Amazon's satisfaction from an ancient e-book encounter

Back in 2010, with Amazon's Kindle e-reader swallowing the burgeoning e-book market, Apple fought back. Illegally, it turns out, but with little real effect.

Three and a half years after Amazon backed down in a brief contest with Apple it has had a belated victory, with a US federal judge ruling yesterday that Apple’s attempt to break Amazon’s dominance of e-book retailing violated anti-trust laws.

Apple, perhaps because of concerns that the ruling could adversely affect its ability to strike deals on other types of content, maintains it didn’t conspire with book publishers to fix the prices of e-books back in 2010 and says it plans to appeal the judgement.

In some respects, however, that confrontation between the two internet giants is ancient history. Both have moved on and ultimately, in e-books at least, Amazon has prevailed.

The seeds for the confrontation were sown in 2007 when Amazon launched its Kindle e-reader and quickly grabbed near-total dominance of the market for e-books using an unusual pricing model. It was buying books from publishers at prices ranging from about $US12 to about $US17 – and selling them at a uniform price of $US9.99.

In keeping with the Amazon philosophy of prioritising long term growth and scale over near term profitability its pricing strategy appears to have been designed to grow the e-book market and the take-up of its Kindle device.

The strategy and the rate at which sales of the Kindles took off got the big publishers hot and bothered because Amazon’s pricing impacted sales of their physical books and undercut, indeed threatened, their traditional distribution channels.

By 2010 the giant Borders book-selling chain was in trouble and others, like Barnes and Noble, were really struggling, although it had responded by launching its own e-reader, the Nook, late in 2009 with promising results. The Nook, at one point, had more than 20 per cent of the e-book market.

Apple’s Steve Jobs, about to unveil the first generation iPad tablet (it was released in April that year) capitalised on the publishers’ discontent. He saw e-books as a prospective primary driver of content and take-up for the iPad, at that time the target of considerable scepticism.

After a series of meetings with the publishers a new pricing model for e-books was agreed with Apple for its iBookstore.

Under the model the publishers set the price, up to a cap of $US14.99, and Apple collected its usual 30 per cent commission on its sales. The publishers got lower e-book margins but were able to shrink the pricing differential between the e-books and their physical versions. Consumers, of course, were to get higher prices.

Amazon was told that either it accepted the new "agency" pricing model or it wouldn’t get access to the title until seven months after publication of the physical book. It momentarily defied the publishers but quickly folded as it realised the delay would destroy its e-book business and award dominance of the sector to Apple.

In 2012, however, the US Justice Department launched an anti-trust action against the publishers (which included News Corp’s HarperCollins). The publishers progressively settled without admission, ditching their agency model, but Apple fought on.

As it happens, the iPad became a raging success without the iBookstore wresting dominance from Apple, although it has made inroads and Amazon, while dropping some e-book prices, didn’t revert to its $US9.99 pricing model for new releases. In recent times its e-book prices appear to have been creeping up, although its overall pricing strategy is now quite opaque. It is also gaining share in selling physical books.

Borders, of course, is gone and Barnes and Noble – the biggest physical retailer of books in the US – lost its chief executive this week after sales of the loss-making Nook device, once regarded as the group’s salvation, slumped 34 per cent in a quarter. There are reports that Microsoft, which bought 17 per cent of the Nook business last year for $US1.7 billion, might buy the Nook tablet and e-bookstore business.

There was considerable empathy for the publishers, trying to protect their legacy book-selling model and the physical distribution chains that support it, and concern that, left unchecked, Amazon would end up with such a stranglehold on e-book publishing that it would ultimately have the ability to impose monopoly pricing.

As it happens, with Apple and Google competing in the e-book space and Microsoft having already demonstrated its interest in the sector the market is competitive and there are disciplines on Amazon’s ability to profiteer.

Apple might, unless it succeeds on appeal, incur a tiny dent in its reputation and perhaps some financial penalties that wouldn’t be noticed within the vast amounts of cash it generates and, even without smashing Amazon’s dominance of e-book retailing, the iPad has been an industry-reshaping success.