It’s over for Apple: Supreme Court denies certiorari in e-book pricing case

It’s over for Apple: Supreme Court denies certiorari in e-book pricing case

It’s the end of the line.

I’ve been writing about this literally for years, and it has been a very important story. It’s also been perhaps a tale of unexpected consequences.

First the quick headline, then some thoughts about it.

On Monday, the Supreme Court of the United States denied Apple (and a bunch of other cases) “cert”. What that means is that they did not certify that Apple’s loss at a lower court level in a case brought against it by the United States Department of Justice over e-book pricing deserved additional review.

The lower court’s ruling was clear enough that it didn’t need to be re-examined.

Even simpler: Apple loses.

Consumers will get some credit to buy e-books.

Now, let’s look at the stories within the story.

Apple is vulnerable

The DoJ also went after the biggest U.S. trade (the kinds of books you would have bought in a bookstore…not textbooks and such) publishers…all of which settled.

Apple fought on, and many people figured Apple had the resources to fight on as long as they wanted.

The thought was that Apple is so big, has so much money, and does so many court cases that, unlike the publishers, it was worth it for them to keep pouring money into this.

One again, they lost.

I’m not sure, but it’s possible the vacancy on the Supreme Court affected this. I’ve read that Justice Scalia would likely have supported Apple…and if this needed a majority and it was split (they don’t tell us much when they deny cert), that would have done it.

The tradpubs made a crucial strategic error

Here was the situation:

Amazon entered the very marginal e-book market (Sony was in it, but not much was happening in the USA with e-books) in 2007.

Part of their strategy was to promote that most bestsellers and new releases would be under $10…considerably less than the hardback equivalents (at least based on the publisher’s suggested retail price…but even discounted, those hardbacks were often above $10).

To do that, they clearly often sold the books at a loss: they paid more to the publisher than they got from the customer.

The publishers didn’t like that.

One of  their biggest concerns was “price value perception devaluation”. Who would pay $25 for a hardback when, according to Amazon, $9.99 was the right price for a popular new release novel?

While it does cost somewhat less to produce an e-book than a hardback (an early analysis said it was about 12.5% lower, as I recall…many of the costs, such as editing, lay-out, legal are the same), the margin on hardbacks (the profit you can make) was higher…and they were selling a lot more p-books (paperbooks).

What could they do, though? Realistically, if they wanted to be in the exploding e-book business, they pretty much had to go with, and cooperate with, Amazon, which absolutely dominated the market.

Then, in the tradition of tempting Apples 😉 , the maker of the iPod offered the tradpubs (traditional publishers) a path.

Apple was getting ready to release a new device…a small, flat, super-portable  computer. There were precedents in fiction (Star Trek: The Next Generation’s PADD, for one), but what would become the massively successful iPad was a big project.

The hardware innovator wanted to include books as part of the package and launch. It’s questionable if they really were that focused on the books in and of themselves, or whether they saw them more as a selling point for the device. If Apple hadn’t been introducing the iPad, would they ever have launched the iBooks store?

They wanted to get  the prestige of having the major publishers onboard, and they knew those companies weren’t happy with Amazon.

Apple offered to let the publishers set the prices the consumers paid (within certain parameters) through something called the “Agency Model”.

The Agency Model is not, in and of itself, illegal. The DoJ alleged that Apple and the tradpubs coordinated in its use to raise e-book prices…that was the problem.

In my opinion, the tradpubs made a very big error.

They accepted the plan, and raised  e-book prices on the most popular titles.

Why was it a mistake?

I’m seeing so many stories reporting this as it slowing the growth of the e-book market…perhaps critically wounding it.

I don’t think that’s what happened at all.

What it did was cede the market, in large part, to indies (independent publishers).

Indies had a very hard time having much of an impact on p-book sales. I was the manager of a brick-and-mortar bookstore…it just wasn’t practical for us to carry independently published books, for the most part. They didn’t have the resources to make selling their books practical. If I needed 100 copies in two days, they couldn’t do it, for example.

E-books changed all that.

