FEDERAL trustbusters have set out to prove that Apple Inc. fixed prices in the market for electronic books, and the case that wrapped up last week is strong but for one inconvenient fact: e-book competition is breaking out all over.
The market that Apple and five leading publishers are accused of manipulating is seeing the most aggressive price-slashing of its brief history. Innovative new hardware and software have revolutionized it. Marketing has gotten more creative.
Far from a rigged game, the battle for e-book market share appears to have evolved into a free-for-all — as it should be — with Barnes & Noble and Apple making headway against the dominant Amazon.com, and Google angling for more business too. At the federal bench trial in New York, Apple scored points by aggressively cross-examining government witnesses to show that competition is alive and well.
Federal prosecutors had reason to cry foul over the deal that Apple reached to break into the e-book business in 2010, but their case shows the limits of government power to bring about competition in an era of blink-and-you-miss-it technological innovation. At this point, the public’s concern shouldn’t be about punishing Apple for an anti-competitive deal it made back in the day, it should be about ensuring that fair and open competition continues to prevail in the fast-moving e-book marketplace. A likely government victory in the case can’t diminish the ability of Apple and other competitors to have at it, free market-style.
Until April 2010, major publishers distributed e-books by selling them at a wholesale price, leaving retailers to set the price paid by consumers. Amazon held 90 percent of what was then a fledgling market, and it had a free hand to sell best-sellers below its cost to stimulate interest. Publishers feared that Amazon’s aggressive discounting would devalue creative content, cannibalize hardcover sales and scare off competing retail outlets.
Enter Apple. The tech giant was releasing its first iPad, a tablet computer that functions as an e-book reader. In early 2010, Apple proposed that publishers, not retailers, should set the price of e-books, then pay retailers a 30 percent commission on each book sold. That deal, in effect, prevented Amazon from peddling best-sellers at $9.99, below its cost. The agreement further guaranteed that if Amazon sold a book for less than Apple, the computer giant would get to match the price.
There is little doubt that Apple and the publishers intended to drive up the price of e-book best-sellers to $12.99 or $14.99, to the disadvantage of consumers. The government says Apple’s deal cost shoppers hundreds of millions of dollars.
There also is little doubt that Apple’s entry into the e-book market ushered in a period of innovation. The iPad proved hugely popular, and its iBooks software was more user-friendly than anything before it. To keep up, Amazon scrambled to launch the Kindle Touch, with an iPad-like touch screen, and the Kindle Fire, which, like the iPad, has a full Web browser, color and video support.
E-book sales soared, and even with the higher sticker price for the top best-sellers, the average price of an e-book fell as the market expanded. By February 2013, Amazon’s market share had dropped from 90 percent to 60 percent, with Barnes & Noble at 22 percent and Apple at 12 to 15 percent, according to expert testimony in the case. An Apple executive testified at trial that its current share is about 20 percent, suggesting the market remains hotly contested.
Today, e-book sales growth has leveled off from the boom, but it’s still on the rise. Consumer e-book promotions have gotten much more sophisticated, featuring prices all over the map.
Those happy occurrences aren’t likely to let Apple off the hook. U.S. District Judge Denise Cote heard the case without a jury. In an unusual move shortly before the trial, she said she thought the government would be able to prove that Apple knowingly conspired to raise e-book prices. That was a strong signal to Apple that it should settle. The five publishers accused along with Apple reached agreements with the government. Apple decided to keep fighting.
The judge is expected to issue a decision in several weeks. Whatever the outcome, we want to see competition in the e-book market get even more fierce, for the sake of book lovers everywhere.