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June 06, 2013

The Apple E-Book Trial, Day Three

A little background.

People (including myself) have asked why the price of an ebook is so high, and and why it's gone up the past few years. When Kindle first came out, ebooks were super-cheap. Now they're not.

This trial is about that.

Apple proposed, and negotiated with the five biggest publishing houses, a different pricing model specifically intended to raise the price of e-books.

Previous to this agreement, e-books had been sold outright to retailers, as goods intended for resale usually are. That is, Manufacturer X sells a Widget to Retailer Y for $10. Retailer Y now owns the Widget outright, and may sell it for any price it likes, whether for $20, or for $10.50, or even for $6, if it wants to sell it at a loss (or must sell it at a loss, due to poor sales).

This is why Amazon usually offers such low prices (or had previously offered such low prices). They buy books from the publishers at the wholesale price. Usually a retailer would add, I don't know, a 50% markup. Instead, Amazon prices at a much smaller markup (maybe 5%), and sometimes even at cost and sometimes even at a loss. I suppose they do the latter with things like the last Harry Potter book, as a loss-leader to essentially buy new customers by offering them a price they can't refuse.

Now the publishing houses don't like this. Why, I'm not sure, as they're still getting the price that they themselves set for their wares. But for some reason, especially with e-books, they felt the low prices were threatening in some way. Perhaps they felt the low prices of e-books would threaten their main business of selling physical books.

Apple proposed a different pricing scheme: The publishing houses would not sell the book to Amazon, but rather permit Amazon to act as the agents of sale. Now, in this "Agency model," the publisher sets the price of the book, and then gives Amazon an "agent's fee" of 30% for each sale.

Now Amazon can no longer set the price, as the publisher still owns the book until the moment of sale to the customer, at which point 70% of the publisher's price goes to the publisher and 30% goes to Amazon.

So, Old Model: We sell a book to Amazon for $8, expecting them to charge something like $14. But they don't charge $14; they only charge $9. Amazon decides to make less money per sale in an effort to expand its business, and for some reason the publishers don't like this.

Thus the New Model: The publisher sets the price at $14, period. Amazon cannot raise or lower the price because it doesn't own the book; it merely has an agent's right to sell it at that quoted price. Now the book sells for $14, as it must. 70% to the publisher, 30% to Amazon.

This is why Amazon has been so insistent about saying "This price has been set by the publisher" regarding all those books with inflated prices.

Now, the trial against Apple isn't about a new pricing model, per se; it's about the Bigs of the Industry getting together to mutually agree to set prices, using the Agency Model as the vehicle for doing so -- that is, it's about price-fixing by major players in the industry.

The five publishing houses implicated in this scheme have all settled independently with the government. For some reason, no article gives me a straight answer as to whether this means the agency model is retired, or what.

I think the agency model is not retired, as I just looked up Dan Brown's lame new book and it costs $13 and carries the advisory, "This price was set by the publisher." I think then all they agreed to do is not insist on actual price fixing (they had wanted to escalate the retail price of books between $13 and $15).

So the US government is suing people and extracting agreements and yet not undoing the Agency Model scheme that raised prices.

Apple insists it's done nothing wrong. Furthermore, their big trial strategy is to put Amazon on trial, claiming Amazon illegally sought to fix prices itself (albeit at a low level). This claim seems to concern Amazon negotiating for best-offered prices (a Most Favored Nation clause, that is, whatever the lowest price is that you offer to any other seller, you offer to Amazon). I'm not sure why this fairly-common clause constitutes price fixing or illegal behavior; I suppose it might be that when a company has near-monopoly position, things they had been permitted to do as non-monopolists become, by law, illegal. Whatever the theory, that's Apple's story and they're sticking to it.

Apple also insists that they're going to embarrass Amazon by having evidence introduced that Amazon itself thinks that its Kindle format is inferior to Apple's format. The supposed legal consequence of this is to prove that Apple needs to have higher prices to support its supposedly-superior format, but that seems absurd; this is rote, mostly automated coding. How many times does a human hand enter the process of turning a computer file of a manuscript into an ebook? A tweak here and there, a read-through; but it's not like there's a lot of work going into this process.

Yes, the iPad has a neat "turning the virtual page" animation when you turn the virtual page. But this is the product of software coded into the iPad -- it's not something that's coded into each and every new book. There's no justification for charging more per book for a cute bit of code you bought once with the iPad.

The real point of this, it seems to me, is for Apple to crow that "Even Amazon thinks the Kindle sucks!"

Which it doesn't, by the way. If I wanted an iPad I'd've bought an iPad. But Apple seems to think it can win some PR by trash-talking the Kindle at a trial about its own behavior.

Sorry to be so biased here. All I know is that one company wants to sell me a book for $8.67 and another company has arranged it so that it is impossible for anyone to sell me the same book for less than $12.99. And no, the iPad's page-turning animation isn't worth $4.32 per book to me.

The trial will last about three weeks, it's expected.


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posted by Ace at 03:00 PM

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