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The ITT List

Thursday, Apr 19, 2012, 4:49 pm

We Already Know the Result of eBook Pricing Lawsuit: Either Way, You Lose

By David Szydloski

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Amazon CEO Jeff Bezos showing off his company's Kindle Fire ereader.
(Photo by Emmanuel Dunand/AFP/Getty Images)

On April 11, 2012, the U.S. Department of Justice filed a lawsuit against six publishing companies and Apple for allegedly colluding to set higher sale prices for their e-books. Defenders of Apple have said the company hasn’t done anything wrong. Instead, the company says it’s merely trying to break Amazon’s stranglehold of the e-book market.

Of course, all of the companies involved have a lot at stake in the case, as well as the authors and artists who rely on royalties from book sales to continue their work. But e-book consumers don’t have much to gain from the outcome—either way, they’re left with a market that severely limits their rights to use what they’ve bought.

One thing Apple gets right is Amazon's concerning market dominance. With about  60 percent of all digital book sales, Amazon has been able to force publishers to accept bargain basement prices for new e-books, often at a loss, or the publishers’ products are pulled from Amazon’s digital bookshelves. Amazon loses some money in each transaction, but they more than make up for it with control of the marketplace, partially because all of the e-books you buy from Amazon come in a DRM-locked proprietary format. Consumers can typically only read books in this format on Amazon's Kindle family of e-readers or Amazon-approved programs.

Obviously, publishers don't like the kind of control Amazon has over their business, but where does Apple come in? Around the same time publishers were considering how to push back against Amazon, Apple was anticipating the release of the iPad in April 2010. With the iPad, the company wanted to break into the market with their own e-book marketplace, the iBookstore. Like Amazon, Apple's e-books would come in a locked format that only works on Apple-approved platforms. In other words, Apple's desire for market share is a battle to make sure their proprietary e-book format (and, by extension, their e-book reader) comes out on top.

In the meantime, the only way publishers could stand up to Amazon is if they all agreed to hold the line and not allow the company to sell their books below the prices they wanted. Without directly contacting each other, they fell into a classic prisoner's dilemma and risked losing a great deal of their customers. Of course, by agreeing with each other to hold the line, they risked violating the anti-trust Sherman Act created to prevent such collusion. The DOJ's complaint alleges the explicit agreement occurred in January 2010 when they each signed “functionally identical” contracts with Apple to sell their e-books through the iBookstore. These contracts gave the publishers more control over the pricing of their books:

Apple and the publishers signed contracts that took the e-book pricing model from wholesale to agency. With wholesale pricing, book resellers pay publishers a percentage of a recommended retail price and are then free to sell the book at whatever price they like. In agency pricing, the publishers set the price and the reseller takes a percentage of that price.

In this case, Apple's percentage was going to be 30 percent off the top of each higher-priced e-book sale sold through the iBookstore. It was a win-win situation for all parties: publishers were to get higher prices for their books through Apple, Amazon would be forced to raise its e-book prices because the six publishers were sticking together, and Apple would have a better chance of gaining more of the e-book market.

It might be tempting to review the case in moralistic terms, with Apple as David and Amazon as Goliath. But that view is misguided. Apple’s attempt to pry business away from Amazon is not new or shocking. In fact, both companies have ruthlessly sought to obtain or maintain superiority in different markets over the years and have used their popular services as leverage to get the best terms they can with other companies.

Sure, Apple may not have much of the growing e-book market (they currently control about 10 percent) but it is a powerhouse company, with a rapidly rising stock price and, before its massive stock buyback, cash reserves of about $100 billion. Furthermore, Apple has done exactly the same thing as Amazon in the past. Apple used the popularity of its iPod and the iTunes store to force record companies to accept its pricing scheme or have their catalogs taken out of the iTunes marketplace. Sound familiar? 

Whatever the outcome of the DOJ suit, consumers will still be stuck buying DRM-crippled products. Charlie Stross, who says DRM-locked e-books are dead, and Cory Doctorow, who compares the proprietary format to whips retailers use to beat consumers, have gone into great detail to point out the problems with Amazon and DRM in the context of the e-book pricing case, and their arguments are worth reading. It’s important, as Stross and Doctorow do, to think about the limitations DRM puts on consumers. As C-NET's Danny Sullivan points out, the rights consumers have when they buy a physical copy of a book, "the freedom to read them however they want, the freedom to lend them to others, [and] the freedom to resell them" are all prohibited by Apple's and Amazon's DRM scheme and the Digital Millennium Copyright Act (DMCA), even though consumers pay very close to the same amount for an e-book versus a physical book. As long as DRM is the rule of the day, consumers will lose a little more of their rights with every product they buy.

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