Apple in hot water over ebook pricing

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Michelle Starr is the tiger force at the core of all things. She also writes about cool stuff and apps as CNET Australia's Crave editor. But mostly the tiger force thing.

Consumer-rights law firm Hagens Berman has taken out a class-action suit against Apple and five major publishing houses over ebook pricing.

(Credit: Apple; Dollar Sign image by Anonymoususer, public domain)

The firm alleges that the agency model of pricing used by Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster is illegal price fixing, and violates various US federal and state antitrust laws.

Under the agency model, publishers set prices and retailers claim a 30 per cent commission on the gross sale price. Up until last year, ebooks were sold under the wholesale model, where the publisher sold the book to the retailer outright; the retailer could then set their own prices. Paper books are still sold under the wholesale model.

Apple already had an agency model in place on the iTunes app store prior to iBooks, which it launched in April 2010 with an agency model.

The lawsuit, filed 9 August 2011, claims that the five publishing houses and Apple conspired to increase prices and to force Amazon to adopt the agency model, abandoning its pro-consumer discount pricing. Amazon adopted the model in March last year.

The publishers had been concerned that Amazon's pricing would set expectations for lower prices that they weren't willing to meet, while Apple was worried that Amazon's freedom from the agency model and lower prices were damaging its market opportunity, according to Hagens Berman.

"Apple believed that it needed to neutralise the Kindle when it entered the ebook market with its own e-reader, the iPad, and feared that one day, the Kindle might challenge the iPad by digitally distributing other media like music and movies," the firm said.

The firm went on to add, "The complaint notes that Apple CEO Steve Jobs foreshadowed the simultaneous switch to agency pricing and the demise of discount pricing in an interview with The Wall Street Journal in early 2010. In the interview, he was asked why consumers would buy books through Apple at $14.99 while Amazon was selling the same book for $9.99. "The prices will be the same," he stated."

The result of all of that, concludes the lawsuit, is this: "As a direct result of this anti-competitive conduct as intended by the conspiracy, the price of ebooks has soared. The price of new bestselling ebooks increased to an average of US$12 to US$15 — an increase of 33 to 50 per cent. The price of an ebook in many cases now approaches — or even exceeds — the price of the same book in paper even though there are almost no incremental costs to produce each additional ebook unit."

Random House, which was the last publishing house to adopt the agency model, is not included in the suit.

Hagens Berman also filed a class-action suit one day prior, on 8 August 2011, against the six big publishing houses, on the grounds that they are under-reporting ebook sales and are therefore underpaying authors' royalties.

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anysia posted a comment   

One of the biggest selling point about ebooks was that they cost so much less, due to no printing needed. Just one file hosted on a server, able to be downloaded by whoever buys it,over and over by thousands. The price hikes are just greed, pure and simple.


Michelle Starr posted a reply   

I'd just like to point out that that's not entirely true. Yes, distribution costs are lowered, but they form only a small part of what it costs to produce a book. From the time the publishing house receives a manuscript, the process takes several months.

During this time, the manuscript must be edited, re-edited, proofread, designed, laid out, typeset and sometimes illustrated, a process that takes a great deal of time and work.

On top of that, publishing houses have legal teams that need to be paid; there are costs associated with marketing and advertising the book; and the book itself will need to be reformatted for the ebook file type.

Also bear in mind that the publishing houses wear all these costs up front, without even knowing whether a book is going to make money; so they price new releases high initially, hoping to recoup the costs of getting the book on the market.

Yes, ebooks should be a little less than paper books maybe; but it's a mistake to think that the only costs associated with bringing a book out are paying the author and getting the book printed.


GavinF posted a reply   

What you say is relevant to all books printed or digital.

How much would you say reformatting a RTF file or other type of document to another digital format would be and how many times do you realistically think they do it?

How much do you think it costs to print a book and how many times do you realistically think they do it?


Michelle Starr posted a reply   

That is my point, Gavin. These costs exist, which is why you won't pay a cheaper price for an ebook right off the bat. Once the publishing house has recouped the costs of getting the book on the market, it will drop the price; but the price does drop more on ebooks, generally, than it will on printed books.

My other point was that people seem to not realise that printing and distributing a book is only a small part of both the cost and the process.

So, maybe ebooks should be cheaper than they are; but until we know how much publishing a book costs, and how much it costs to run a publishing house, it's difficult to know how much they should be. And, after all, a publishing house is a business; if they want to continue to operate, they need to make a profit.


PhilippaP posted a comment   

I wondered why eBooks had become so expensive. This whole eBook v Paper has long been a bone of contention for me. I prefer ebooks but the books I want to buy are rarely available to Australian readers. It also peeves me greatly that Pan Macmillan charge more (by up to 200%) for eBooks over paper books. A case in point; a while ago I wanted to buy an eBook from an Australian author, Matthew Reilly, if I lived in the US, I would have paid $14.59, because I live in Australia, Pan Macmillian wanted $50. I ended up paying $19.95 and bought the paperback!

As pointed out in this article, there are few ongoing costs to resellers, and yet the prices are so high. Considering the questionable lack of editing on some books I've bought over the past 5 years, I think authors should be allowed to circumvent Publishers altogether.

As for Apple and iBooks - I've paid less for books I've bought through iTunes than Amazon were charging for the same books. The most annoying thing about how the eBook market has gone, is that for every different place I go to to buy my books, I have to have a different reader. My preferred reader is eReader, but I can only buy books in that format from or Fictionwise and they won't sell to Australians. Therefore I have to have Kobo for books from Borders, Kindle for Amazon, Nook for B & N, and I keep Stanza for free books. It's jolly annoying. It would be so much easier if there were just one format and we could load it up using whatever reader we like.

Good on Hagens Berman if they can bring some fairness and coherence to this mess, I wish them success.


DanielO3 posted a comment   

Agency is used extensively in Australia as a way companies use to fix prices, or, as in the case of some premium brands like Miele, to make sure retailers don't over discount their products thus retaining the value of the brand.

The biggest user of agency is the mobile industry for both pre-paid and post-paid mobile. It fixes the price but also shields the retailer from price fixing or retail price maintenance allegations from the ACCC.

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