DOJ threatens Apple and book publishers over ebook pricing

Apple and five of the “big six” book publishers just received a shot across the bow from the U.S. Justice Department.  The DOJ claims that Apple and the publishers worked together to increase the prices of ebooks.  The Wall Street Journal reported that the DOJ warned that they would sue Apple and the five publishers if a settlement could not be reached.

It all goes back to the first iPad and Apple’s efforts to convince the book publishers to move to an “agency model”.  The idea was that book publishers could set the price of their ebooks at whatever they wanted and Apple would receive 30 percent of the sales price.  At the time, the publishers were using the “wholesale model” where they would charge the retailer 50 percent of the cover price and the retailer could set the price wherever they wanted.

The problem was that Amazon was extremely aggressive in its pricing for ebooks.  They would pay the publishers the wholesale rates and then set the price of the ebooks very low.  In some cases, Amazon was willing to lose money on each ebook sold.  This scared the publishers as they were worried that ebooks would cause customers to always expect low prices for ebooks and that it would give too much power to Amazon.

There doesn’t seem to be any problem with the concept of the “agency model” that Apple proposed to the publishers.  This is the same model that Apple uses for apps in the App Store.  An iOS developer makes a popular game for the iphone and Apple takes 30 percent of the revenue and gives 70 percent to the developer.  It would make sense that the same model would work for ebooks too.  Even Amazon uses the model for authors that choose to self-publish their ebooks with them.

The problem that the DOJ has most likely has to do with the quote from the biography of Steve Jobs written by Walter Isaacson.  Steve Jobs was quoted as saying, “We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway,'”.  The last part of that quote sure sounds like multiple companies cooperating to increase prices for mutual benefit.

Another issue is that Apple also required the book publishers to sign an agreement guaranteeing that they would not set ebook prices lower at any other retailer.

These two pieces sure make it seem like the DOJ has a valid concern.  Combine that with the fact that the book publishers earn 50 to 70 percent of the revenue from an ebook and you can see how consumers could definitely benefit if the “agency model” didn’t exist.

Will the DOJ end up settling for a slap on the wrist?  Or will they mandate that the book publishers return to the “wholesale model” for ebooks?  The result of this settlement/lawsuit could result in much lower prices for ebooks.  It could also result in Amazon having complete control over the ebook market.  It will be very exciting to see how this plays out.