There’s no two ways about it: Apple has a problem on its hands with this emerging e-books investigation by the federal government.
The long and the short of the U.S. government’s case, which accuses Apple and five book publishers—Macmillan, HarperCollins, Simon & Schuster, Hachette, and Penguin—of colluding to keep e-book prices artificially high in order to thwart Amazon and achieve higher profits, centers around the two different pricing models each companies has used.
The wholesale model: This allows retailers to negotiate individually with book publishers for the rights to electronic books, and then to sell those books for whatever price they want. Remember how cheap Amazon Kindle books were three years ago? That was because Amazon was using the wholesale model. In theory, this model offers heavier competition and therefore more attractive prices.
The agency model: Apple, along with the book publishers decided to pursue this pricing model, which allows the book publishers to set prices however they’d like. In this scheme, Apple all but declared itself content to receive 30% of the profits of each e-book sold, and agreed to put no pricing pressure on the publishers.
Sounds like a case of fighting fire with fire, right? In attempting to break what was viewed as Amazon’s monopolistic hold on the book industry, Apple and book publishers themselves created their own monopolistic practice, and appear to have broken the law in doing so.
Why Apple's next move should be to settle up
Regardless of which side you fall on—ultimately, in a three-way scrum between two empires and an entire industry, there are multiple angles/interests—there’s an emerging consensus that Apple should just settle up and pay the piper to forego extended scrutiny and a prolonged, possibly ugly fight against the federal government.
Not only does the Department of Justice have clear evidence of collusion—evidence prosecutors “fantasize about”—but any investigation is going to hamper short-term profitability and cost the company—and shareholders—money.
The smoking gun? Jobs’ own biography, where he’s quoted by Walter Isaacson as saying: "We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30 percent. And yes, the customer pays a little more, but that's what you want anyway."
If that’s not enough, three of Apple’s co-conspirators—News Corp’s HarperCollins, CBS Corp’s Simon & Schuster, and Lagardere SCA’s Hachette Book Group—have already agreed to terms that include terminating their agreements with Apple and halting the practice of limiting retailers’ abilities to set prices for e-books.
That’s essentially a slap on the wrist, and it’s hard for me to imagine why Apple wouldn’t settle if it could get anywhere near this kind of deal.
Regardless of Apple’s decision to settle or fight it out, some clear consequences will emerge over the short- and long-term.
1. It seems certain that eBook prices will once again fall, which means better discounts for consumers.
2. The balance of power will tilt slightly back to Amazon. This said, it’s clear that the high number of iPads Apple has sold puts it on more competitive turf than it was before it established the agency model for pricing. In this regard, mission accomplished for Apple, even if it does get slapped on the wrists.
3. Even more eBooks will be purchased this year than ever before. We’re still at the beginning of a major growth and transition cycle, not just in North America, but internationally as well, and some are forecasting 3x growth to a $9 billion market over the next 4 years.
Windows 8 specifications revealed, but what will Microsoft do about e-books?
Set against the e-book suit, news that Intel confirmed numerous details about Windows 8 tablets felt muted in comparison. It was interesting nonetheless. For many businesses and a few holdout consumers, Windows 8 is the missing piece of the puzzle.
The short version of the news is that Intel China chairman Sean Maloney revealed that at least 10 vendors are working with the chipmaker to push out Intel-powered Windows 8 tablets by the end of the year, and that Intel has established its own set of Windows 8 specifications along the following lines:
- Dual-core Atom Z2760 “Clover Trail” CPU
- Standalone 10- or 11-inch display with a physical keyboard
- Battery life greater than 9 hours
- 3G/4G connectivity
- Weight less than 1.5 pounds, thickness less than 9mm
- NFC and Wi-Fi Direct connectivity
It’s worth noting that this is Intel’s specification for x86-based tablets.
Here’s the problem: In conjunction with Apple’s e-book problems, the Windows 8 news made me realize that, to date, Microsoft hasn’t announced any e-book solution of its own. This feels like a big hole in the Windows 8 gameplan for tablets.
Does this mean it will partner with Amazon or some other commerce partner? Given the potential revenue around this, that doesn’t seem likely. Here’s hoping Microsoft has a plan here.
As an aside: I’m a little worried about some of the prices I’m hearing being thrown around about the initial wave of Windows tablets and ultrabooks. $2,000 feels like too much money to spend on a portable computer, even if it is Lenovo’s eyebrow-raising IdeaPad Yoga.
This week’s loser: Apple
In addition to the DOJ investigation around eBooks, some authentic footage aired regarding the working conditions at FoxConn. While it’s interesting to watch how iPads are being built, there’s something unsavory about the whole thing.
It’s not likely that the FoxConn news will have a negative impact upon Apple’s stock performance, but no one likes to hear the words "monopoly" or "federal investigation" attached to their brand. Not even Apple
This week’s winner: FiftyThree
The developer of the iPad’s top-ranking free app across 75 countries announced that Paper has received 1.5 million downloads of the app in just two weeks, and that its users have created over 7 million pages of content. Even if just a small portion of this audience makes a few in-app purchases of tools at $1.99 per tool, that’s a lot of cash for two weeks’ time.
Runner-up in the winner’s circle this week is Polaroid, which announced its very own 10-inch Android 4.0 tablet. That’s heady use of a recognizable, if aged, brand. It’s not clear what, if any unique features will be on the tablet, but with a 1.5GHz CPU, 512MB of system memory, and 4GB of internal storage, it appears to be in the value class of tablets.
On the horizon
I’m expecting to see Apple quickly settle up with the federal government on the eBook pricing front; if it does happen, look for an announcement right at the end of the week.
Also this coming week: DEMO, an event of particular interest to Silicon Valley because of its emphasis on startups, ideas, and innovation, is taking place in Santa Clara, Calif. On April 17-19. TabTimes’ news reporter David Needle will be in attendance and reporting from the event.
And, given that earlier this week we heard about Windows 8 specs and tablet partners, I wouldn’t be surprised to hear some more specifics about the OS itself, including a specific launch date, packaging, and more.
One final note: Special thanks to TabTimes user Meta Kaizen for catching an inconsistency in last week’s column. Much obliged, Mr. Kaizen.