You didn’t need book factories and distribution Godzillas. You didn’t have to fight for shelf space…it was pretty much infinite.

Indie e-book sales were present before the Agency Model came into being in 2010, but I think that move by the publishers and Apples greatly accelerated the market growth for the “outsiders”.

When I did an analysis of USA Kindle store bestsellers in January 2012, three of the top twenty them were from indies:

Top 20 analysis January 22 2012

When I did a similar analysis in January of this year, the story was different: none of the top ten were from Big 5 publishers.

None of the top 10 bestselling USA Kindle store books are from the Big 5

That’s not exactly apples to apples (so to speak), but it seems very clear to me.

At least at Amazon, the Big 5 share of the market for bestsellers has significantly eroded.

I think the tradpubs thought that raising e-book prices would mean that they would make more money…because people would keep buying their books at the same rate.

Instead, many readers instead discovered other options…and they’ve stuck with them.

You can’t undo that discovery.

The news stories reporting e-book slowed growth are actually reporting the Association of American Publishers reporting slowed growth…which might be more than offset by indies (although those stats are hard to get).

I think the publishers may also have wanted to “teach Amazon a lesson”. They did: they taught Amazon that the e-tailer could do its own publishing, at least for e-books, and do very well. 😉 Brick-and-mortar bookstores didn’t, for the most part, want to carry Amazon’s p-books, but in e-books, they are often at the top of Amazon’s bestseller list (thanks in part to Kindle First books (at AmazonSmile*)).

It’s about journalism

This case would have been very different without journalism.

Journalist Walt Mossberg was chatting with Steve Jobs at the iPad launch…and Jobs said that e-book prices would be the same at the then launching iBooks store and Amazon.

All Things Digital post by Kara Swisher

That was major evidence against Apple.

I think it’s also important to note that, while Mossberg had mainstream credentials, this was much more a new media incident. It wasn’t a sit down interview. It wasn’t even an ambush interview at Apple’s front door. It was a casual exchange which was recorded on a handheld, shaky Flip cam (remember those?), and then posted online.

You can watch the video (the e-book exchange is right at the beginning) in that Kara Swisher post (I’m relinking for those using screen readers: All Things Digital post by Kara Swisher).

I think those are the three main stories. It’s possible the pay-out to we consumers will boost the e-book business…we’ll get a credit to buy more e-books, as I understand it, not cash.

While this has been an important story, and I’m happy to have been able to provide whatever help to people in understanding it and its implications that I could, I won’t deny some relief in seeing its conclusion.

What do you think? Have questions? Do you think this was a good decision? How does it affect the future of e-books? Feel free to tell me and my readers what you think by commenting on this post.

Join thousands of readers and try the free ILMK magazine at Flipboard!

All aboard our new The Measured Circle’s Geek Time Trip at The History Project!

* I am linking to the same thing at the regular Amazon site, and at AmazonSmile. When you shop at AmazonSmile, half a percent of your purchase price on eligible items goes to a non-profit you choose. It will feel just like shopping at Amazon: you’ll be using your same account. The one thing for you that is different is that you pick a non-profit the first time you go (which you can change whenever you want)…and the good feeling you’ll get. :) Shop ’til you help! :) 

This post by Bufo Calvin originally appeared in the I Love My Kindle blog. To support this or other blogs/organizations, buy  Amazon Gift Cards from a link on the site, then use those to buy your items. There will be no cost to you, and a benefit to them.



3 Responses to “It’s over for Apple: Supreme Court denies certiorari in e-book pricing case”

  1. Edward Boyhan Says:

    I mostly agree with your analysis, but there are some nuances. It is true that Apple & the big 5 raised prices for eBooks, and by losing, in the short term the industry went back to a consignment model for only two years (as per the judges order) after which we had a series of very intense negotiations between Amazon and the big five during which many mainstream journalists went out of their way to vilify Amazon at the expense of poor starving authors (overlooking the fact that about 85% of what those poor authors sold went into the pockets of the big 5 publishers and literary agents).

