At first glance, the lawsuit is a classic smackdown between two giants of e-commerce. On April 11, when the Justice Department sued Apple Inc. and five major book publishers on charges of price-fixing, it was widely viewed as a boost for Apple’s arch-rival in selling e-books: Amazon.com.
But there’s more than a business rivalry going on, says marketing professor Raghunath Rao at the McCombs School of Business. The bigger story is the dilemma of book publishers, as theirs becomes the latest industry to be squeezed by the forces of e-commerce. They’re pushing up e-book prices, in part, to prolong the life of a product that fewer and fewer consumers want: the printed book.
Common sense suggests that the electronic version of a book should sell for less than the physical version, says Rao. “It definitely costs less to produce an e-book. Electronic compiling and delivering average around 50 cents, as opposed to 3 to 4 dollars for a traditional hardcover book.”
Instead, e-books are priced close to printed ones, and sometimes higher. A current paperback bestseller, Bossypants by Tina Fey, sells on Amazon at $12.99 for the Kindle edition and only $10.81 for the paperback.
What gives? Call it fear of Amazon.
New Model for E-Books
For decades, publishers had a standard sales model. They wholesaled books to stores, at half the cover price, and stores were free to set their own retail prices. The system rewarded publishers with predictable profits, until Amazon got into the game. Like Apple’s iTunes store, Amazon set a standard price for almost every work it sold. Instead of 99 cents a song, Amazon charged $9.99 a book. Says Rao, “Clearly, they have borrowed from Apple’s notebook.”
Amazon won 90 percent of the e-book market, while sparking sales of its $349 e-book reader, the Kindle. But publishers felt threatened by Amazon’s low prices when the cover price of a hardcover book averaged $26.
The result, in 2010, was a new sales model for e-books. Publishers would set minimum retail prices. Online booksellers would sell them at those prices and take a commission instead of a markup.
In the short-term, publishers got what they wanted: a boost in average e-book pricing, to between $12.99 and $14.99. They also got something they didn’t want: antitrust investigations in the European Union and the U.S. In its recent filing, the Justice Department alleges the five publishers met together and with Apple to create the new sales model and force it on Amazon.
E-Books Will Win Eventually
Three publishers — HarperCollins, Simon & Schuster and Hachette — have already settled with the Justice Department, letting Amazon return to setting its own prices. The remaining two publishers and Apple, Rao suggests, are fighting a losing battle against the market. He points to the recording industry, which has seen $15 compact discs displaced by 99-cent downloads.
Besides suffering lower revenue, big publishers may lose market share, as more and more writers publish themselves. “If you’re a small guy, your chances to get into Barnes & Noble are slim,” says Rao. “I see more authors coming into play, people who could not succeed in getting a book out the door before, because of the whole cost structure of printing a book. It’s a good development, but what it does to the profitability of the traditional publishing industry remains to be seen.”
In the long run, forecasts Rao, the struggle between e-books and printed ones will be no contest. “Over time, kids who are growing up now will consider it strange that people actually used to read from non-digital books.”