The Breakdown | Explaining Southern California's economy
Business & Economy

Apple speaks on e-books price-fixing lawsuit

Apple CEO Tim Cook speaks during an Apple product launch event at Yerba Buena Center for the Arts on March 7, 2012 in San Francisco, California.
Apple CEO Tim Cook speaks during an Apple product launch event at Yerba Buena Center for the Arts on March 7, 2012 in San Francisco, California.
Kevork Djansezian/Getty Images

Apple has made its position known in an e-books price-fixing lawsuit that the Department of Justice filed against it and, originally, five big publishers, but now just two (three have already settled). And its position is pretty clear:

The DOJ's accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon's monopolistic grip on the publishing industry. Since then customers have benefited from ebooks that are more interactive and engaging. Just as we've allowed developers to set prices on the App Store, publishers set prices on the iBookstore.

The DOJ claims that Apple and various publishers colluded to get the industry to switch from retail pricing (where book sellers like Amazon set ebook prices) to the agency model, where the publishers themselves determine ebook prices. The DOJ alleges that the publishers and Apple made the switch in tandem to combat Amazon's dominance and its $9.99 price point for the vast majority of ebooks it sold.

I posted on this a few days ago. Apple's defense is essentially what I thought it would be. What's interesting is that, although it's obvious that this an Apple-versus-Amazon fracas, Apple has correctly outlined, in protest, Amazon's looming monopoly problem. If Apple loses, Amazon could very well find itself with an e-books monopoly.

At which point it would Amazon's turn to be taken to court by the government. 

Absent in Apple's defense of the "agency" model is that embedded therein is Apple's profit margin. Apple sells premium devices and wants premium content available for those devices that can be priced high — so that Apple can take its traditional 30-percent cut. 

Apple wasn't really combating Amazon's dominance in this area. It was ensuring the dominance of its own profit model. By giving the publishers the opportunity to set prices, Apple can — because it controls the iBookstore just as it controls the iTunes Store — reverse engineer an acceptable price for e-books based how much it wants to make. It can't do $10 per e-book. It needs $15. But what if the publisher thought $20 was more like it? Apple, as the effective retailer, might take a different stance in that case, if it thought that would be too steep for e-book consumers.

Publishers are in the same position as music companies and wireless providers. Apple builds the devices and runs the delivery system, so it has the power to extract profits from the content and service providers. Amazon also does this, but it isn't defending margins like Apple's (Amazon's margins are extremely thin).

As for app developers, it's not really a good analogy. There are hundreds of thousands of apps in the App Store and many, many developers. Lots of apps are free. There aren't enough aggregated profits for Apple to go after. Yet.

At this point, Apple and Amazon have well-defined ways of doing business. The real losers, no matter how this case goes, are the publishers. You can't blame them for throwing in with Apple and the iPad, to prevent Amazon from pricing e-books as low as it reasonably could. But you can blame Apple for misrepresenting the stakes.

Follow Matthew DeBord and the DeBord Report on Twitter.