Apple, Amazon and the problem of ebook pricing

Is the lowest price always the best option for consumers?

Would you pay more for ebooks?

The matter of ebook pricing has been in the spotlight in recent years, with Apple being found guilty in a US District Court of conspiring with publishers to raise the price of ebooks. The tech giant reached a conditional settlement reportedly worth $450 million, with the final amount conditional on the outcome of a pending appeal of a New York federal judge's ruling last year.

At the heart of the case is the question: what is a fair price for consumers to pay for an ebook, that is profitable for publishers and writers and fosters competition between retailers?

Apple's defence is that it wanted to promote competition in the ebook market by lessening the power of dominant player Amazon in the interests of consumers.

Apple treads where Amazon rules

Apple's price negotiations took place in the lead-up to launching the iPad and iBookstore in 2010. It made agreements with five major publishers – Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster. These agreements, known as the agency pricing model, allowed the publisher to set retail prices.

Before this, ebook retailers such as Amazon could determine ebook prices, known as the wholesale pricing model. This system allowed retailers to compete by reducing ebook prices. Amazon lowered the price of new release and best-selling ebooks it sold to $US9.99, leading many other retailers to similarly discount their prices to compete.

Apple, as well as changing the pricing models, made agreements using the so-called 'most favoured nation' clause to ensure it wouldn't pay more than its competitors. As a result, new release prices went up to between $12.99 and $14.99, but catalogue titles on average went down in price.

Apple appeals

Apple maintains its stance that it wanted to introduce more competition. It says the agreements with publishers were lawful and the publishers themselves were unhappy with Amazon's monopoly position.

Apple is gearing up to defend itself again with an upcoming appeal, with two US economists (not involved in the case) submitting an opinion to the court that supports Apple's proposition.

The two academics agree that Apple's entry into the ebook market reduced Amazon's power and that setting prices and using most favoured nation clauses can increase competition where there's a monopoly or dominant player. They say the court made a mistake in equating price increases with lowering competition, because it didn't take into account predatory pricing. With the Apple agreement, publishers had more bargaining power to set profitable prices with Amazon.

The court will respond to Apple's appeal document in May, but it's not yet known if the independent submission will be allowed into evidence.

Consumers need a choice

Consumers like a bargain, and who can blame them? But deep discounts – if they're predatory and unsustainable – can result in less competition if it reduces the number of retailers in the market, which ultimately limits consumer choice.

Supermarkets, petrol, and banking are all also markets where there are a few big players being watched closely by CHOICE and industry regulators such as the ACCC. A sustainable business means consumers pay a fair price, retailers don't overreach in the market and suppliers can earn a living for creating content and services – whether it's ebooks, milk or bank accounts.

Publishers and booksellers want ebook prices to be fair and profitable in the long term, but many are worried their current pricing will hurt the industry.

It remains to be seen how the ebook market will develop and whether smaller retailers and publishers will look at new, innovative ways to attract consumers other than by price alone.

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