Friday, April 13, 2012

Apple Guilty of Price-Fixing on iBooks?

Earlier this week the U.S. Department of Justice (DOJ) sued Apple and five major players in the book publishing industry of conspiring to fix prices on eBooks.  According to this Wall Street Journal article the agreement between the six companies began in 2010 and was orchestrated by Steve Jobs.  The lawsuit basically claims that Apple and the various publishers worked together to set prices that were favorable to them rather than allowing the market to set prices naturally.  According to some sources the prices for new releases and current best sellers may have been inflated anywhere between three to five dollars.

While money was undoubtedly the root reason for the companies to band together the underlying reason seems to be that they feared that consumers would come to expect the deeply discounted prices that Amazon was offering on a regular basis.  Amazon was selling eBooks at a loss in an attempt to solidify itself, and their Kindle eBook reader, as the top portable eBook reading device.  According to CNET Amazon would sell a book that they purchased for $12.99 wholesale for $9.99.  Perhaps publishers balked at this practice behind closed doors but they must have found the arrangement acceptable enough to want to sell their wares on Amazon.  If the DOJ is correct then the problem seems to have arisen when Apple released iBooks.  If you’re familiar with how Apple runs the iTunes store then you know that Apple takes 30% of whatever items are sold for.  It doesn’t matter if it’s a movie, an app for your iPhone, a 99 cent song, an iBook.  To my knowledge Apple has never budged from this “30% off the top” model.  And it doesn’t take an economics degree to see why neither Apple nor the book publishers would want to try to compete with Amazon’s deeply discounted prices.  The DOJ is alleging that the companies in the lawsuit agreed on a common price structure and pressured Amazon and other eBook resellers to stop selling books at a loss.  The DOJ is alleging that under the agreement publishers would not allow other companies to sell their eBooks at a lower price than Apple.

So far three of the five companies named in the lawsuit have settled out of court.  Apple, Penguin, and Macmillion have either refused settlement agreements or even refused to enter talks.  Do you think that the government has the right to step in and force companies to change the way they price their products?  This situation hardly seems like a monopoly situation like when the government broke up the telephone companies.  In fact, it seems like a continuation of the war between Apple and Amazon that you may or may not have noticed.  Both companies want you to consume all of your digital media within their respective ecosystems.  Shouldn’t companies be allowed to come together as an industry and set common pricing guidelines?  I’m not an eBook purchaser but from what I’ve seen over the years they never cost more than a physical copy.  Before learning about this case I would have assumed that Amazon’s hypothetical $9.99 price point would have been because publishers didn’t have to pay printing, shipping, and storage expenses.  However, according to the CNET article those expenses only amount to a few bucks for a major publisher because they print large quantities.  On the other side of the coin, the DOJ estimates that consumers may have overpaid for eBooks by tens of millions of dollars.  The Consumer Federation of America raises that estimate to a shocking $200 million or more!

Typically I’m pretty leery whenever the DOJ sticks its nose into these types of matters.  However, some of those alleged quotes from high ranking executives at the various publishers that were mentioned in the Wall Street Journal article are damning.  It also doesn’t help much that three out of the five publishers have already settled.  The charges were just brought up on Wednesday!  I don’t like the idea of price gouging but it doesn’t seem like this was a gross abuse of power that warrants spending our tax dollars on litigation.