Apple Guilty of Price Fixing Ebooks

On 7/10/2013, Apple was found guilty of being the ring leader of a price fixing scandal on ebooks. They colluded with these major publishing groups, Hachette, Macmillan, Penguin, HarperCollins, and Simon & Schuster, which all quickly gave in to the accusation and agreed to settlements – leaving only Apple to be the only company that went to trial. Apple made sure that the main publishers all agreed to sell their ebook at the $14.99 price, which would make Amazon eventually raise their ebooks from the $9.99 price point up to $14.99 too.

You can read the full article here.

Related to this price fixing scandal were the previous concerns that many consumers had of why some ebooks are priced higher than hardcovers. Understanding the context of how the prices of books are decided will paint the picture for why Steve Jobs’ “Agency Model” was a scheme to fix the prices. While you can read the full article here, I will provide a short synopsis to explain what is going on behind the scenes with book prices.

If a printed book is listed for $25, half of that goes back to the publisher (which then gets divided among author, agent, and publisher), and the other half goes toward the retail chain. This allows a profit buffer for the retailer to discount the book and still make money (because the publisher will still make half of the original list price no matter what the book gets discounted to). Then Amazon came onto the market and started selling ebooks for $9.99 on the kindle… they were actually selling the books at a loss. The consequences of this is that they were changing consumer’s expectations of the value of what a book should be.

So when Apple launched the iPad, they changed the way ebooks were sold. Publishers got to set the price, they get 70% and Apple gets 30%. They raised the price of ebooks to $14.99 because at that price, even with keeping 70%, publishers were still making less per book sale than selling a hardcover.

If Amazon were to adopt this model, dubbed the Agency model, then they would no longer be losing money per book sold. In addition, since Publishers choose the price in this scenario, the prices would all be set at $14.99, and that’s how Apple led a price fixing scandal.

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