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Breaking Down The iBooks Suit: Was Steve Jobs a Criminal Colluder?

Did Steve Jobs and other Apple Execs conspire with the world’s six largest publishers to fix e-book prices? The case is being heard in federal court this week, so we’re breaking down the facts in an attempt to figure out who did what.

Breaking Down The iBooks Suit: Was Steve Jobs a Criminal Colluder?

Two Sides to the Charges

Apple is accused of conspiring with publishers to raise e-book prices: “a collective effort to destroy Amazon’s model of selling e-books for a uniform $9.99,” according to Justice Department lawyers.

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At the time of the alleged Apple conspiracy, many of us were much more concerned about Amazon’s increasing monopoly power in book retailing. This market dominance gave Amazon the leverage to set e-book prices at $9.99.

Amazon’s apparent abuse of power or Apple’s alleged price-fixing conspiracy–which side in this seeming conundrum has the moral upper hand?

From the legal point of view, there are no formal charges against Amazon, so it’s not an issue. Yet this Walrus remembers feeling the weight of Amazon pressuring publishers to play their game. Let me give you an anecdotal example.

The large, international publisher I was working for received a new agreement from Amazon with terms more favorable to Amazon. There were no contract negotiations. From what I was told, Amazon would sooner drop our entire catalog of thousands of books than negotiate terms. Amazon had the upper hand, because they pretty much knew that they were our largest single source of revenue.
We heard from friends at other publishers who were being treated the same way. We were all being forced to accept contracts that favored Amazon. But this was not collusion, not a conspiracy, far from it! It felt like an abuse of monopoly power.

The Case Against Apple

If Apple had said to each of the six publishing behemoths, do it our way or go it alone, that would have been similar to the Amazon tactics I observed. But it seems that Apple was creating a group to act together. Sounds like collusion, but were the intentions of this group illegal?

One could make the point that Apple would do anything to break Amazon’s near monopoly in e-book retailing, and it’s hard to discount this possibility, entirely. But motivation and business objectives are not the same, and Apple’s objectives had more to do with changing the retail model for e-book selling.

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Think about the differences between Amazon’s model for selling goods online and Apple’s iTunes model, originally created to sell tunes for 99¢ each. Amazon created a virtual marketplace for physical goods. Apple’s virtual marketplace exists primarily for making file transfers across the Internet.

As much as anything, it’s this fundamentally different view of the retailing world that gave rise to the federal lawsuit.

Two Ways to Sell Books Online

There are two basic business models for retail book sales, the Discount Model and the Agency Model. One needs to understand how these differ and the historical precedents of their existence in order to judge Apple’s motives. Here goes!

The Discount Model is the standard for retail trade book sales. It’s simple:

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Every book has a list price and it’s usually printed right on the cover by the publisher. The publisher sells box-loads of books to distributors at a discount, usually around 50%. So the wholesale price for a $20 book is $10.

Basically, the distributor pays the publisher the wholesale price and is free to sell the books for any price they like, from full-markup to loss-leader.

The Agency Model is so-called, because the retailer acts as a selling agent for the publisher, which is difficult to manage with physical books but works well for web-based transactions. This is the model of Apple’s iTunes Store and it works like this:

The publisher (or record company or video company) sets the price of the item, which is posted by the seller. The seller collects all money for transactions and tracks it. Now here’s the big difference. The seller pays the publisher a percentage of every sale, pocketing what remains.

In the case of the iTunes Store, Apple set a standard 70/30 split, with the larger share paid to the publisher. In earlier days, Apple’s 30% went almost entirely to cover overhead.

The iPod’s success turned iTunes into a modest profit center and gave Apple the kind of market dominance in music that Amazon now enjoys with book and e-book selling.

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Expanding Empires & Border Wars

You can almost feel the inevitability of conflict between the multiple colossuses of the digital world. It’s like reading about the period of European history immediately preceding the outbreak of WWI. (How much more civilized to fight with lawyers instead of soldiers!)
Coverage of the Apple price-fixing case, as it’s popularly called, makes it seem as though Apple is the aggressor bent on hegemony, while Amazon, the protector of lower consumer-friendly prices, is the innocent victim.

In fact, the government’s suit has nothing to do with Amazon, at least not directly. The U.S. Justice Department is protecting us, the consumers, from an attempt by monster conspirators to manipulate the market, raise prices, and increase profits.

Boiling Down the Essentials

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For the case itself, it doesn’t matter that Amazon is behaving like a friend of the court, nor that Apple’s six alleged co-conspirators have settled with the Justice Department. Apple CEO, Tim Cook, says there’s nothing to settle, because they’ve done nothing wrong.
Neither does it matter that data on e-book pricing is pretty much inconclusive. It’s nearly impossible to answer the simplest questions, like are average e-book prices going up or down, and if so, why? Or more importantly, I doubt we’ll ever be able to say that consumers will be better off if Apple loses this case.

What matters is Apple’s intent. Was the motivation greed and increased profits, and were the publishers in collusion to raise prices together towards this end? A lot of people believe it looks this way.

The problem I have with this conclusion is that Apple’s behavior is consistent with the way iTunes has been set up and run since its inception. Also, I much prefer the Agency Model supported by iTunes. As a business model, it’s much cleaner and more straightforward than the Discount Model, which is more easily subverted if one party is overwhelmingly more powerful in any given transaction.

As consumers, it’s hard to say which model favors lower prices, but the lowest price is not always the best or fairest price! Think software pricing, but that’s a topic for another day.

Resources:
The New York Times Bits Blog is following the story closely.

[Stack Of Books: R.Martens via Shutterstock]

About the author

Professor Walrus (AKA: Clay Andres) is the Publisher & Walrus-in-Chief of WalrusInk, and a long-time veteran of tech publishing— journalist, author, editor, designer, blogger, columnist, and party host. He lives on an iceberg in the Bearing Sea with his wife and two dogfish.

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