And So It Begins…

On Monday, the U.S. Department of Justice (DOJ) began its lawsuit against Apple, Inc. over an alleged ebook price fixing scheme between Apple and seven book publishing companies. The publishers settled and paid hefty fines up to as much as $75 million. Apple stands alone to fight stating they did not collude to fix pricing on ebooks.

The DOJ’s case seems to hinge on one particular email sent from Steve Jobs to James Murdoch of HarperCollins Publishers, where Jobs wrote:

“Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.”

Sounds pretty damning to me!

Unless you read the text of the original email and get that line in the context in which it was written. Then it doesn’t seem quite so clearcut about the intent. It does come across as more of an example or statement of opinion than it does as a conspiracy to set pricing on ebooks. Still, Jobs is suggesting a price-point in that email.

The DOJ states they have a lot of evidence to support their allegations against Apple. Either way, it is in the court now and will be on public record. The next couple of weeks, we’ll see where this goes.

For me, it brings forward the issue of what to charge for an ebook. The publishers want people to pay the same for an ebook as they do for a hardcover book. Personally, I think this is being greedy.

The setup costs for an ebook are the same as it is for a hardcopy book: editing, typesetting, etc. But the production and distribution costs are not. While hardcopy books have materials, warehousing and distribution costs, an ebook has nothing. Once that file is saved onto the server, there are no more costs with distributing that file.

And before purists pounce upon me pointing out the electricity costs and equipment costs of the servers needed to distribute the ebook file, let me point out that the infrastructure to distribute the files already existed as the distributers were selling files for applications, music and movies. An ebook is just another file stored on the server’s hard drive and creates no further overhead or investment to distribute that file.

Once an ebook file is on the server, its production and distribution costs are $0. No need to purchase ink, paper, create new printing plates, trucks, gasoline, etc. Until the file is deleted, it is there for sale to anyone who wants to buy it. And there is now no longer a reason to allow a book to go out of print. Because unlike a printed book, a file costs nothing to store and takes up no physical space. A warehouse can cost millions. An entire library can be stored on a $10 flash drive. There no longer is a reason to say, “This book isn’t selling anymore, so we’re going to stop printing and storing it to save money.”

Once sales of an ebook have covered the setup costs, each sale is 100% profit. Well, okay, if you sell it through a distributer, the distributer is going to take 30%–35% of the sale price. But there are still no further production costs to that ebook file.

That’s why it irritates me when I see companies pushing ebooks for $13–$15.

The publishers claim that they must sell at these prices in order to stay profitable. Then why aren’t they selling the hardcover books at $50 and softcover books at $22?

A bit closer to the truth is the argument that the publishers don’t want to “devalue the book” to the customer. Their concern is having done to them what Apple did to the music industry: set the price of songs to 99¢ per song. That pretty much destroyed the pricing model the music industry: $20 per song. (Based on one good song on a CD and 12 tracks of absolute crap. Forcing the consumer to fork over $20 just to get that one hit song.)

Apple now offers top list songs at $1.29 per song on iTunes Music Store. Most people consider this a fair price for a song.

There is something to be said about undervaluing a product. You need to make enough money to bring home a livable income.

The author Dean Wesley Smith published this piece on pricing ebooks fairly.

For me, the key word is “Fair.” The customer should get a good value for their money.

There is another side to being fair: compensation to the author for two to three years of no income while writing the book.

Which brings us back to Apple and their agency pricing model.

Basically, Apple did not and does not set the pricing on the ebooks sold through iBookstore. Apple leaves that to the publisher.

I chose my price at a point that I thought was fair to both the customer and myself. At no time did I receive an email from Apple telling me my price was too low.

Right now, Apple pays a straight 70% royalty on every ebook sold. Regardless of price, even at 99¢.

If Apple loses the DOJ case, it is possible they may change their terms and force authors to go with a minimum selling price or they get half the royalty payment. This is how Amazon handles this. With that other distributer, you can sell your book for 99¢ if you wish, but they’ll only pay you a 35% royalty. You have to sell it for $2.99 or higher to get 70% royalty on the sales. That makes for a very strong incentive for an author to keep an ebook priced $2.99 or higher.

Where do I think Apple could get burned? On the “Most favored nation” clause in their pricing contract, whereby a publisher agrees not to allow their goods to be sold at a lower price through another distributer. If Distributer-A puts the ebook on sale at a 15% discount, then the publisher must ensure that the ebook is sold via Apple for the same price. If the publisher doesn’t, then they could be in violation of their contract and Apple could terminate the contract and withhold all unpaid monies. In a way, this clause could be used to facilitate price fixing by forcing the publishers to keep the same price across the board and not allow any retailer-specific sales to happen. This means no variation in pricing and no competition and no choice for the consumer.

Naturally, these are only my wild guesses at what may transpire. I can only offer layman conjecture, rather than professional commentary on this matter.

I don’t think ebook prices are going to really change all that much, regardless of what the court hands down to Apple and the DOJ. Consumers will eventually steer the pricing. If publishers and distributers try to push pricing that consumers are not willing to pay, then the whole market will eventually collapse, as it has done in the past.

If they push unfair pricing, they open the door for newer, smaller publishers to get a chance to get their foot in the door. This in turn, will drive the market toward lower prices, so long as they aren’t being artificially propped up at a higher level as the DOJ is accusing of Apple and the publishers.