Apple to face antitrust investigation over ebooks

Wall Street Journal has claimed that the DOJ has warned Apple along with five of the biggest US publishers that they could face an antitrust investigation for manipulating the prices of ebooks.

Amazon's wholesale model
Amazon, pioneer of selling ebooks, used to follow the wholesale model where it used to buy ebooks from publishers at a fixed price for larger quantities and then was free to set the price to be sold to the end users. To attract more users, Amazon has sold ebooks at very attractive prices, at times much lower than available at other sources.

This was disliked by the publishers as they feared that the customers will get accustomed to lower prices, drive other publishers who will not be able to compete with Amazon on pricing leading to a monopoly situation. This could also result in limiting the ability of the publishers to set prices.

In comes Apple with the agency model
When Apple was preparing to start its iBooks digital books store, ahead of the launch of the iPad, Apple offered to implement the agency model. Under this model the publishers were free to set the prices of books in return for a 30% cut on every book sold.

The publishers than used the agreement with Apple to push Amazon towards accepting the agency model with a threat that if it doesn't follow suit, it will not be allowed to sell any more books. Amazon had vociferously opposed the agency model as it cut deeply into its low margin and high volume strategy while playing to Apple's strength of better UI, but had to eventually agree.

Five publishers including Hachette, Simon & Schuster, Macmillan, HarperCollins and Penguin were supporting Apple, while Random House stayed away citing price concerns

Resulting in rise in prices of ebooks
As the prices are set by the book sellers and not by the retailers, there is an uniformity of price across all available outlets. This also means that Amazon can no longer sell books at cheaper prices.

After the agency model was implemented, it is estimated that the prices of ebooks increased as much as 30-50%, with Amazon no longer offering new titles at US$9.99. It also had the effect of reducing Amazon's market share from 80% to 60% in North America ebooks segment.

Causing regulators to worry
While the sales of ebooks were rising, the increasing prices of the books was a major concern. Eventually, a Seattle, USA based law firm, Hagens Berman, filed a class action lawsuit against Apple and its five supporting publishers.

Later in December 2011, both the European Commission (EC) and the US Department of Justice (DOJ) announced and investigation in this matter. The regulators were more concerned about the increase in ebooks prices rather than Amazon being a monopoly.

This antitrust lawsuit, is with regards to the investigations underway at the DOJ. WSJ also reported that the concerned parties (Apple and the five publishers) were aiming to settle the case to avoid a potentially far more damaging court battle.

If the DOJ has its way and enforces the choice of using wholesale model, than it will have major impact on the ebook industry. For one, the prices of ebooks will fall again, possibly back to their original levels which would be favourable for the users. Amazon could also gain market share which it lost after implementing agency model.

It will also make Apple's life more difficult, Even with agency model it has not been able to take significant share and is in third place behind Amazon and Barnes & Noble. If the wholesale model is adapted, Apple will not be able to compete on price and might even make a partial strategic retreat considering that it prefers businesses with high margins.

Overall the news is very positive for Amazon and negative for Apple.