The Justice Department has warned Apple Inc. and five of the biggest U.S. publishers that it plans to sue them for allegedly colluding to raise the price of electronic books, according to people familiar with the matter.
My headline is a bit dystopian, but I'm trying to cut to the heart of the matter. The devil, as they say, is in the details.
Amazon is a content company. Their strategy is to sell you books, movies, music, etc. They're now using their hardware (various Kindle models and the Kindle Fire) to drive their content strategy. (This is why they're currently selling Kindle Fires for less than it costs to make them.)
Apple is a hardware company. Their strategy is to sell you iPods, iPhones, iPads and Macs. They're using their content ecosystem (iTunes, apps, music, movies, books) to drive their hardware strategy.
More from the Wall Street Journal:
To build its early lead in e-books, Amazon Inc. sold many new best sellers at $9.99 to encourage consumers to buy its Kindle electronic readers. But publishers deeply disliked the strategy, fearing consumers would grow accustomed to inexpensive e-books and limit publishers' ability to sell pricier titles.
Publishers also worried that retailers such as Barnes & Noble Inc. would be unable to compete with Amazon's steep discounting, leaving just one big buyer able to dictate prices in the industry. In essence, they feared suffering the same fate as record companies at Apple's hands, when the computer maker's iTunes service became the dominant player by selling songs for 99 cents.
As Apple prepared to introduce its first iPad, the late Steve Jobs, then its chief executive, suggested moving to an "agency model," under which the publishers would set the price of the book and Apple would take a 30% cut. Apple also stipulated that publishers couldn't let rival retailers sell the same book at a lower price.
To sum up:
- Amazon wants the freedom to sell books at lower than cost. Traditional booksellers and even other ebook vendors (Barnes and Noble) can't compete with Amazon when playing that game.
- Apple offered to let publishers set prices however they liked, with the stipulation that publishers must force competitors to sell for the same price, or higher. (That's the crux of the Justice Department investigation.)
Consumers, of course, are going to side with Amazon. Amazon wants to sell books at $9.99 or cheaper. Apple is happy to allow publishers to sell books at $24.99, if they want to do so. The choice seems obvious, right?
Let's go back to the strategies, though:
Apple doesn't seem to care where you get your books, so long as you're reading them on an iPad. (That's not to say that they're not going to prefer an iBooks sale over a Kindle sale.) Critics often fault Apple for the closed nature of the app store, but iPad owners have an awful lot of choice when it comes to buying ebooks.
You say you like the Nook? Download Barnes and Noble's Nook app and you can read Nook books. Kindle? There's an app for that. And, of course, Apple offers iBooks, but it's not even bundled as a default app -- if you want it, you've got to go get it.
It's certainly possible, even as an avid reader, to buy one of Apple's devices and never buy a book from Apple's iBookstore. In fact, it wouldn't surprise me if I found out that there were already more Kindle books on iPads than iBooks.
What about the Kindle Fire (or any Kindle), though? First of all, it's preloaded with the Kindle app as a core component of the OS. Whether you want it or not, you've got it.
Furthermore, Amazon's Appstore doesn't include the option to download and install an app for iBooks (disclosure: Apple doesn't make one) or an Android version of the Nook app (which does exist). That's because the Kindle Fire exists to sell you Kindle books. Even if you want to try another option, Amazon isn't about to let you do so.
Let me just get this out of the way: I don't fault either company for either strategy. I'm not saying that one is better than the other. That's not the point of this exercise. The question is -- based on those strategies -- who would you rather see with monopoly control of the ebook market?
Worst case scenarios:
- Apple wins the day, which means you may pay more for books, but you'll have more options when it comes to where you buy them and how you consume them. It's not even clear that Apple's deal with publishers would ever give Apple monopoly control. If anything, it decentralizes power and puts it in the hand of profit-minded publishers, at the probable expense of innovation and ownership.
- Amazon wins the day, which means books will often be quite a lot cheaper, but you'll be limited to getting them from Amazon and, eventually, maybe even to reading them on a Kindle. Fearing revenue loss, notoriously skittish publishers may become even more draconian than they already are.
The answer, of course, is that neither strategy is perfect for consumers. (No strategy driven by a business model ever will be.)
Ultimately, publishers attempted to head off one monopoly and walked right into a price fixing investigation.
It seems to me, though, that the last company you want to see in control of the ebook industry is a company that is betting its future on its ability to sell content. From that perspective, Apple's strategy feels like the "less bad" of two bad futures.
The ideal outcome is that the Justice Department, on behalf of consumers, takes a much broader look at the ebook publishing industry (ownership, formats, compatibility, DRM, etc.) but that's unlikely to happen -- and a whole article unto itself.