    At any rate now we are back to the agency model with a vengeance. Back before eBooks, and the Apple case, the market worked on a consignment basis in which distributors could sell books (gotten from publishers at a fixed cost) at whatever price they wished. Further they would get a credit on any unsold product. Trade publishers would typically release a title first in hardcover at say $25, and then a year later in mass market paper at about $8.

    The situation now is that the big five release titles in hard cover between $25-30, and simultaneously in eBook at about half the hardback price. After all is said and done with the Apple case, hard covers are a bit more expensive than before, eBooks (from the big 5) are way more expensive than they were even under agency pricing before the DOJ brought the Apple case. Back then mass market paper and eBooks were priced similarly — frequently the eBook was cheaper than the paperback. Now it seems that eBooks (from the big 5) are more expensive generally than the mass market paperback edition.

    It seems to me that pricing has been turned on its head, and at the end of the day (forgetting indies for a moment) the consumer is worse off than before the case was brought. So my reaction to the Apple loss is Meh! (save for the few bucks coming my way from the $450 million that Apple must now shell out :grin)

    You mentioned at the top of your post that eBooks were about 12.5% less costly to produce than a print book. That may be true at the big five, but in my opinion that reflects costs that don’t need to be incurred. A better way to look at this is to look at the pricing for titles coming out of Amazon’s own imprints. Here you still have things like editing, layout etc., but Amazon imprints are usually priced in the $3.99-6.99 range which to me gives a much better sense of what it costs to fully publish a title (Amazon publishes in both e & p formats). Much editing and layout can be done by computer programs. Most manuscripts are delivered electronically with layouts and editing in a “good enough” state (I don’t think perfection is necessary)

    For authors using Kindle Direct Publishing (not Amazon imprins) the costs are even lower and the pricing reflects this ($0.99-4.99).

    Over the long haul the traditional publishers are pricing themselves out of the market. They will either bring costs under control, or smaller imprints like those run by Amazon will eat their lunch. This process will only accelerate as existing stables of big 5 authors pass on to their rewards. It’s hard to see how new authors would put themselves through the agonies of rejection letters for a measly 12.5-15% royalty, when the indie route or a smaller imprint offers so much more.

    • Bufo Calvin Says:

      Thanks for writing, Edward!

      A couple of points…

      I agree that prices have gone up…a lot…on those bestsellers. I’ve been noting that in my monthly

      The average on March 1st for the New York Times bestseller hardback fiction equivalents was $13.44.

      A year earlier it was $11.11.

      March 1st, 2014 it was $10.26

      However, I also think that part of the price differential between tradpubs, Amazon imprints, and KDP has to do with the intent of the publisher. I don’t think it is just that the first two more truly reflect production costs.

      While the tradpubs may (and often are) part of much larger and diverse corporation, they still have to make a profit in and of themselves. They are full time booksellers.

      Amazon’s imprints undoubtedly want to make money…but I’m guessing it’s okay with Amazon if they don’t, as long as they inspire other sales (especially Prime memberships).

      For many, many KDPers, publishing isn’t how they make their living. Many of them would be happy with an extra $100 a month. Hm…do professional authors who use KDP charge $2.99 and less for their books? I’m thinking they don’t, but I’ll try to take a look at it. Another factor is that some KDP authors go for quantity, publishing ten books and more in a year. That’s easy to do with no brick and mortar distribution, no marketing cost, and so on.

      I think your point about brand name tradpub authors…um, lessening in numbers over time 😉 is an excellent one! None of them seriously considered independently publishing forty or fifty years ago, if they wanted to make a living at it. Presumably, even rights managers for those authors who have learned the industry when that was an option will have a different approach.

      Another key, which I didn’t note this time, is I think that the 12.5% differential wasn’t taking into account a book which was developed as digital only, which, as you point out, could be considerably less expensive. I think it was looking at an already developed book, and then producing it as an e-book or a hardback.

  2. It’s over for Apple: Supreme Court denies certiorari in e-book pricing case | I Love My Kindle : Pricing News Says:

    […] It’s over for Apple: Supreme Court denies certiorari in e-book pricing case | I Love My Kindle. […]

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