How The $9.99 Ebook Died

Thanks to Amazon, the price of a hit ebook was $9.99, the same way hit songs cost 99 cents. But then Apple and the publishers changed all that, alleges a lawsuit brought by Justice Department.

The US Justice Department has filed a lawsuit against Apple and five major publishers — Penguin, Hachette, HarperCollins, Simon & Schuster and MacMillan — for colluding to fix and raise ebook prices above the default $9.99 pricepoint that Amazon had successfully made the default price for ebooks. Hachette, Simon & Schuster and Penguin have already settled, agreeing to “refrain from limiting any retailer’s ability to set e-book prices for two years.”

There are still ebooks for $9.99 — or less! — but what the industry sought to do was raise the normal price above that, precisely so people wouldn’t come to think of books as a cheap commodity, the same way we think about 99-cent songs.

Normally, legal briefings are boooooring, but the Justice Department’s filing is actually a fascinating account of the conspiracy to end the $9.99 ebook. The story, in chunks:

The Goal

All five Publisher Defendants agreed in 2009 at the latest to act collectively to raise retail prices for the most popular e-books above $9.99. One CEO of a Publisher Defendant’s parent company explained to his corporate superior in a July 29, 2009 e-mail message that “[i]n the USA and the UK, but also in Spain and France to a lesser degree, the ‘top publishers’ are in discussions to create an alternative platform to Amazon for e-books. The goal is less to compete with Amazon as to force it to accept a price level higher than 9.99… I am in NY this week to promote these ideas and the movement is positive with [the other four Publisher Defendants].”

The Model

To raise e-book prices, the Publisher Defendants also began to consider in late 2009 selling e-books under an “agency model” that would take away Ama zon’ s ability to set low retail prices. As one CEO ofa Publisher Defendant’s parent company explained in a December 6,2009 e-mail message, “[o]ur goal is to force Amazon to return to acceptable sales prices through the establishment of agency contracts in the USA … . To succeed our colleagues must know that we entered the fray and follow us.”

The Apple

On February 19, 2009, Apple Vice President of Internet Services Eddy Cue explained to Apple CEO Steve Jobs in an e-mail, “[a]t this point, it would be very easy for us to compete and I think trounce Amazon by opening up our own ebook store.” In addition to considering competitive entry at that time, though, Apple also contemplated illegally dividing the digital content world with Amazon, allowing each to “own the category” of its choice—audio/video to Apple and e-books to Amazon.

(emphasis mine)

The Conspiracy

The Publisher Defendants acknowledged to Apple their common objective to end Amazon’s $9.99 pricing. As Mr. Cue reported in an e-mail message to Apple’s CEO Steve Jobs, the three publishers with whom he had met saw the “plus” of Apple’s position as “solv[ing the] Amazon problem. ” The “negative ” was that Apple’s proposed retail prices — topping out at $12.99 for newly released and bestselling e-books — were a “little less than [the publishers] would like.” Likewise, Mr. Jobs later informed an executive of one of the Publisher Defendant’s corporate parents that “[a]ll major publishers” had told Apple that “Amazon’s $9.99 price for new releases is eroding the value perception of their products in cus tomer’s minds, and they do not want this practice to continue for new releases.”

The Agreement

Each Publisher Defendant required assurances that it would not be the only publisher to sign an agreement with Apple that would compel it either to take pricing authority from Amazon or to pull its e-books from Amazon. The Publisher Defendants continued to fear that Amazon would act to protect its ability to price e-books at $9.99 or less if any one of them acted alone. Individual Publisher Defendants also feared punishment in the marketplace if only its e-books suddenly became more expensive at retail while other publishers continued to allow retailers to compete on price. As Mr. Cue noted, “all of them were very concerned about being the only ones to sign a deal with us.” Penguin explicitly communicated to Apple that it would sign an e-book distribution agreement with Apple only if at least three of the other “major[]”publishers did as well. Apple supplied the needed assurances.

The Price

The final version of the pricing tiers in the Apple Agency Agreements contained the $12.99 and $14.99 price points for bestsellers, discussed earlier, and also established prices for all other newly released titles based on the hardcover list price of the same title. Although couched as maximum retail prices, the price tiers in fact established the retail e-book prices to be charged by Publisher Defendants.

By entering the Apple Agency Agreements, each Publisher Defendant effectively
agreed to require all of their e-bookretailers to accept the agency model. Both Apple and the Publisher Defendants understood the Agreements would compel the Publisher Defendants to take pricing authority from all non-Apple e-bookretailers. A February 10,2010 presentation by one Publisher Defendant applauded this result (emphasis in original): “The Apple agency model deal means that we will have to shift to an agency model with Amazon which [will] strengthen our control overpricing.”

The Outlier

[Penguin CEO] Mr. Shanks also encouraged a large print book and e-book retailer to punish the other publisher for not joining Defendants’ conspiracy. In March 2010, Mr. Shanks sent an email message to an executive of the retailer complaining that the publisher “ha s chosen to stay on their current model and will allow retailers to sell at whatever price they wish.” Mr. Shanks argued that “[s]ince Penguin is looking out for [your] welfare at what appears to be great costs to us, I would hope that [you] would be equally brutal to Publishers who have thrown in with your competition with obvious disdain for your welfare… I hope you make [the publisher] hurt like Amazon is doing to [the Publisher Defendants].”

The Result

Defendants’ conspiracy and agreement to raise and stabilize retail e-book prices by collectively adopting the agency model and Apple price tiers led to an increase in the retail prices of newly released and bestselling e-books. Prior to the Defendants’ conspiracy, consumers benefited from price competition that led to $9.99 prices for newly released and bestselling e-books. Almost immediately after Apple launched its iBookstore in April 2010 and the Publisher Defendants imposed agency model pricing on all retailers, the Publisher Defendants’ e-book prices for most newly released and bestselling e-books rose to either $12.99 or $14.99.

The whole brief (PDF) is totally worth reading — it’s filled with accounts of secret CEO lunches, threatening phone calls, corporate brinkmanship and well, a blueprint of how a conspiracy works. With the settlement (via Wired) agreed to by three of the publishers, hopefully we’ll see truly competitive ebook pricing again.

newsandinsight.thomsonreuters.com

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