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

David Szydloski April 19, 2012

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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