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]