The government's antitrust suit against Apple and five publishers will make Amazon more powerful than ever in publishing
For the next two years, Amazon CEO Jeff Bezos will be free to dictate the price of eBooks across much of the publishing industry.
That, more or less, is what we can take away from the antitrust suit the Department of Justice filed yesterday against Apple and five major publishing houses, which alleges that they colluded in 2009 to raise the price eBooks and stop Amazon from using steep discounts to lure customers . Already, three publishers have settled on terms so friendly to Amazon that, as Wired's Tim Carmody put it, Bezos should send the attorney general an early Christmas card. Two more are still fighting the case, along with Apple. But there's little doubt about what the outcome will be for the book world.
Readers will pay less. That's the bright side. The settlement gives Amazon carte blanche to discount the eVersions of popular titles, much as it used to. Of course, that also happens to be the dark side. Because that control over price is going to reinforce the monopoly power of the world's largest online retailer.
In the government's telling, their suit is about aging industry incumbents ganging up to undermine an innovative retailer whose consumer-friendly business model threatened their bottom lines. After effectively launching the eBook market with the release of the Kindle, Amazon began marketing new releases and best sellers for $9.99 -- essentially at cost -- in order to attract customers to their device. According to the Department of Justice, this terrified much of the old New York publishing establishment, which believed it would cause the price of books to drop permanently once buyers became accustomed to the discounts. In response, they banded together and used a new agreement with Apple as leverage to force Amazon into accepting so-called "agency model" contracts, which empowered the publishers to set the price of books themselves.
The publishers come off as a smidgen less than sympathetic in this tale. The government's filings are filled, for instance, with descriptions of hush hush dinners at New York's Picholene, where executives plotted out how they would make customers pay $3 or $5 more per book, presumably while tucking into some Roquefort parfait or red-legged partidge.
But this is the plain reality that's missing from the government's complaint: Amazon isn't simply a garden variety retailer, or a helpless, well-meaning innovator. It's the dominant force in books, and especially digital publishing. According to O'Reilly Media, more than 70 percent of readers buy their eBooks from Amazon, either directly on a Kindle, or via the Kindle app available on tablets, such as the iPad. And while by the end of 2011 eBooks made up just about 16 percent of trade sales -- which include general interest fiction and non-fiction titles -- their portion is rapidly increasing.
When a company is the single gate-keeper to your fastest growing market, it makes it a tad harder to resist their demands at the negotiating table. And for the next two years at least, the publishers will be legally helpless to do so. Their old contracts are being tossed and they will be barred from colluding during the new talks. Retailers will be guaranteed the right to discount books any way they like, as long as a publisher's entire catalog isn't sold at a net loss. Retailers will also be allowed to "stagger" contract negotiations, so they can deal with publishers one at a time. Publishers will also be banned from "retaliating" or "punishing" retailers that set prices low.
In other words, Amazon will have two years to consolidate its hold over the fast growing eBook market by offering virtually any sort of discount it pleases -- a marketing strategy it can afford thanks to the volume of business it already does. The question, then, is what happens after that time is up? Will there be any company that can challenge Amazon in the digital market? Maybe not. Thanks to the use of DRM technology, most eBooks can only be read on a propriety device. Amazon's eBooks can only be read on a Kindle, or a Kindle app. Barnes & Noble's books can only be read on a Nook. So the larger a library any one customer builds with a single retailer, the less likely it is they'll ultimately switch.
Perhaps you're comfortable with a single company exercising this much power in an industry. After all, if the Justice Department has demonstrated anything through this suit, it's the lawyers there care about what consumers pay. If Amazon eventually used its heft to raise prices, chances are a government attorney would come knocking. But competition isn't only about price. It's about pushing companies to improve their services, or the technology they offer. When it comes to books, it's about ensuring access to ideas. It's certainly about more than just dollars and cents.
Perhaps Amazon's perpetual battle with Apple will be enough competition to ensure the health of the book industry. Maybe not. But by shackling publishers, the Justice Department is only ensuring one half of a free market. It's hard to imagine that bodes well for anyone long term, even if it means low prices today.