Apple’s Gambit to Disrupt Amazon’s E-Book Dominance

Apple was found to have violated federal laws by scheming to eliminate Amazon`s dominance of the e-book retail market.

By: Michael Capitano, Junior Writer

Photo courtesy of Håkan Dahlström.

On July 10, 2013, U.S. v. Apple Inc et al was ruled in favour of the US Department of Justice; US District Judge Denise Cote found that Apple violated federal antitrust law, by colluding with five major publishers to force Amazon to raise e-book prices and eliminate retail competition (Apple went to court alone as the publishers had already settled to the tune of over $166M).

Competing businesses are not fond of Jeff Bezos and Amazon’s general business strategy of gaining market share now and making profits later. It turns out Steve Jobs’ Apple was also not a fan. At trial, incriminating e-mail evidence sent from Steve Jobs indicated his desire to increase prices and, “create a real mainstream e-books market at $12.99 and $14.99.”

When Apple entered the e-book market with the launch of the iPad and iBookstore in 2010, Amazon had around 90% of market share for e-books. By buying e-books at wholesale prices, often set at $12 or $14, and then selling them for $9.99 or less, Amazon was able to dominate the market while successfully promoting its Kindle reading device. In no small thanks to Apple, Amazon’s market share has dropped to about 65%.

Apple was out to make a profit and knock Amazon off the top. The only way for that to work, however, was to force Amazon to raise prices by using an agency model: the publisher sets the retail price and the e-book store takes 30 percent of each sale. In late 2009 and 2010, it began colluding with the five publishers.

When the publishers approached Amazon (having Apple to fall back on) with the option of following along or having to wait months to begin listing best-sellers in its stores, Amazon had no choice but to comply. Consequently, e-book prices from those five publishers increased by almost 20%. In her decision, Justice Cote notes that, “without Apple’s orchestration of this conspiracy, it would not have succeeded as it did.”

Apple’s attempt to bully Amazon was not as successful as Apple and the publishing companies had hoped. Under their original deal with Amazon, they were making the full $12 or $14; with Apple’s strategy, they were making only 70 percent of that. Additionally, the rise in prices hurt sales, which further diminished publisher profits. The government soon intervened with its antitrust suit.

While Amazon’s market share has shrunk from its once near-monopoly to just over half, in the end, Apple is facing over hundreds of millions of dollars in damages and, if the Justice Department has its way, several prohibitions to prevent future price-fixing.

The decision will help reduce e-book prices as Amazon now has the freedom to return to its previous business strategy. Chances of a successful appeal are minimal, though Apple is still denying it committed any wrongdoing. The trial to determine damages is scheduled for August 9 and the parties have been ordered to conduct settlement talks before that time.

Michael Capitano is heading into his second year as a law student at Osgoode Hall Law School. He is an aspiring novelist and spends most of his time reading, writing, and playing video games. LinkedIn: www.linkedin.com/pub/michael-capitano/75/158/662