Lessons in Self-Destruction

The Battle of $9.99: How Apple, Amazon, and the Big Six Publishers Changed the E-Book Business Overnight - Andrew Richard Albanese

I suppose everyone who follows the book business now has made some kind of judgment about the tug-of-wat between Apple, Amazon, and the legacy publishers. (Full disclosure: I got $145 in the ebook settlement, which was used immediately to get more ebooks through Amazon.) Some people seem to adore Apple who can do no wrong, others (while reading and typing on their computers) refuse to ever read off a screen, and still others (me included) love ebooks and Amazon, which started the ebook revolution.

 

Admittedly, I’m an early adopter and read off my Palm and later even purchased a Rocket Book ereader (it still works but has been superseded.) I remain puzzled by what may be a uniquely American trait that is to begin to denigrate and fear success: big business, Walmart, B&N and Borders (until they tanked), agribusiness, big farms (be they family or otherwise) , MIcrosoft, K-Mart, Sears and Montgomery Ward (until they tanked); the list goes on. Personally, I love Amazon. They are successful because they do things well. When they cease to perform, or someone does it better, I’ll abandon them.

 

Just before the iPad was released, a high-ranking Apple executive was charged with the task of creating an ebook bookstore. Despite Steve Jobs’ earlier predictions that no one would ever read an ebook, Amazon had released the Kindle and it had become wildly successful. Others had had similar opportunities, but only Jeff Bezos had the foresight to link the Kindle to an online store with wireless (and free) access to a huge selection of books. And, he priced bestsellers at $9.99, a brilliant strategy similar to what other retailers have always done, a form of loss-leader. Jobs wanted to copy that success with the iPad as the device of choice. But he wanted to collect more money. In a move that brought down the wrath of anti-trust regulators, the Apple folks corralled all the major publishers (except Random House) and persuaded them to adopt the “agency” model even though the publishers would get less money. (Under the Amazon model, Amazon purchased the ebooks from the publishers at whatever discount the publisher offered, as with print books, and then sold the ebooks for whatever price they wanted, also as with print books, as all bookstores did.

 

Apple was very smart in recognizing what the legacy publishers feared - rightly or not - that pricing the books at $9.99 might devalue their profitable hardcover distribution system, so they invented the agency mechanism. Under this system, Apple (and they argued Amazon) would have to sell the ebooks at the price determined by the publisher and act as distributor only rather than reseller.

 

<i>Walsh’s message underscored the degree to which the publishing community at large had grown to fear Amazon’s pricing. Under the agency model, most authors stood to lose money, as their royalties would now be paid as a percentage of the publishers’ smaller agency cut. In records cited by the government, Macmillan concluded that “the royalty payment for each sale of an e-book with the corresponding hardcover list price of $26.99 fell from $4.04 under wholesale to $2.28 under agency,” for example. And for a $14.99 trade paperback, “the decline was from $2.25 to $1.75.” The math looked like this for the agency model: For a hardcover priced at $30, publishers would set the consumer price at the top tier, $14.99. Minus Apple’s 30% commission, publishers would net about $10.50. Under the wholesale model with Amazon, with a 50% discount, they netted $15.</i>

 

<i>“Jobs [had] insisted that Apple e-books be priced lower than physical books and “competitively with other e-book retailers.” Unlike Amazon, Apple would not tolerate losing money on any e-book sale, a philosophy consistent with its existing digital content business. Each e-book sale would have to generate a “single-digit net profit” for Apple.” </i> Ironically, Walmart and some other box stores were selling the Steve Jobs hardcover biography for less than the Amazon ebook price.

 

It’s no spoiler to reveal that this joint move by Apple and the legacy publishers that forced Amazon to adopt the agency model was ruled illegal and a violation of antitrust through monopolistic price manipulation result in substantial settlements to consumers. Apple didn’t settle preferring to go it alone in court, but they have lost all the court decisions to date. Their ebook store has never had close to the success of Amazon’s despite their refusal to permit in-app purchases for all of the ebook apps (including Kobo, Nook, and Kindle) used on Apple devices. Apple’s case was not helped by several comments he made in public and in emails regarding the pricing battle, comments the general counsel for Simon & Schuster called, “incredibly stupid.”

But Apple’s persuasive powers were incredible. “With that, Apple had pulled off a remarkable feat. [Their] business proposal was simply too extraordinary. Not only did it involve a business model foreign to publishing, it included price protections for Apple and less revenue per e-book sale for the publisher. Although Random House remained unsigned, Apple had successfully negotiated identical retail agreements with five of the six largest U.S. trade publishers in less than two weeks. Strikingly, at the time they signed their deals, none of the publishers had yet to even see an iPad or an Apple e-books app. In fact, Apple developers hadn’t even begun working on the Apple e-bookstore until mid-December. “ The iPad wasn’t released until January. No one had even seen it.

 

The myopia of the Authors Guild and some legacy authors never ceased to amaze me. Rather than attacking ebooks, as they did early on, they should have been going after the used book market and libraries which bring them zero revenue. Ebooks can’t be resold and never go out-of-print, and had the potential to bring them much more revenue assuming they could work out reasonable contract with their publisher (not an easy thing as many have discovered.) But the need of the legacy publishers to support an existing infrastructure by doing things the way they always had, won over early on. (The substantial revenue they are now getting from ebooks has greatly tempered their fear.) And to support the publishers in the fight over agency made no sense for the authors it represented since they were guaranteed *less* under the agency model.