Should Apple be forced to host rival book retailers for free?

That appears to be a key part of the DOJ’s proposed remedy for Apple in the eBook pricing case.

To reset competition to the conditions that existed before the conspiracy, Apple must also for two years allow other e-book retailers like Amazon and Barnes & Noble to provide links from their e-book apps to their e-bookstores, allowing consumers who purchase and read e-books on their iPads and iPhones easily to compare Apple’s prices with those of its competitors.

There are other demands as well. First, for 5 years, Apple will not be able to have its original eBook deals with major publishers. Second, it will have to allow models other than agency with publishers — that is, the pricing control will be handed over to Apple. Third, this will go beyond eBooks:

Apple will also be prohibited from entering into agreements with suppliers of e-books, music, movies, television shows or other content that are likely to increase the prices at which Apple’s competitor retailers may sell that content.

All this together is surprisingly far reaching especially those that move beyond the eBook market. There, it appears that Apple will not be able to impose most-favoured-nation clauses.

The real question is: will it work? Consider the ability of Amazon to now sell books directly through its iPad app and not have to pay the 30% fee to Apple. This is certainly good news for Amazon but is it likely to lead to lower prices by Amazon. Let’s consider the current situation. If you use the Kindle app, you do so because the prices of books will usually be below those on the iBooks app. You also may use it because the rest of your family likes using Amazon’s Kindle eReader. iBooks is exclusive to the iPad and so has a more limited reach. However, given that the Kindle app is currently less convenient, Amazon must compete more intensively to attract those consumers. Allow the Kindle app to be more convenient and this is no longer a concern. This may actually increase prices to the detriment of non-iPad using Kindle consumers. It may also harm iPad using Kindle customers but that may be offset by the benefits of more convenience.

In any case, it is not at all clear how much easier price comparisons might be. There are apps that do that now but these apps won’t be able to sell books. Nonetheless, imagine that comparisons are easier for consumers. Then it is not clear that that will increase price competition. Now if Amazon lowers price, consumers will be more easily able to compare that with iBooks and so iBooks may respond quickly. The end effect could be the same as the concern over MFNs.

When it comes down to it, the real locus of competition between eBook retailers is with regard to the retailer that they build their eBook collections with. At the moment, the reason that locus exists is DRM and eBook formats. It is within the control of publishers to end that control. What the DOJ should have potentially considered was changing the fundamental structure of the industry. After all, in the old days, if you bought books from Borders that would not disadvantage you from putting books bought from Barnes and Noble on your bookshelves. Today, there is no easy app interchangability. That means consumers are getting locked into Amazon, Apple or what have you. Want lower eBook prices? End that lock-in. Require publishers to provide eBook copies in multiple formats to consumers regardless of which retailer they first purchased the book. The publishers would suffer no loss as the sale is already made but competition amongst retailers would be opened up.

6 Replies to “Should Apple be forced to host rival book retailers for free?”

  1. Of course, the publishers could do that voluntarily as a way of investing in creating competing ebook platforms. Do you think that the publishers have the wrong incentives on that?

  2. With regard to publisher’s incentives in the case of DRM: Based on my interpretation of the anecdotes cited in the original judgement, I think part of this has to be about the fact that publishers understand they are on one side of a platform market (or, in the case of the wholesale model, a market with platform-like characteristics) and that any time platforms are forced into close competition the market tends to tip. This is precisely the thing publishers seem to be most afraid of: a dominant ebook platform that commoditises their products in order to win the battle for the market. You could see these fears in the way publishers referred to Amazon’s low pricing and its 90% market share prior to Apple’s entry. The danger for publishers is that once the market has tipped and all consumers are aboard a platform with low ebook prices, the platform can use its position as a competitive bottleneck to squeeze publishers’ margins.

    Somewhat perversely, the recent court ruling might make strategies that foster retailer competition even less appealing to publishers: If the market were allowed to tip and ebook prices were so low that an entrant platform can’t compete on consumer prices then the only way into the market would be some deal cut between the platform and publishers. With Apple having gotten burnt for such behaviour, it seems that publishers might have a hard time finding an entrant willing to try such a gambit.

    1. ^ Sorry, some text here got lost in the process of cutting and pasting which makes the post seem confusing. The missing point is that going DRM-free ought to be especially appealing because, unlike other mechanisms to foster retailer competition, it cuts away the platform component of competition. Whilst book prices may be driven low by retailer competition, the platforms never get to be a competitive bottleneck if consumers aren’t bound to a platform by DRM.

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