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A sign displays the Apple logo outside of the company’s headquarters in Cupertino, Calif. (AP Photo/Marcio Jose Sanchez, File) (Marcio Jose Sanchez/AP)
A sign displays the Apple logo outside of the company’s headquarters in Cupertino, Calif. (AP Photo/Marcio Jose Sanchez, File) (Marcio Jose Sanchez/AP)

Globe editorial

Between Amazon and a hard place Add to ...

By the letter of the law, a U.S. judge was right to rule that Apple colluded with five of the world’s heavyweight publishers to drive up e-book prices. But it is clear their collective pricing gambit was born more of desperation than greed.

Publishers could have, and still can, come up with a more constructive solution to sell e-books at prices that will be viable in the long run.

The Apple deal was hardly a get-rich-quick scheme – in fact, Penguin Group, Simon & Schuster, HarperCollins, Hachette and Macmillan all expected to lose money in the short term. Rather, the beleaguered publishers saw a fleeting chance to wage war against the online retail giant Amazon, whose lowball pricing schemes and massive clout left the book industry desperate for an alternative.

When Apple arrived on the scene – the company that helped reinvent the sale of music – the publishers leaped before they looked.

In a decision notable for its clarity, Denise L. Cote, a federal court judge in New York, ruled this week that Apple worked in concert with five of the six largest U.S. publishers to break Amazon’s dominance of the e-book market. Instead of wholesaling digital books to retailers who were free to set their own prices, the group crafted a new “agency model” whereby publishers set higher industry-wide prices – usually $12.99 and $14.99 (U.S.) for new and popular books – and gave retailers a cut.

This allowed them to raise e-book prices and compel Amazon and others to switch to the agency model, eliminating competitive pricing, Judge Cote ruled. Apple will appeal, but its chances look faint. All five publishers had earlier chosen to settle with the U.S. Department of Justice, which brought the antitrust case, all the while proclaiming their innocence. (Canadian lawyers are now launching a class-action lawsuit alleging this conduct bled over into Canada, where all five publishers also operate.)

The publishers and Apple put their heads together in late 2009, anticipating the launch of the groundbreaking iPad tablet. The market for digital books was burgeoning, and Amazon had it in a stranglehold, thanks in part to the early popularity of its e-reader, the Kindle. But it was largely a matter of price. Eager to make its site the go-to destination for as many online shoppers as possible, Amazon sold nearly all new releases and bestsellers for $9.99 (U.S.), often losing money on the publishers’ wholesale price.

The so-called Big Six publishing houses’ outright disdain for Amazon was clear – Hachette’s then-CEO David Young described Amazon’s pricing as “wretched,” and hated the retailer’s “bullying behaviour.” Executives feared Amazon was recklessly devaluing books in the consumer’s mind, and eating into crucial hardback sales.

Banding together to artificially wrench e-book prices upward was not a defensible solution, as Judge Cote rightly concluded. It was unfair to readers. Still, Amazon’s position that its disruptive strategy will lead to greater choice and generate more money for more authors is dubious – the publisher CEOs were united in their conviction that staying under Amazon’s thumb was unsustainable.

Digital publishing needs a new ecosystem with a better balance of power to protect the future health of publishers – and thus the breadth and quality of books available – while keeping prices competitive for consumers. And publishers need to act quickly, before the window to shape it slams shut.

In 2009, Apple estimated the North American e-book market at $100-million. By 2012, the U.S. market alone was worth $3-billion, or 20 per cent of all publishers’ revenues, and it is still growing.

When Apple signed its now-illegal contracts in 2010, the cost of new and popular e-books rose sharply. After the five publishers later settled, to avoid a trial, prices began falling again – but not always back to the old $9.99 benchmark. Amazon now sells Khaled Hosseini’s newest work, And The Mountains Echoed, for $10.99 (U.S.) or $16.99 in Canada.

Many in the publishing world worry that the Apple ruling hands Amazon a big stick, and once again dread the squeeze of deep discounting. But rather than throwing up their hands and surrendering to Amazon’s aggressive prices, publishers who believe the retailer is hurting the book industry must be more enterprising.

Leading publishers should consider forming a retail consortium of their own to reach some of Apple and Amazon’s book-buyers. The consortium’s prices would compete in the open market, unlike the arrangement cooked up with Apple. But to succeed, publishers must be ready to take the risk of withholding books from retailers such as Amazon whose prices they deem too low. They will have to use their leverage as the gatekeepers of books, even if it means a short-term plunge in digital sales.

Perhaps there should even be two competing consortia to avoid falling afoul of competition laws again. Hachette, Simon & Schuster and Penguin (now Penguin Random House) are already backing Bookish, a website launched early this year that sells e-books directly, but focuses on giving readers recommendations. Its 300,000 visitors a month are still modest compared with Amazon’s 80 million.

The recent Penguin-Random House merger consolidates market share, which in itself may not favour consumers, but at least makes collusion needless. Readers, in any case, will benefit from an industry that can bring out books of high quality. Book publishers will need to be creative and fair, and above all act quickly, before e-books become even more essential to their bottom lines.

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