9/07/2010

Apple, The Puppet Master

Earlier this year Macmillan Publishers and Amazon had a public dispute over Macmillan’s requirement to charge between $12.99 to $14.99 for e-book versions of its bestsellers and some hardcover releases. Amazon retaliated by refusing to sell Macmillan’s books…but it only lasted about a week. Amazon gave in because, well, Macmillan has monopolistic power over its titles, and there’s not much they can do about it since they likely have a load of inventory they’d prefer to cycle through.

It’s important to realize there is another party in this dispute. Because market power is so short-lived (especially right now in the tablet market), Apple is being very strategic in its actions to maintain its market-leader position with the iPad. By persuading MacMillan to follow an agency model with Amazon, Apple has basically regulated Amazon’s Kindle by constraining any advantages the Kindle can gain in the sale of e-books.

9 comments:

Dave said...

I don't get it. Could you explain a bit more? What exactly do you mean by: " ... Apple is being very strategic in its actions to maintain its market-leader position with the iPad. By persuading MacMillan to follow an agency model with Amazon ..."

Jedora Rules said...

Dave, it is simple. Apple is throwing their weight around. Apple has been selling the i-books (from MacMillan) for $13-$15 while Amazon has been selling them for around $10. Apple persuades MacMillan to force Amazon to increase the price to match Apple. Kindle consumers suffer the consequences.
How can MacMillan force Amazon to increase their prices? They say if you want our books, then you better do it. MacMillan is leading publisher, according to linked articles.
Without the cheaper e-book/Amazon advantage, Jobs thinks consumers will buy the I-pad over the Kindle. I agree.

Jedora Rules said...

At least that is how I see it.

iPoser said...

Indeed, one of the few advantages of a Kindle was the lower price for eBooks. Now Apple has squashed that in its behind the scenes deal with MacMillan.

An "agency" model is centered on the idea that the publisher is selling to the end-consumer and is thus setting the price of the product, so the “agent”, (Amazon in this case, but generally a retailer) that generates a sale would get a commission from the publisher.

Brett said...

Once again, the consumers will be the ones who suffer financially from the "behind the scenes" actions of the parties involved in this price-fixing. Although we don't know the exact deal that Amazon and MacMillan agreed to, we can be assured that neither party will turn a loss from it. It will be interesting to see if any anti-trust lawsuits arise or if this will simply blow past without many batting an eye. I know if I was an avid Amazon i-book reader, I would be very upset.
I am one who feels that the price margins should be the same for both print and electronic books. I don't know if this will ever be, but it makes sense.

Dave said...

Thanks Jedora Rules ... but you probably weren't clear that "Dave" was Dr. Tufte. ;)

What I was implying, and what I think iPoser answered later, is that it wasn't clear they understood what they were writing, or were just repeating something that sounded good.

I figured it was OK, but I was just a little suspicious, so I asked.

Dave said...

I have a Kindle, so I find this interesting.

But, let's think about iTunes. With a network externality and a decent price point, Apple was able to get people to pay for music.

I wonder if they'll kill people paying for books by doing the opposite?

Dave said...

Brett:

Don't jump to the assumption that "consumers will be the ones who suffer".

Are they suffering if they'd be willing to pay $25, a hardcover costs $20, Apple will charge $15, and Amazon would have charged $10?

It's easy to say they could have gotten $15 in consumer surplus from Amazon, but now will only get $10, and therefore they've lost $5.

But, anyone who had those values before already bought the book from Amazon (remember that valuation includes both the willingness and ability to pay).

So, the people who might have been hurt are those who would not have paid $10, and therefore never bought the book, and whose value has now increased. Why might that be so? Because they have more money, or more interest in an author than they used to.

But ... these people haven't lost any opportunities at all.

See the video I'm posting separately.

Grant said...

As a kindle fan I think I have to interject here and question the claim that Apple was exercising monopoly power in this instance. It seems to me that had the situation been reversed and Amazon was charging more and Apple less that Macmillan would have sided with Amazon and forced a similar concession out of Apple. I see this as being more of a oligopoly situation. Both Apple and Amazon are forced to consider their competitor in their actions. For example Amazon recently released a new Kindle for a much lower price and it will be interesting to see how Apple responds with the next generation of iPad. I'm expecting a significant if not equally large price drop.