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Apple’s Ebook Price Fixing Saga: “Curiouser and curiouser!”

by User Not Found | Oct 06, 2015

…or, as Lewis Carroll would otherwise have it, it is going “down the rabbit hole”.

We thought it case closed when the ruling was handed down in July 2013 that Apple and the leading ebook publishers colluded in the US market to raise the ebook prices. The publishers in the case readily settled with the Department of Justice, but Apple held out to appeal. We thought it definitely case closed when Apple lost at the Appeals Court in June 2015. But, to almost everyone’s surprise, Apple is asking the Supreme Court to look into the case, aiming to turn around the earlier rulings. 

I’m leaving the legal technicalities to the professionals, but I honestly don’t see the business sense in Apple pursuing the case further. The United States, where this case is most pertinent to, is not only the biggest ebook market, according to Strategy Analytics’ forecast, but also the most vibrant ebook market with the highest ebook penetration in the market. Based on different estimates, ebooks have accounted for between 20% and 30% of all books sold in the US in the past few years, beating the UK to the second place at about 12%-15%, and way ahead of other developed markets at mid to low single digit percentage points.  The key reason for more consumers embracing ebooks in the US (and to a lesser degree in the UK) is the price difference between ebooks and print books, driven by market competition.

In Germany, France and other Western European countries (but not the UK), ebook pricing is regulated by law (e.g. France’s “Lang Law”) not to go below a certain level from print book prices. In France the maximum discount is 5% and in Germany that’s no more than 20%. Another factor that keeps ebook prices at a high level in Europe is the EU regulation that ebooks are subject to higher VAT rates as other digital goods (e.g. digital music) while print books enjoy much lower VAT rates.  In Germany the difference is between 19% (ebooks) vs. 7% (print books) while in Sweden it’s 25% vs. 7%. The most extreme case is the UK, where ebooks are subject to 20% VAT while print books pay zero. Therefore although there is the flexibility with ebook pricing in the UK, the higher VAT rate has reduced that price difference. Under such regulatory regimes, even Amazon, who is market leader in most of the markets, with everything else being equal, is finding it difficult to take ebook penetration beyond a low single digit of the total book market in most Western European markets. In France, ebooks account for about 3% of the total book market, in Italy 2%, and in Germany about 4%.

Admittedly the European regulations are based on the social and cultural assumption that “print matters”, therefore are meant to protect the physical especially independent bookshops. I love my books, but I also believe at the end of the day books are products to sell and they shouldn’t receive more protection than other products. Neither do I think the regulations like limiting the range of price flexibility is doing European business, especially digital economy, too much good. As when I commented on net neutrality, I’m all for choices, and I do envy my American friends who have more attractive options in ebooks, especially when it comes to best-sellers and those books I’m less likely to re-read.

Which brings me back to Apple. When it launched iBooks in 2010 Apple was driving up ebook prices together with the leading publishers, and the publishers were threatening Amazon (e.g. by windowing popular titles) to follow suit. So, technically, Apple entered the market as a competitor to Amazon by being anti-competition. And through the tactics of its publisher partners, instead of creating more appealing choices for consumers, Apple was reducing the choices, or to quote the late Steve Jobs from an interview by then Wall Street Journal journalist Walt Mossberg, “The prices will be the same.” Colluding or not, to me, this is simply wrong. Apple may argue that it’s about principle, but I just feel there’s too much ego in it. And for what? Eddy Cue, who negotiated the publisher deals in 2009 and has been in the thick of it, won more respect when he promptly responded to the public rebuttal from Taylor Swift and made a U-turn on Apple Music pay-out policy. So my advice to Apple: live with it and move on. By dragging on the legal battle, Apple is doing their reputation a disservice, and the only party Apple is doing a favour to is the law firms. They would be better off to focus on how to make the ebooks more attractive to consumers, and to give Amazon a real run for their money.

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