Unraveling the Ebook Conspiracy

Courtesy: cherylktardif.blogspot.com

It all began with Amazon entering the fray for supremacy in the book selling business. The signs were always there for everyone to read, esp. with the launch of the Kindle that revolutionized the way the book publishing industry works. Print books were no longer the only path to choose, the rise of the Ebook opened up newer avenues for all entities involved in the value chain.

The next step was simple- make money.

Traditionally publishers would set the price for a book and distributors such as Amazon received a fee (usually 30%) on every unit sold. This is popularly known as the agency model. With Amazon stepping in, they adopted what is now known as the Wholesale model. Historically used for print books, this model allows the publisher to sell books to the distributors at a fixed price and the latter has the option to set any price they prefer while selling the book to the end consumer.

Owning approx. 70-80% market share in Ebooks, this model put Amazon in an extremely comfortable position. Pricing Ebooks lower than the standard price would not stand in the way for Amazon to realize its monetization objectives; it in fact benefited the Giant by giving them the opportunity to cross sell and up sell other products thus increasing its overall sales.

However things did not stay rosy for long. Apple decided to enter this market by launching an Ebook store and with the hope of developing a new market for its latest technology marvel- the iPad. To be profitable in this market, Apple had two options to consider

1. Partnering with Amazon: Had this venture taken birth, it would have taken the market by a storm. Both would have acted as a reseller for the other however Apple decided it would be more profitable to sell at a higher price than the Amazon standard of $9.99.
2. Forming a liaison with the Publishers: Apple reached out to five of the top six publishers (Hatchette, Macmillan, Harper Collins, Penguin and Simon & Schuster) agreeing to act as a distributor for them on the condition that Amazon was forced to increase the price. To bring this into effect, Apple designed a most favoured nation (MFN) clause in its agreements which required Apple to be able to sell books at the lowest possible price. This clause would imply that publishers coerce Amazon into increasing its price and thus moving from the Wholesale model to the Agency model. One method adopted to do so was delaying the launch of Ebooks on Amazon. Not to be let down, Amazon retaliated by removing the “Buy” option against the books belonging to some of the publishers and working out a model with Authors where in they were offered up to 70% royalty for pricing books between $2.99 and $9.99 and removing any middle men from the deal. Amazon could not hold fort for too long with all publishers dictating conditions and forcing a move to the agency model.

The latter option that Apple chose led to the DoJ suing Apple and the five Publishers for conspiracy to fix book prices. Three of the five publishers reached an out of court settlement which allowed Amazon to resume discounting books and terminated the MFN clause with Apple. The settlement also prohibited the publishers from entering into an Agency model agreement that prevented retailers from offering discounts. Macmillan and Penguin eventually opted for a settlement while Apple continued the battle eventually losing the case.

This incident if nothing else does imply the fierce competition that exists in this market and the extent to which players can go to stay competitive and maintain their market share. With Ebooks gaining popularity, the publisher is bound to lose control to a large extent. The publisher’s argument that the Agency model will help the book industry survive does have essence of truth in it however given the nature of this market and the rate at which it is growing, the pricing wars will continue and Amazon will play a dominant role in controlling the market dynamics. It is time all publishers and potential distributors accept this fact.