Thursday, April 12, 2012

How Steve Jobs Got Apple Into Trouble Over Ebooks

How Steve Jobs Got Apple Into Trouble Over Ebooks

So Apple and a group of major publishers stand accused of ebook price fixing. But before we have them drawn and quartered, let's consider the facts.

First of all, Apple never tried to hide what it was doing with ebooks. Steve Jobs wanted his new iPad and iBooks platform to compete in the exploding ereader market.

As ever, Jobs wanted to do so on his own terms. So he told publishers how it was going to be.

Publishers agreed to his "Agency Model" (publishers set the price, Apple gets 30% of the profits, and publishers cannot allow lower prices on a competing service). The fortunes of Apple, publishers, authors and even Amazon, improved as a result.

Walter Isaacson's Steve Jobs biography outlines Apple's plans in stark detail. In the book, Isaacson describes a conversation he had with the late Apple CEO the day after the iPad launched in 2010:

"Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. Publishers hated that — they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.'

"But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.' …

"We were not the first people in the books business. Given the situation that existed, what was best for us was to do this akido move and end up with the agency model. And we pulled it off."

There it is, in all its glory: the heart of the Department of Justice's case against Apple and the publishers. I'm no lawyer, but this does sound a lot like price-fixing between Apple and publishers — especially since Amazon was not given a seat at the negotiating table.

The fact that publishers went along with it is a clear indication of just how desperate they were to break the stranglehold Amazon had on the ebook business.

You see, Amazon was doing its own bit of price-fixing. It bought the books from publishers and then set super-low prices — $9.99 for everything from a three-year-old-book to the latest best seller. The whole discount-over-time model was thrown out the window.

Clearly, Amazon was selling books at a loss, but I doubt CEO Jeff Bezos cared. He wanted to build market share, fast, and knew the quickest way to do that was through consumer's wallets.

They'd be much more likely to adopt Amazon's Kindle ereaders if they thought they could find new books for much less than they could by 1) buying Amazon's own hardcovers or 2) shopping at the local bookseller (think retail discounter and current ebook competitor Barnes and Noble). This plan worked and by 2010, ebooks were outselling traditional books on Amazon.

Over the years I spoke to numerous people in the publishing industry who were somewhat shocked and not necessarily happy with this turn of events. Best-selling author James Patterson, whom I once met briefly on an airplane, wondered if movie makers would be as happy if their first run-movies were also available on DVD for $1.99 on the day films hit theaters.

Patterson's books have long been on ereaders, but back then he was clearly feeling the pinch of lost royalties as his bestsellers which once sold for over $20 at Barnes and Noble and were now selling for $9.99. Was it any wonder he was riding coach?

Amazon tried to smooth things out with publishers prior to the iPad launch by raising publisher royalties to 70% — effectively matching Apple — as long as publishers followed Amazon's rules for pricing and allowing text-to-speech on their books.

Amazon's $9.99 pricing insistence did not sit so well with government types, either. Back in 2010, the Connecticut Attorney General called Amazon's $9.99 pricing scheme potentially anti-competitive. Certainly, undercutting brick and mortar competitors by more than half on new hardcovers made it difficult for anyone else to compete in the ebooks space. Amazon was doing something few others could at the time: swallowing significant revenue losses until the scale of the business caught up.

I'm not saying what Steve Jobs and publishers did back in 2009 and 2010 was right. But it was right there in front of everyone's face. Only Steve Jobs could be so bold and, like it or not, what he did probably saved or improved more than one business.

Without Apple to force Amazon to rethink its pricing model, book publishers might have had to resort to draconian measures to stay afloat and deliver product (for all I know, they did anyway). Authors might have seen their publishing and sales platform opportunities shrink as fewer publishers took risks on unknown or no-name authors. Oh, and surely Amazon would be making less money on ebooks than it is today.

What good will come of this DOJ investigation? Not much, I suspect. Maybe the DOJ casts out the Apple pricing rule: "No one shall price below us!" There will be fines imposed on the publishers and, likely, Apple. We know Apple can afford to pay and I doubt that the DOJ will seek to destroy the publishers through exorbitant penalties.

Ultimately, this whole drama is just another little piece of Steve Job's legacy laid bare. He was a hard-nosed business man who knew how to win — at almost any cost. Do we judge Apple or him more harshly for it?

No comments:

Post a Comment