Even when Apple is losing, it wins

April 12, 2012

The Department of Justice, as anticipated, filed suit Wednesday against Apple and five of the Big Six publishers over alleged price-fixing. Three of those publishers have entered into a proposed settlement with the DOJ, but Apple is still on the hook.

We won’t know until we know whether Apple will win, lose or settle (and now there are 16 states piling on the charges, too), but in a way it’s a sort of hapless victim. If the DOJ theory is correct, Apple did participate in a sort of conspiracy, but one driven (again, according to the allegations) by publishers that were determined to keep controlling e-book prices. In the beginning of the e-book industry it was the publishers, not Apple, that had the upper hand.

It’s important to remember the climate in which this alleged conspiracy unfolded. Amazon, against publishers’ wishes, was going rogue with $10 e-books. The mammoth online retailer – which got its start in print books but essentially created the e-book business – was widely thought to be making nothing, or next to zero, on its proprietarily encoded e-books, the better to boost demand for the Kindle.

It was classic razor-and-blades: You want to make money on the razor, so you almost give away the blades, except only your razor can hold the free blades. But in e-books it’s an even better deal. Amazon doesn’t make e-books, and they are virtual goods, requiring no inventory and little overhead in the traditional sense.

But the publishing industry was displeased with Amazon’s new $10 regime. While it was beating on Amazon to change its ways, Macmillan – whose titles at the time included the best sellers Wolf Hall and The Gathering Storm – and Apple were negotiating terms for the iPad maker’s new offering: iBooks. Apple, unlike Amazon, was willing to play by Macmillan’s – and thus the publishers’ – rules.

In Apple’s agreeing to terms from publishers that Amazon had resisted for as long as it could, a number of things occurred. It was high-stakes poker, with most of the cards still face down:

  • Apple, always fearsome in prospect if not in practice (can you say iAds?), got all the deals it needed to be a credible e-book player with its new platform.
  • The publishers got a new, and potentially fearsome, retailing partner that agreed to see things their way.
  • That new dynamic had the immediate effect of making Amazon’s market power less fearsome.

I wouldn’t call Apple’s strategy sandbagging, because Apple almost always has a winning hand (and even when it doesn’t, still bets big – can you say Apple TV?). But I would say that, however it happened, Apple won and is winning: It got a deal that then launched iBooks, and it will benefit from varied pricing. (Relatedly, as my Wired colleague Tim Carmody makes clear, Amazon is still sitting pretty.) The genesis of Apple’s victory is the height of irony: Apple’s initial agreement weakened all retailers, as the balance of pricing power returned to publishers. Prices did go up – Amazon stopped trying to sell e-books for $10, and $13 to $15 became the norm for new e-titles everywhere. But that shift to higher prices gave the appearance of collusion, which got the attention of the Obama Justice Department.

Fast-forward to today: Apple is still in the DOJ’s sights (as far as anyone knows), but even if Justice manages to completely dismantle the price controls all five publishers had imposed (again, coincidentally, they all assert), Apple will finally get flexibility in pricing that it was denied by the agreements it had originally agreed to. At the time the negotiations were taking place, Apple, which had no place in the e-book hierarchy, was in no position to insist on a pricing prerogative in straight-up talks with the publishers (though there was some reporting at the time that it had tried). Now it will simply enjoy the terms of the settlement, because it constrains publishers – no matter if the DOJ suit goes forward, it wins or loses such a trial, or if some other settlement is hammered out.

That’s what I call drawing four cards to make a straight flush.

One comment

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I never buy anything Apple as I believe that they are to controlling and are always very noncompetitive. Much like Standard Oil was at one time.

Posted by wallynm | Report as abusive