The Justice Department, Apple, and five major e-book publishers may reach a settlement regarding the allegations that the tech giant colluded with Simon & Schuster, Penguin, Hachette Group, MacMillan, and HarperCollins to keep e-book prices high, while simultaneously delivering a blow to rival Amazon.
Although the situation is still in flux, sources close to the negotiations report that a settlement would likely end Apple’s “most favored nation clause,” which currently prevents publishers from selling electronic books to retailers such as Amazon or Barnes & Noble for less than they sell digital books to Apple.
If it is put in place the settlement would alter Apple’s current agency model, in favor of the wholesale model. The wholesale model allows publishers to set the prices of books, sell them to the retailer at a particular price, but also allows the retailer discretion to mark up to the suggested retail price, or offer e-books to consumers at a discount. With the agency model the price is set by the retailer, and the publisher receives a percentage of each sale with little opportunity to offer consumers enticing discounts.
The purported settlement could ultimately benefit consumers, who would be able to score more than just the occasional e-book discount, as well as Amazon, with its extensive e-book offerings and its family of Kindle e-readers.
According to Cowen & Co. analyst Jim Friedland, “It would be a positive for Amazon because the company’s greatest strength is as a high-volume, low-price retailer and the wholesale model plays into that.”
A settlement between Apple and e-book publishers would supersede any agreements the companies made over two years ago. While none of the companies have admitted that these agreements exist, and the Department of Justice and Apple both declined to comment on the issue, the DOJ’s attempt to bring a settlement on this issue didn’t come out of thin air.
Since the iPad’s release in 2010, Amazon’s share of the e-book market has decreased from almost 90 percent to the current 65 percent according to Cowen & Co. estimates. At the moment Barnes & Noble holds 20 percent of the market, while Apple claims 10 percent.
All while e-book prices have increased, and the e-book market has grown, and continues to grow, dramatically. Albert Greco, a book-industry expert Fordham University’s business school estimates that e-book sales have ballooned from $78 million in 2008 to $1.7 billion in 2011. According to Greco e-book revenue could reach $3.55 billion in 2012.
While returning to the wholesale model would likely benefit Amazon, though, it wouldn’t necessarily be that detrimental to Apple. Friedland posits that Amazon’s e-book revenue could grow by an additional half-billion dollars, to 1.6 billion, by 2013. Apple’s stake in the e-book market is smaller, so the settlement’s effect on Apple’s $100 billion revenue would be negligible.
Consumers may see lower e-book prices, and even lower hard cover prices, if retailers return to the wholesale model, according to Howard University School of Law professor Andrew Gavil, who teaches antitrust at the Howard University School of Law.
Gavil offered, “The consumer will be the short-term winner because the autonomy to set the price of e-books will go back to Amazon. Manufacturers may have to lower the price of hard cover books. They may have to adjust their expectations of profits of hard copy books.”
Until a settlement is reached, e-book fans will have wait patiently to see what, if any, changes are in store for this burgeoning digital market.