Department of Justice wants Amazon to have a monopoly on ebooks

Just when you thought the US government couldn’t possibly be any more ineffective than it is, they go and sue Apple and the book publishers to try to increase competition in ebooks.  Yes, they are going after mighty Apple and its 5-10% share of the ebook market.

The US Department of Justice filed an antitrust lawsuit last Wednesday alleging that Apple and five book publishers worked together to artificially increase ebook prices for their mutual benefit.  The DOJ threatened to sue the book publishers and Apple over ebook pricing over a month ago so they are just following through with their warning.

The antitrust charges were filed as a result of a change in the way the book publishers sell their ebooks to retailers back in 2010.  Apple was launching the very first iPad and they wanted to be able to offer ebooks on the device.  They approached the book publishers and explained to them that they wanted to sell ebooks on the iPad like they sell everything else.

Apple wanted the publishers to set the price of the ebooks and Apple would take a 30% share of the sales price.  This is the same pricing model that Apple used with music companies and also with app developers.  This agency model was very different from the way publishers were selling ebooks at the time.  Publishers were using a wholesale model where they would sell the ebook to the retailer for a fixed price and the retailer could then charge however much they wanted to for the ebook.

Apple explained to the book publishers that they should switch to the agency model for the iPad.  The publishers liked the idea since they were afraid of Amazon at the time.  Amazon had 90% of the ebook market and was willing to sell ebooks at a loss so that they could sell more Kindles.  The publishers were worried that this might train consumers to expect really low prices for ebooks.

So the publishers went for the agency model with Apple.  The problem with the switch to the agency model is that Apple wanted a “most favored nation” clause that made it so that the book publishers would not sell their ebooks for a lower price anywhere else.  This caused the publishers to force Amazon to switch to the agency model.  The net effect was that ebook prices increased compared to the wholesale model.

This is why the DOJ has targeted Apple and their pathetic 5-10% ebook market share instead of Amazon and their 60% ebook market share.  The DOJ is thinking they can be the hero because they are going to increase competition with their antitrust lawsuit and lower the prices of ebooks.

Three of the book publishers decided to settle right away, but Apple, Penguin, and Macmillan are fighting the lawsuit.  The publishers that settled agreed to terminate any existing deals with Apple or any other retailer that “restricts, limits, or impedes the ebook retailer’s ability to set, alter, or reduce the retail price of any ebook”.  The publishers also can’t enter into any such deal for at least two years.

In other words, the publishers and Apple will not be allowed to use the agency model for ebooks for two years.  More specifically, Amazon and other retailers will be able to price ebooks at whatever price they want instead of the price that the book publisher or author wants.

This will almost guarantee that Amazon will have a monopoly on ebooks.  Soon after, they will probably have a monopoly on print books as well.

Amazon will begin pricing their ebooks at prices so low that they lose money on every ebook sold.  Barnes & Noble will not be able to match the low prices, so they will lose their 25% market share of ebooks.  Consumers will buy way more ebooks than they do now since ebook prices will be much lower than print book prices.  This will cause Barnes & Noble to go out of business just like Borders.  Declining print sales will no longer support their physical stores.

Amazon will be the only place to buy either print books or ebooks.  They will then go to the book publishers and negotiate more favorable deals.  The publishers make most of their money on sales of print books which will drastically decline after Barnes & Noble goes out of business.  A huge swath of authors will choose to self-publish directly with Amazon since there will be no need to market their through book publishers.  This will cause the book publishers to go out of business or to drastically shift to marketing firms for only the most successful authors.

In the end, the DOJ will have created an end-to-end ebook monopoly for Amazon.  They will be the retailer, the publisher, and the ereader manufacturer.  Of course consumers will pay less for ebooks if that happens.  At least until Amazon decides to raise the prices.