“Irony prospers in the digital age.”
Macmillan CEO Jim Sargent, who wrote those words, should certainly know. Sargent, along with his counterparts at publishing giants Hachette, Simon & Schuster, Penguin and HarperCollins, recently agreed to settle charges that they conspired with Apple Inc. four years ago to dilute Amazon’s power over the e-book industry.
The idea was to create a new pricing scheme, in which the publishers, not Amazon, would set prices over the fast-growing e-book category. Amazon, which dominates book sales, normally purchases works at a wholesale price and offers customers a significant discount. The new plan would have given Apple a 30 percent cut of whatever price the companies charged for e-books.
Over the past few months, however, Amazon agreed to let the publishers determine prices. But in a weird twist of fate, a federal judge has effectively allowed Apple to continue to set its own prices, the very power the publishers sought to deny Amazon.
If anything, this odd soap opera among Amazon, Apple and publishers demonstrates the unintended consequences of trying to use old-school tactics — high-powered lawyers, secret meetings, backroom negotiations — to solve business problems prompted by new technologies. Rather than explore new ways of distributing their products, publishers sat on their hands while Amazon amassed near dominance in both hardcovers and e-books.
“Through great innovation and prodigious amounts of risk and hard work, Amazon holds a 64 percent market share of Macmillan’s e-book business,” Sargent wrote in a letter last week (one that I received because, full disclosure, Macmillan publishes my book, “Rebuilding Empires.”). “As publishers, authors, illustrators, and agents, we need broader channels to reach our readers.”
Too bad Sargent and his cohorts chose collusion instead of innovation all those years ago.
In 2007, Amazon introduced the Kindle device and soon offered new and best-selling books for just $9.99. Naturally, this alarmed publishers.
“Publishers saw the rise in e-books, and particularly Amazon’s price discounting, as a substantial challenge to their traditional business model,” according to court documents filed by the U.S. Justice Department. The companies “feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid.”
The publishers “had concluded that unilateral efforts to move Amazon away from its practice of offering low retail prices would not work, and they thereafter conspired to raise retail e-book prices and to otherwise limit competition in the sale of e-books,” the documents said.
By the end of 2009, the publishers enlisted the help of Apple. The company was lagging Amazon despite a similar e-book business model — it was buying them in bulk and setting its own prices. But with its popular iPad combined with its dominant iTunes store, publishers believed Apple was the only retailer with enough clout to break Amazon’s $9.99 model.
Here’s how the plan worked: The publishers adopted a new “agency model,” under which the companies would set the e-book price and Apple would act as their “agent” in selling the e-books to consumers. In return, Apple would receive a 30 percent commission off each e-book.
“Yes, the customer pays a little more, but that’s what you want anyway,” the late Apple founder and CEO Steve Jobs told publishers, according to the court documents.
As a result, e-book prices for best-selling titles went for $12.99 or $14.99, $3 to $5 more than the $9.99 charged by Amazon.
Apple’s agency model didn’t last long.
Federal and state attorneys sued Apple and the publishers for antitrust violations. The publishers eventually settled and promised not to change their old pricing system for a period of time. But Apple, which was found liable during a trial in June 2013, cut an unusual deal with the court.
Until a higher court rules on its appeal, Apple can still set its own e-book prices, the very system publishers were trying to wrestle away from Amazon. Meanwhile, Amazon was busy brokering deals allowing publishers to determine digital prices on its platform.
In short, the publishers went through all of this trouble to deprive Amazon the power to dictate prices only to inadvertently (and exclusively) give that power to Apple.
Apple is now “the only retailer who is allowed unlimited discounting,” Sargent wrote. “This will ensure a muddled and inefficient market ... (and) will cause us to occasionally change the digital list price of your books in what may seem to be random fashion. I ask for your forbearance. We will be attempting to create even pricing as best we can.”
Oy.
But Sargent did correctly note that the case does not solve the publishing industry’s long-term problems. Amazon still dominates the book industry, which means publishers need to develop new ways of distributing digital products to consumers.
According to Sargent, publishers generally dislike subscription models offered by startups like Rooster and Scribd, both from the Bay Area, because “we have always worried that it will erode the perceived value of your books.”
But as the digital market continues to expand, Sargent said, Macmillan is now testing subscription services, though mostly for backlisted books and titles hard to find at brick-and-mortar stores.
One can only imagine what publishers could have accomplished had they applied the same imagination and cunning to selling digital books as they did with conspiring with Apple to fix prices.