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Apple turns tables on Amazon, starts discounting e-books

updated 02:00 am EDT, Wed September 12, 2012

New deal with HarperCollins may signal new tactics

Apple, still facing scrutiny from the US Department of Justice and having recently moved to settle with the European Commission over allegations of conspiring with publishers to price e-books higher than the predatory pricing of Amazon, may have opted to change strategy. Having maintained that its "agency" model pricing was required to allow itself (and other companies) to enter the market and break the monopoly abuse it claims Amazon was engaging in, Apple appears now to be fighting with fire: lowering prices on e-books.

Apple has taken advantage of a new "wholesale" deal with publisher HarperCollins -- one of three major publishers who agreed to settle with the DOJ and tear up its "agency" contract with the iBooks maker -- to begin discounting e-books itself. The company is now selling HarperCollins titles for the same or less than Amazon's price. Amazon has now found itself forced to lower prices on some titles where its price was higher than Apple's.

Ironically, low prices was the key to Amazon building a near-monopoly on e-books as the market began to mature in 2010, but Amazon has -- to coin a phrase -- paid a heavy price for the discounting. The losses stemming from its predatory pricing practices have kept the company's profits razor-thin, leaving it in a weakened position to fight off a price challenge from Apple or other competitors (see chart, below). Apple, now the most profitable and valuable technology company on the planet, can easily afford to discount e-books to whatever level necessary for however long it likes.

Assuming Apple engages in the same practice as it signs new deals with the other two major publishers who were required to abandon the "agency" model, Amazon could see increasing pressure from its shareholders to find a more profitable model for selling e-books. The company already loses substantive revenues on each one of its Kindle e-readers and Kindle Fire tablets, which it also sells at a loss to lock-in customers -- which it hoped to steer to higher-priced e-books once it had minimized competitors. Amazon had raised its e-book prices after Apple had signed publishers to its "agency" contracts, which had the effect of raising prices (about 25 percent overall) as publishers dictated the selling price of e-book titles.

The company could also see its still-dominant position in the e-book market falter if Apple can maintain the discounting longer than Amazon. Though down from its 90-plus percent share of the e-book market it held prior to Apple's, Barnes and Noble's and Sony's entry into the market (afforded by the profitable pricing levels fostered by the "agency" pricing model), Amazon still has a majority position in the arena. However, Apple's iPad (and rumored mini-iPad) can display books from its own iBooks and Amazon (using the Kindle app), along with books from most other e-book sellers via iOS apps from those companies. As they make their money primarily through e-book price profits, they have little incentive to stop providing iOS app versions of their reader hardware.

Amazon has also tried to buffer its losses by introducing ads it calls "special offers" to its Kindle line; however, it was forced to offer a paid opt-out due to customer backlash when it failed to mention the mandatory ad program was subsidizing its low prices on the recently-revamed Kindle Fire lineup.

Combined with consistently low prices, the versatility of Apple's platform could draw users away from the hardware Kindle, which in both e-reader and tablet form attempts to draw buyers to only one outlet: Amazon. Currently, Apple has about a 10 to 15 percent share of the e-book market -- and an unassailable defense against regulators if their fortunes rise using the same discounting model that the authorities vetted in court when Amazon utilized it to build share. [via PaidContent]




By Electronista Staff
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Comments

  1. elroth

    Junior Member

    Joined: 07-05-06

    That chart is amazing.

  1. Inkling

    Mac Enthusiast

    Joined: 07-25-06

    Amazon may regret the role it played in sending the DOJ after Apple and the Big Six publishers. I suspect Apple, like any well-managed company, has a Plan 2 that assumes that, at least with some publishers, they can no longer use agency pricing.

    The article points out that Apple has far larger profits that it can use to subsidy selling ebooks at a loss. That's only part of the difference between the two.

    Despite criticism from me and many others, Apple has continued to sell ebooks that only display on their iDevices. In a price war with Amazon, that gives Apple an enormous advantage.

    Assume what seems to be the current situation with Apple having 10% of the ebook market and Amazon 70%. Apple cuts the price of bestsellers below costs and loses $10 million dollars that it can justify because it helps sell iPads, on which it makes a big profit, to rabid readers. Amazon matches those prices but, because it has a larger market share, discounting those same titles costs it $70 million. That's its first problem. Being the biggest has its downside.

    But the difference doesn't end there. Amazon's marketing scheme is to sell reader hardware below cost and make apps for all the major platforms free in order to make profits on the ebooks it sells. In a price war with Apple, it's now losing money on both the hardware and ebooks. That's not a smart business model. Over the long-term, it's going to have to raise the prices on either or both, losing market share.

    On the other hand, if Amazon quits matching Apple's below-wholesale ebook prices, then those eager readers will begin to shift to Apple, adding to Apple's iPad profits and Apple's slice of the ebook market. Publishers will flock to high-status Apple, perhaps giving it the first and best version of their ebooks. Amazon will become the second fiddle.

    And yes, Apple may be losing money on some of the ebooks it sells, much as it does by giving apps such as iPhoto away. But it can more than make that up in increased iPad sales. That's something Amazon, with its loss-leader device marketing plan can't do.

    Like I said, Amazon may come to regret the DOJ's attack on Apple.

    Personally, I think that, if this is Apple's plan, it'll lead to a healthier, more competitive market, or at least one where two large companies are battling for market share, rather than one totally dominated by Amazon.

    The real issue for me is what this means for small publishers and independent authors like myself. The advantage of discounting the books from less visible authors and publishers may exist, but it isn't as obvious as that of discounting bestsellers from the big houses. The DOJ claims to have acted to put down what it claims were the predatory behavior of the Big Six publishers. It may, in the end, be giving those publishers an advantage over every other publisher and author.

  1. Synthmeister

    Fresh-Faced Recruit

    Joined: 02-05-10

    Apple has cash cows and a huge war chest to subsidize any e-book pricing they decide to do.

    Amazon does not have any wiggle room here.

    One very simple thing Apple should do yesterday is to release an iBook reader app for Macs and PCs. I would guess someone could finish that on their lunch break.

  1. Charles Martin

    MacNN Editor

    Joined: 08-04-01

    Just wanted to say thanks to inkling for a thoughtful, insightful and in-depth post drawn from experience. On this I am totally with you and appreciate the effort you made in posting it.

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