Apple slams Amazon for behaving just like Apple

Apple (s aapl) finally responded on Thursday to the Justice Department’s lawsuit against it and several of the Big Six book publishers — for allegedly colluding to keep e-book prices high — by releasing a statement saying it did nothing wrong. The company says its agreement with publishers actually helped break Amazon’s (s amzn) “monopolistic grip” on the market, and that it always lets the companies that supply it with things like apps or books set their own prices. But wait: didn’t Apple more or less control the market for digital music in the early days of iTunes, and dictate prices to the major record labels in order to keep prices low? It sure did. In other words, it behaved more or less the same way towards the music business as it accuses Amazon of behaving towards the publishing industry.
The situations are not identical, mind you. When iTunes was first launched, Apple negotiated an agreement with the major record companies to charge a fixed price of 99 cents a track and give the labels roughly 70 percent of the proceeds (in most cases), while it kept the remainder as a commission. Before the arrival of the “agency pricing” model that Apple negotiated with e-book publishers — which allowed the publishers to decide what price Apple would charge for their books on the iPad — Amazon had deals that paid a specific wholesale price to publishers for a certain number of copies, and then it was able to charge whatever it wanted for the books in the Kindle store. In most cases, that was $9.99, a price the publishers believed was too low.
But despite the differences in these two models — with Apple’s iTunes model being closer to the agency approach, where the supplier sets the price and the retailer or “agent” gets a flat commission, rather than the wholesale model where the retailer gets to charge whatever they want — Apple’s purpose was effectively the same as Amazon’s, and so was the outcome for their respective markets.

Was Apple a monopolist or a market innovator, or both?

Apple wanted to keep the price of iTunes music low in order to stimulate the market, and because it hoped that low prices and control over the content supply chain would drive sales of iPods and other devices. And since it had the most popular portable music player at the time, it was able to dictate terms to the record labels — who had failed in virtually every attempt to launch their own digital music operations, and therefore had virtually no choice but to play ball. They protested every chance they got about the 99 cent limit, but Apple was able to hold that line until relatively recently when it changed to more flexible pricing.

In a similar way, Amazon jump-started the e-book market with the Kindle and wanted to keep prices low in order to stimulate the market — and to gain and keep control over as much of the supply chain as possible so that it could drive sales of Kindles and related devices. So for a time, it dictated prices to publishers just as Apple did, and when they balked it took steps like pulling all of their titles from its retail stores to show them who was boss. And when they charged too much, it simply discounted prices to $9.99 — a level that in some cases meant taking a loss on each book sold, something critics have called “predatory pricing.”
If Amazon had wanted to go head-to-head with Apple a few years ago — a giant who enjoyed monopoly control over both the online music business and the market for related hardware like the iPod — it might have offered record labels the opportunity to cut a deal that would have guaranteed them higher prices, just as Apple has done with publishers and the agency-pricing model. And presumably Apple would have argued that it was trying to stimulate a burgeoning market, and Amazon would have protested to regulators about the horrible monopolist who was treating content producers so poorly.
In the case of books, Apple did what it believed it had to do to try and compete with Amazon, and whether that involved collusion is ultimately for the Justice Department or the courts to decide. But it looked at things very differently when it was in charge of the music business — and the way that it treated record companies arguably benefited the music industry and music consumers in the long run. Who’s to say that the way Amazon has been trying to deal with publishers wouldn’t have similar benefits?
Post and thumbnail images courtesy of Flickr users Beverly and Mike Licht