How Apple's battle over e-books helps consumers [Update]
(MoneyWatch) COMMENTARY The battle lines over e-book pricing are dug deep, and the verbal attacks are flying. The Department of Justice last week sued Apple (AAPL) and five major publishers for alleged price-fixing. Apple, in turn, says it and the publishers were trying to break Amazon's (AMZN) "monopolistic grip on the publishing industry."
Some claim that the ultimate result will be to let Amazon dictate e-book prices for everyone. Others say that the government's move may be good for readers, because prices will drop. But looking at this through a consumer's eyes misses what it really going on: a battle for control that pits an old business model against an emerging one. And this is one case where the business establishment may lose, no matter what happens.
Publishers and Amazon have been at odds for years. Amazon's purchasing volume means it generally can demand what it wants and twist arms if necessary. Publishers hate having so much power concentrated in one company, particularly when that company sells a lot of books (if not nearly enough to buoy the industry).
Amazon has effectively used e-book price discounting to gain market share and promote its own closed Kindle platform. Publishers see that as reducing the perceived value of the books. And, from their view, that's correct. The cost of printing and handling paper books constitutes only two or three dollars of a typical book's price. Even though many people assume that e-books should be dirt cheap -- after all, what expense is there in copying and distributing computer files? The lower the price that publishers see, the less money they have to cover costs and their own profits.
Apple didn't ride in to this market on a white horse. The company enjoys its own closed ecosystem and wants to control and get a portion of all sales -- whether of e-books, music, videos, or software -- to users of its devices. It isn't just to make an amount of money that is dwarfed by what the hardware sales provide. The idea is to lock customers into the continued need for Apple devices to gain access to the content they previously purchased.
In fact, the DOJ alleges that Apple considered splitting the digital content world with Amazon. Apple would get music and video, while Amazon would have books. (And Amazon would never settle for that arrangement.) In other words, if the DOJ is correct, it's always been about power. Publishers are trying to play Apple against Amazon to drive prices up again with the so-called agency model, in which the publisher sets the price and the retailer takes a percentage.
[Update: A reader comment reminded me of something I had meant to mention but forgot to. One of the tools in this publishing war is the most favored nation clause of contracts. Companies like Apple and Amazon use it to ensure that competitors don't get better deals. Publishers use that clause in the contracts in negotiations to push for higher e-book pricing for Amazon because they "can't" give Amazon a better deal than Apple. it's good to remember that there are no innocent parties among these corporations.]
Publishers aren't the only ones unhappy with the distribution of power. Authors have been concerned for at least as long as publishers, if not more so.
Authors write their complaints
Someone like Authors Guild president and best-selling writer Scott Turow can argue that Amazon is the real danger. But when you descend from the Olympian heights of the literature business and speak with rank-and-file writers (and I've spoken with more than I can count), you'll hear that publishers are often seen as the "frenemy": entities you do business with but never trust.
Publishing firm continue to trim royalties and advance payments, increase costs, demand that authors do more marketing, and provide fewer resources for success. I've seen many colleagues walk away from the book industry because they could no longer justify the small amounts they received for the enormous investment of time. From their view, Amazon isn't the main problem. If anything, it becomes one way out of an otherwise dead-end street. Writer Joe Konrath, who has been notably successful and vocal in direct sales of his work, worked with novelist Barry Eisler to comment on Turow's take and expresses the view that the status quo may be fine for publishers and the big authors, but not other writers.
Consumers say heads we win, tails you lose
Does Amazon want to control the industry? Absolutely. But it also provides an approach to self-publishing that a growing number of authors are embracing. They don't see that there's anything left to lose in the conventional publishing model, no matter who sells the titles. Instead, a growing number have decided to sell their own books through Amazon and Barnes & Noble (BKS).
Ironically, consumers are likely to win no matter what happens with the case because the self-publishing gate is open and the horses are out of the barn. If the government wins, Amazon discounts like crazy, twisting the arms of publishers and other retailers like Apple. Prices drop, publishers become even less effective in selling books, and writers increasingly go off on their own. And most writers can sell e-books for much less and still make more money per copy than they ever could with a publisher.
If Apple and the publishers that haven't inked a deal with the DOJ prevail, consumers still win. Publishers push their prices up for the near future and continue to absorb as much profit as they can. People tire of the prices of e-books and start buying more independently produced titles. Bigger names in writing notice the hoi polloi making significant money, so they go independent as well, reducing prices to levels that bring in the sales they want -- and consumers still win.
[Update: The "win" for consumers will be of brief duration if either side manages to really freeze out the other. Prices will stay low until competition eases enough for them to rise again. As for writers who see Amazon as a savior, they could just as easily change their terms if they were in a position of controlling the bulk of e-book sales.]
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