Apple’s Agency Model Was Not Invented For E-Books
The U.S. Justice Department had sued Apple and five major publishing houses. The suit alleges that ahead of the 2010 launch of the original iPad (and iBooks) Apple colluded with Macmillan, Penguin, Hachette, HarperCollins, and Simon & Schuster to raise e-book prices by adopting a agency model for pricing.
Before the iPad launched in 2010, Amazon effectively owned the e-book market with its Kindle e-reader. Operating on a wholesale model for pricing, Amazon paid a wholesale price for e-books, then set its own prices for them. Much to the publishers’ frustration, Amazon used books in a way no retailer had done before: as a loss leader. It sold the e-books below wholesale in order to drive sales of the Kindle. Publishers feared that this would create unreasonable expectations among customers, and that it would drive down the cost of hard copy books – especially hardcovers, which are the publishers’ biggest money makers.
While Barnes & Noble tried to elbow its way into the e-book market with its Nook e-reader (which was arguably superior to the Kindle in terms of hardware), it met with little real success, never getting closer than a distant second to the Kindle. When Apple launched the iPad and its iBooks e-reader software, though, it also announced new deals with the five publishers named in the Justice Department’s lawsuit. Under the agency model, it’s the publishers who set the prices of e-books, and the retailer – in this case Apple – gets a 30% cut off the top for every book sold. Once the iPad took off in popularity – to the point that it harmed sales of e-readers like the Kindle and Nook – the publishers were able to force Amazon and Barnes & Noble to enter into the same sort of agency model agreements they had with Apple.
All of this raised major concerns with the Justice Department (and the European Commission), which thought the switch to the agency model smacked of anti-competitive collusion. They finally filed an antitrust suit against all six companies earlier this month. While three of the companies – Hachette, HarperCollins, and Simon & Schuster – reached quick settlements to avoid a costly legal battle, the other three did not. Macmillan, Penguin, and Apple all issued statements insisting they had done nothing wrong. What’s more, they claimed that although the agency model did result in higher e-book prices, it actually fostered competition by breaking Amazon’s stranglehold on the e-book market….
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