eBooks: Did Apple screw us all, or save the industry?

The Wall Street Journal is reporting that the American Justice Department is about to sue Apple and five of the biggest book publishers in the US for colluding to raise the price of eBooks.

This means that the Justice Department, which has been investigating eBook pricing since last year, has decided the parties involved violated the Sherman Act. The Sherman Act is a law that guards against business activities that lead to anti-competitive behaviour in the marketplace. The US government’s intention to sue signifies strained negotiations and that we might see a shakeup in the way publishers charge for eBooks.

How did we get here?

In the traditional “wholesale model”, publishers such as Simon & Schuster Inc. — one of the publishers under investigation — would sell books to online (Amazon) or brick and mortar (Barnes & Noble) retailers for roughly 50% of the recommended cover price. The retailer could then set its own price, equal to or higher/lower than the cover price.

Amazon opted for a lower price on eBooks, often US$9.99 to encourage customers to buy a Kindle, its electronic eReader. This strategy didn’t sit well with publishers who felt that consumers would get used to cheap eBooks, limiting publishers’ ability to sell pricier titles and that retailers like Barnes & Noble would not be able to compete with Amazon’s bargain basement pricing. Publishers foresaw Amazon becoming so dominant, that the online retailer would be the able to dictate book prices in the industry.

It’s not clear if the publishers ran to Apple, or Apple saw an opportunity, but right around the time the first iPad was set to be introduced, Apple’s ex-CEO, the late Steve Jobs, suggested that publishers adopt an agency model.

Under the agency model, publishers would set the price of the eBook and Apple would take a 30% cut, much like the way Apple handles app and music sales on iTunes. Apple also cunningly stipulated that publishers couldn’t let rival retailers — like Amazon — sell the same book at a lower price. This is where it all went pear-shaped.

Under the agency model customers used to paying less for eBooks would now have to pay more — the price set by publishers. According to the Wall Street Journal, Walter Isaacson quoted the late Jobs as saying: “We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.’”

The five publishers, Simon & Schuster Inc., Hachette Book Group, Penguin Group, Macmillan and HarperCollins Publishers Inc. then went on to impose the model across the industry.

This was a blow to Amazon. “They went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books,’ ” Jobs told Isaacson.

Here we are today.

The US Justice Department decides that the publishers conspired to raise prices. The publishers are protesting, arguing that the agency model stifles Amazon’s dominance and allows more eBook retailers to thrive. That’s a hard sell when prices in the industry went up overall.

A possible solution being thrown around to settle the case is to keep the agency model but allow retailers to sell books at a discounted price.

So what do you think? Did Apple screw us all by trying to shut out Amazon at all cost; the cost being increased industry prices for consumers, or did Apple save us from a monopoly?