By Kevin Rackham
With all of the past few months’ hype about Apple—like the new iPhone and its huge win against Samsung—some not-so-positive news managed to miss being publicized.
The U.S. Department of Justice brought a suit against Apple and five of the six biggest book publishers over the way Apple and those publishers priced books on iBookstore. Hachette, HarperCollins and Simon and Schuster settled and agreed to pay back $69 million to customers who had purchased books under the pricing model. Apple and two other publishers refused to settle, but the e-book market is going to change a lot.
Apple and publishers had a deal that books could only be sold on iBookstore if they weren’t being sold at a lower price elsewhere. This led to publishers selling exclusively on iBookstore or, more usually, marking up prices across the board. In the past two weeks since the settlement, e-book prices have been dropping.
Apple claimed in July that Amazon held a monopoly on e-books, and accused the DOJ of siding against the competition. But the DOJ is continuing its suit against Apple, and rightly so.
What’s at stake here is the wholesale model versus the agency model. Amazon has used the wholesale model since it started selling e-books. The company buys a number of e-books from the publisher, and then sells them at their own price. This is often the way traditional books are sold, and it worked better for the publishers because there was a finite number of books and shipping costs, so the wholesale buyer wasn’t making as much of a profit.
Publishers don’t like this model when it comes to e-books, because with an unlimited number of e-books and no shipping costs, buyers like Amazon or Barnes and Noble have a definite advantage.
Under the agency model, things work a lot better for the publishers. They set the prices and then the seller gets a cut (usually 30 percent) of each sale. This is what Apple and the publishers were doing.
Apple’s model definitely had its advantages. A self-published author selling through iBookstore receives 70 percent of a sale’s profit. A self-published author selling through the Amazon Kindle Store only receives 35 percent. Amazon’s model isn’t flawless, and applying the paper-and-ink sales models to e-books is a mistake to begin with.
The way Apple and friends used the agency model isn’t fair, and it’s also counterproductive.
Jacking up the prices on e-books doesn’t always lead to higher profits. Cheaper e-books make more money. Cheap e-books sell like proverbial hotcakes.
Joe Konrath, an author who blogs about the industry and writes thrillers, once broke down his profit from e-book sales. He published five books through Hyperion and self-published four others. The Hyperion books sold from $4–8, and all of his self-published books sold for $1.99. He made almost $5,000 more off his self-published books in six months, not only because the publishers weren’t taking a cut, but because more people bought them.
I don’t buy expensive e-books, and I know a lot of people don’t. Driving the prices of e-books down is a good thing for the publisher and the consumer in the long run, because people are going to buy more e-books if they can afford them.
The DOJ is probably doing the publishing industry a favor with this suit, because now they’re going to have to reexamine both the way they price and the sales model they use. Apple and the other two publishers are in the wrong on this one, and it’s going to be a long year for them if they try to fight it.