DoJ warning means one thing: E-book prices are coming down

The rumblings about Apple (s aapl) and the possible anticompetitive nature of its deal with book publishers over “agency model” pricing have turned into an all-out roar, with the news that the Department of Justice has warned the various parties about an impending antitrust lawsuit. According to a report in the Wall Street Journal on Thursday, federal prosecutors have sent letters to Apple and five of the major publishers notifying them it is pursuing a case for collusion and price fixing — charges that are similar to class-action lawsuits filed recently involving Apple and book publishers. While the outcome of this case is not certain, one thing seems fairly clear: E-book prices are headed downward, whether publishers like it or not.
As my paidContent colleague Jeff Roberts has described, the legal background of the case goes back to 2010, when Apple was preparing to launch the iPad. At the time, the dominant model in the e-book publishing market (and print publishing, for that matter) was what publishers called the “wholesale” model, which allowed retailers — such as Amazon(s amzn) — to cut deals with publishers and then set the price on e-books at whatever level they wanted. This allowed Amazon to set prices at $9.99 or lower, which it said was necessary in order to stimulate demand (and thereby also boost sales for its Kindle e-reader). But for publishers, this meant a significant haircut from the cover prices they were used to charging for print books and therefore a threat to profit margins.

Apple courted publishers by offering the agency model

Some publishers tried to fight Amazon’s price-cutting moves, but the online retailer’s response was swift and merciless: When Macmillan balked at the $9.99 level, Amazon yanked all of the publisher’s books (including its printed books) from its online inventory, until Macmillan relented. Just as this fight was heating up, however, along came Apple, which had its sights set in part on the e-book market, with the launch of the iPad. It had the perfect gambit: Offering the publishers the ability to set their own prices for books, otherwise known as the “agency model.” As Steve Jobs described it:

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…’ They went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.’

I have argued before that these efforts by publishers to maintain some kind of artificially high-pricing scheme are not only doomed but misguided as well. There is a growing body of evidence that authors (and presumably also publishers) who price their e-books at low levels — as low as 99 cents, as some self-publishers like J.A. Konrath, Amanda Hocking and John Locke have done with the Kindle versions of their work — can sell orders of magnitude more books than they would at the kinds of prices most publishers are choosing, which are closer to the $19.99 level or even higher. Is this guaranteed? No. But as Felix Salmon of Reuters noted in a recent post, there is something compelling about that 99-cent price point, and in some cases it can change consumer behavior dramatically.

Lower prices may not be the nightmare publishers are fearing

Supporters of the traditional publishing industry argue that the major publishers — despite their massive size and dominant role in the print market — need tools like the agency model in order to protect themselves from Amazon’s dominance in the e-book business and have to protect their profit margins so they can smooth the transition from print to electronic publishing. Unfortunately for the Big Six, however, that kind of argument probably isn’t going to carry much weight with antitrust investigators at the Department of Justice (or with the European Union, which is pursuing a similar case). In fact, the kind of price control that the publishers have tried to assert over retailers through the agency model actually used to be flat-out illegal in the U.S. until relatively recently.
As Jeff notes in his piece on the legal issues raised, the ultimate outcome of the DoJ case is far from certain. In many cases, the federal authorities wind up settling for what is known as a “consent decree,” in which the parties involved agree to refrain from behaving in certain ways and/or pay fines, etc. And the letters that have been sent could be designed as a pressure tactic to convince the publishers and Apple to change their behavior before it leads to a full-fledged investigation. But whatever happens, it seems likely that publishers will either choose to modify the agency-pricing model voluntarily or be forced to do so. And the outcome of that process, at least in the long term, is likely to be lower e-book prices.
That may seem like a nightmare for traditional publishers, but just as innovations like the VCR and the compact disc seemed to spell doom for the movie and music industries and later turned out to be massive profit-generating mechanisms, publishers could find that e-books — even at much lower prices — are a boon rather than a disaster. For more on what the ongoing disruption of the publishing industry means for e-books, see Mike Wolf’s recent GigaOM Pro report (subscription required).
Post and thumbnail images courtesy of Flickr user Mark Strozier