition away from discounting, to shore up revenue.
"The Amazon model is quite interesting because it's setting it at a level where obviously they wanted to get in and dominate the e-book market globally, but ultimately a lot of the pundits think that those prices will ultimately rise."
It's a problem that the newspaper industry is struggling to come through, as the take up of their free news sites eats away at revenue and print circulation plummets. The news still costs similar amounts to produce, but consumers are conditioned to expect it for free.
E-books aren't free, but they are much cheaper than their print counterparts, and they do not make much money for the people who are still investing similar resources in their production.
Macmillan chief executive John Sargent told the American Authors Guild in a blog post on April 11 that his company's decision to move to an agency model with Apple was his decision alone, and that the company had done nothing wrong.
"It is… hard to settle a lawsuit when you know you have done no wrong. The government's charge is that Macmillan's CEO colluded with other CEOs in changing to the agency model," the post says.
"I am Macmillan's CEO and I made the decision to move Macmillan to the agency model. After days of thought and worry, I made the decision on January 22nd, 2010 a little after 4am, on an exercise bike in my basement. It remains the loneliest decision I have ever made, and I see no reason to go back on it now."
The companies that have decided to fight on for the agency model see it as a way to stop the degradation of an industry that is on the edge.
Books have taken longer to transition from print to electronic, largely because reading so much text on screen has long been seen as unworkable. But the readability of devices such as the Kindle and the iPad have changed that, making e-books a viable alternative, and it's no longer just the early-adopters who are making the switch.
In March, after hearing whispers about an impending suit, Scott Turow, the president of the American Authors Guild, blogged about the prospect under the heading "Grim News".
"We have no way of knowing whether publishers colluded in adopting the agency model for e-book pricing. We do know that collusion wasn't necessary: given the chance, any rational publisher would have leapt at Apple's offer and clung to it like a life raft. Amazon was using e-book discounting to destroy bookselling, making it uneconomic for physical bookstores to keep their doors open," he wrote.
Then on April 12, following news of the settlement, Turow again took up the issue:
"The proposed settlement is a shocking trip through the looking-glass. By allowing Amazon to resume selling most titles at a loss, the Department of Justice will basically prevent traditional bookstores from trying to enter the e-book market, at the same time it drives trade out of those stores and into the proprietary world of the Kindle," he wrote.
Passions are running high in the industry, as authors, publishers and retailers look for new ways to make a profit in a climate where one player appears to hold most of the cards.
And the screws are being turned on Apple's agency model, in both the US and the Eurozone, where similar allegations were raised in an investigation by the European Commission in late 2011. On the day the US government suit was announced, Bloomberg ran a piece that suggests Apple may settle the EU case. There is also a US class action suit against Apple regarding the competition claims, which the company is fighting.
If Apple wants its day in court, it may be quite some time before this issue is resolved. But the settlements reached with Hachette, HarperCollins and Simon & Schuster will significantly impede the agency model, and is likely to ensure Amazon is able to continue expanding in the e-book field.
If, as John Sargent told the Authors Guild, agency sales structures are the best solution for an ailing industry — what will be the least-worst?
For the moment, the industry seems unable to work that out.
We have amended the original version of this story to more clearly define what is known as the "most favoured nation" clause.