E-mail predicted bad behavior by Amazon

As the e-book lawsuit from the Justice Department against Apple and two other publishers expands, some recently-unsealed evidence shows that former Apple CEO Steve Jobs personally intervened to convince a holdout major publisher that the "agency model" -- a standard pricing model in the book industry that lets publishers set prices for books -- was the way to go, and succeeded in convincing the publisher.

The class-action suit revolves around the Justice Department's contention that Apple and other publishers colluded to keep e-book prices higher than the lowest possible price. While some publishers have already settled with the government, Apple along with publishers MacMillan and Penguin fought back against the charges, saying that in fact it was Apple's e-book rival Amazon that was fixing prices and engaging in abusive monopolistic practices.

An amended complaint that allowed some 17 states to join in the lawsuit brought with it some new revelations, including the e-mail between Jobs and an unnamed holdout publisher, reports AppleInsider. Apple Senior Vice President of Internet Software and Services Eddy Cue, who was usually the point man for deals between content providers and Apple, was unable to get a commitment from one of the "big five" publishers for Apple's then-unrevealed iBookstore.

Amazon uses a "wholesale" model in which Amazon sets the price of the e-books, often selling them at a loss. At the time, Amazon was still compensating publishers for the normal price and eating the difference. This had caused it to become a near-monopoly for e-book sales at the time, a tool it was using to force publishers to lower pricing overall.

In Jobs' letter to the holdout publisher, he paints a three-choice picture for the company: go with Apple and the agency model, with most books priced between $13 and $15 dollars; sell with Amazon at $10 but eventually lose commissions as the company answers to its stockholders and $10 becomes the "new normal" with Amazon not allowing books to sell for more than that; or hold back the books from Amazon and face reprisals from the company as well as customer backlash and piracy.

Referring to the third option, Jobs wrote "Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started, there will be no stopping it. Trust me, I’ve seen this happen with my own eyes." He concludes the e-mail by saying he might be missing something, but "I don't see any other alternatives, do you?" The publisher reversed its stance and signed with Apple three days later.

The e-mail in and of itself does not suggest price-fixing -- under Apple's model, publishers are free to set whatever price they think the market will bear -- but also doesn't mention the main bone of contention the Justice Department has with Apple, the "most favored nation" clause that forbade publishers from selling the e-books at a lower price anywhere else than they did with Apple. The government has expressed concern that this may interfere with the notion of a free commodity market for e-books, but some publishers are afraid it will cause a "race to the bottom" that will drive most publishers out of business.

MacMillan and Penguin say that without Apple's agency model, Amazon would use its wealth to completely dominate the book market and dictate prices to publishers, something the company has already been accused of doing. Before the iBookstore and Nook market found audiences, Amazon had over 90 percent of the e-book selling market, and the average price of e-books has risen somewhat since Amazon has been whittled down to a 60 percent share.

While Amazon's loss-leader tactics were seen as good for consumers in the short run, and helped encourage early adoption, it would likely have led to consolidation and more corporate ownership of the publishing industry, along with the death of independent bookstores both online and brick-and-mortar. Author's Guild president and best-selling novelist Scott Turow has sided with Apple and the two publishing houses fighting the DOJ lawsuit, saying that while he personally made more money from the Amazon/Kindle model than the agency model, the former would destroy choice and make it difficult for less-popular authors to get exposure and sales.

Turow has pointed out that Amazon tends to abuse its position when it is dominant, punishing publishers that don't go along with pricing or exclusivity demands or who give exclusives to others. He has referred to the company as "successful" but "a bully" in the marketplace, and his comments have gotten wide (but not unanimous) support from authors. [via AppleInsider]

by MacNN Staff