Did Apple Save Us From the Clutches of Amazon.com?

Once upon a time in the dark ages of e-books, a domineering overlord reigned supreme. As the sole gatekeeper for the largest viable platform, everyone had to play by this tyrant's oppressive rules. This authoritarian ruler laid down the law of the land until a knight in shining iArmor rode in to save the day. How dare the despot boldly declare that no e-book would cost more than $9.99? Who did it think it was?

Amazon.com (Nasdaq: AMZN  ) is who, and Apple (Nasdaq: AAPL  ) plays the part of the chivalrous hero rescuing e-book buyers from its evil clutches. At least this is the picture Apple is painting in the face of the Department of Justice's antitrust suit against Cupertino.

Put up your dukes
The feds have recently charged a handful of alleged conspirators, including Apple and major publishers Hachette, News Corp.'s (Nasdaq: NWSA  ) HarperCollins, CBS's (NYSE: CBS  ) Simon & Schuster, Pearson's (NYSE: PSO  ) Penguin, and Macmillan.

Hachette, HarperCollins, and Simon & Schuster have quickly settled with the Department of Justice, while Apple, Macmillan, and Penguin intend on defending themselves.

The DoJ suit follows after the European Commission opened an official antitrust investigation in the matter a few months ago, and a domestic suit was inevitable.

Apple to Amazon: "Only we're allowed to do that"
Before Apple's entry into the e-book market, Amazon was the primary conduit for content and the e-tailer used a wholesale pricing model with the e-books that it received from the publishers. Amazon would buy books from the publishers and then turn around and sell them to consumers -- sometimes even at a loss.

Under the wholesale method, Amazon retained pricing power and had imposed a maximum e-book price of $9.99 at the time, helping to spur adoption of the Kindle. Publishers weren't all too happy with the arrangement, as they believed that it hurt the industry if consumers perceived that books are worth only $10.

Then along came Apple with its iBookstore in 2010. It changed the game by offering another promising content platform and extended salvation to publishers through the agency model, where publishers set their own prices while Apple simply took its 30% cut. This is the same model it uses in its iOS App Store, where app developers are free to price their digital wares accordingly.

The important distinction is who has pricing power. With the wholesale model, the retailer determines the price tag; with the agency model, the content provider sets it.

The irony in the situation is that Apple famously set a maximum per-song price of $0.99 when the iTunes store first launched. Apple also broke up albums so consumers could buy individual songs instead of full albums, so listeners could just buy the one hit song that they wanted instead of having to buy an entire album that was inevitably loaded with a few fillers. Apple dragged record labels, kicking and screaming, to its new model, disrupting the music industry in the process.

Back to battle
After publishers celebrated their regained pricing freedom, Amazon was forced to offer similar terms or risk losing content -- a death wish for any platform.

The net result of the broader shift to the agency model has been that publishers have bumped up e-book prices in recent years, leading to higher prices that consumers face throughout the e-book industry and culminating in the DoJ's antitrust suit alleging that Apple conspired with publishers in an illegal price-fixing campaign.

Here's Apple's official response provided to AllThingsD:

The DoJ's accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon's monopolistic grip on the publishing industry. Since then customers have benefited from eBooks that are more interactive and engaging. Just as we've allowed developers to set prices on the App Store, publishers set prices on the iBookstore.

Source: AllThingsD.

That "breaking Amazon's monopolistic grip" bit leads to imagery of the medieval scenario I led off with. Dramatic metaphors aside, the Mac maker has more of a leg to stand on defending itself from the feds.

Numerous antitrust experts think the DoJ has more of a case against the publishers than Apple. For example, part of the suit mentions how numerous publishers met over meals on numerous occasions, presumably to discuss their price-fixing collusion -- meetings that Apple did not attend.

It's also a tough case since Amazon is the e-book king, with Apple as a new competitor challenging an incumbent that dominates in market share. Just because a business arrangement has an impact on prices doesn't necessarily make it an antitrust violation, a legal precedent set in the 1979 case of BMI v. CBS.

A secret meeting among publishers to discuss or coordinate pricing strategy is a pretty clear violation, which is what the DoJ will be trying to prove.

Apple may not have rescued consumers, but it sure rescued publishers.

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Fool contributor Evan Niu owns shares of Amazon.com and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 17, 2012, at 7:43 AM, jdmeck wrote:

    If you can't make a profit (most publishers can't with just Amazon) you can't publish. Apple helped open the ebook market to smaller publishers. If I was a publisher I would only sell ebooks through Apple or my own on-line store unless Amazon was willing to pay a fair price.

  • Report this Comment On April 17, 2012, at 10:23 AM, H3D wrote:

    Amazon has a P/E of 150

    You can bet your last dollar that Amazon's shareholders expect Amazon to be making 10 times the profit that they are now, once they have their monopolies locked in place.

  • Report this Comment On April 17, 2012, at 10:59 AM, pondee619 wrote:

    So competition, the addition of Apple into the E-Book trade, is not good for the consumer.

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