Pending settlement will change e-book pricing

Claims from sources wisely choosing to remain anonymous are pointing towards a settlement with Apple, five major publishers and the US Department of Justice following allegations of price-fixing.

This means the publishers selling e-books with Apple would have their pricing policy changed from the current agency model to one benefiting the e-book retailer competition – e.g. Amazon. Initially reported by The Wall Street Journal, Apple’s current pricing model with publishers is explained:

As Apple prepared to introduce its first iPad, the late Steve Jobs, then its chief executive, suggested moving to an “agency model,” under which the publishers would set the price of the book and Apple would take a 30% cut. Apple also stipulated that publishers couldn’t let rival retailers sell the same book at a lower price.

This contract Apple had with publishers is believed to be in violation of antitrust laws. In Wired, an IP and antitrust attorney outlines why:

  1. Whether and how the agency model applies to virtual goods;
  2. Whether Apple and publishers engaged in a “hub-and-spoke” conspiracy or simply “conscious parallelism”;
  3. The status of the “most-favored nation” clause, common to many legal contracts today, which Apple used to ensure that books could not be sold elsewhere at a lower price than in the iBooks store.

The New York Times have reported the latest possible outcomes coming from inside sources:

One publishing executive with knowledge of the situation, who insisted on anonymity so as not to upset continuing negotiations, said that investigators had expressed interest in finding ways to augment the current system, known as the agency model, and not discard it entirely.

If that system were to disappear, it would be a boon to Amazon, said Mike Shatzkin, chief executive of the Idea Logical Company, which advises book publishers on digital change, adding that it would be “essentially bad news for just about everybody else in the book business.”

The merits for authors, publishers, retailers and readers can be argued in all directions. Would Amazon’s dominance be beneficial for the digital publishing industry? According to Bloomberg, Amazon currently have 58% of e-book sales compared to Apple’s 9%.

Agency pricing was implemented to establish a higher price for e-books for the sake of retaining the publisher’s name. In O’Reilly, Joe Wikert considers an all-wholesale pricing model in digital publishing:

Think of the premium products you’ve bought or admired. Oftentimes, their prices are higher than most of the competition’s. What would happen if those prices were suddenly significantly reduced? Would those products retain the full value of their premium brand? Highly unlikely. And shouldn’t the owner of that brand have a say in what price is associated with it? Again, it’s OK for a short-term loss-leader model, but I’m talking about selling something at or below cost for years and years, not just for a day or two. Over time, the value of that brand is affected. That’s why I think publishers should definitely have the option to go with the agency model so they can manage retail prices and not let their brand lose value.

The outcomes from this case will no doubt change the e-book market and will likely incur soon. Watch this space.

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This is the future of the book, but not the one you were expecting.