According to recent reports, the U.S. Justice Department is planning to sue Apple Inc. and five U.S. publishing companies for violating antitrust laws related to price collusion. The accusation and lawsuit is centered on the rising price of e-books and an agreement between Apple and five major publishers to switch to a new pricing model that may have falsely inflated the prices of e-books for consumers.
In order to persuade traditional customers to purchase Kindles, Amazon initially priced the majority of e-books for $9.99. While this pricing model propelled digital content to new heights and helped Amazon’s Kindle gain popularity, the publishers felt the pricing structure undercut traditional retailers and would cause consumers to resist higher priced books. Since the publishers felt that the low price model was a long-term threat to their industry, they began to discuss the potential of a new pricing model with Apple.
When Apple was preparing to launch the iPad in 2010, the late Steve Jobs suggested the publishers move to an “agency model” that would simultaneously benefit Apple and the publishers. This pricing structure, which reportedly forced Amazon and other online retailers to raise their prices on e-books, enabled publishers to set more favorable prices for the digital content. Since the online retailers did not have the ability to decrease the pricing, the end result was higher prices for the consumer.
According to Walter Isaacson, the late Steve Jobs said the following regarding the pricing arrangement:
“We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.’ The publishers were then able to impose the same model across the industry. They went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.’”
Prior to publishers shifting to the agency pricing model, Amazon was selling e-books for a loss, which according to the publishers prevented new retailers from selling the books. The publishers, who deny acting together to raise prices, feel that the new pricing model has increased competition in the marketplace and has provided a better end-product to consumers. However, since consumers are paying a higher price for the same product, the Justice Department does not feel that competition has increased or that the consumers’ best interests were in mind.
Do you feel that the pricing arrangement is fair or that the price of e-books have been falsely inflated by this agreement?
[Sources Include: Wall Street Journal]