Blowout quarterly results notwithstanding, Apple still faces a number of challenges on a number of fronts, chief among them a growing controversy over ebook pricing, and whether the company colluded with major publishers to raise prices.
The issue came to a head earlier this week in Canada after a Quebec Superior Court judge gave the go-ahead to a class action suit filed by Normand Painchaud, a Montreal-area lawyer. The lawsuit, first filed in February, alleges that Apple worked directly with five industry-leading publishers, including Penguin Group and HarperCollins, to artificially raise the price consumers pay for ebooks.
The issue hinges around the group's use of the so-called "agency" model, where the publisher is allowed to dictate the price of the book as long as the distributor — in this case Apple — gets 30 per cent of the revenue. This approach, which mimics the model at the core of iTunes content and application sales, runs counter to the wholesale model that publishing has largely used for decades, where retailers are free to mark up from a baseline price.
Canadians weigh in
The Montreal lawsuit claims that prices, which had been near the $9.99 average that industry-leader Amazon charges for most of its titles, have since risen closer to $14 and $15 because of alleged Apple-publisher action. That's because Apple's agency model dictates that publishers aren't allowed to sell the same book for less on another retailer. This threatens Amazon's strategy of charging less so it can boost market share and penetration. The lawsuit claims Apple and its group of five publishers plotted together to force prices up.
The Quebec class action echoes a similar case filed against Apple and the same five publishers earlier this month by the U.S. Department of Justice. Two other Canadian class action cases, in Ontario and British Columbia, have also been filed and are currently awaiting certification. With the European Union nearing the end of its own antitrust investigation and the Australian government considering its own action, the growing controversy threatens to dog Apple as it attempts to wrest market share away from Amazon, which currently controls over half of the global market for ebooks.
All cases currently in progress are civil antitrust proceedings, meaning no executives will go to jail in the event that Apple and the publishers lose their respective cases. Still, the fines could be huge — especially if even a small percentage of the millions of ebook buyers step forward and register to be a part of the class action — and the resulting pressure to tighten regulatory oversight over this nascent market could limit profitability for years to come. Apple, especially, has deep enough pockets to write any cheque necessary, but that doesn't mean the outcome won't cost it dearly in the long run.
Not backing down
Of key interest is Apple's claim that it will fight the Department of Justice lawsuit even though, according to Reuters, Hachette and HarperCollins have already agreed to pay $51 million to consumers, while Simon & Schuster is negotiating a similar payout. Although Apple itself bowed to the EU investigation, it vows to fight the U.S. case "just plain wrong," the company claims to be the underdog, fighting Amazon — which currently dominates the North American and global ebook markets — and preventing against a possible monopoly.
However the lawsuits play out, they raise questions over how much is enough - or too much - for an ebook. The still-evolving market hasn't yet decided what an appropriate price point should be for a typical book. Whether they stay in the $10 to $15 range or migrate higher or lower, everyone agrees that margins are significantly fatter now that publishers no longer have to print them, ship them across the country and stock them on shelves in brick-and-mortar stores. The shift online also gives publishers unprecedented agility to anticipate and respond to sudden changes in demand. If Oprah ever gets back into the book-picking business, publishers will have a much easier time managing the inevitable sales spike with ebooks than they ever could selling paperbacks through traditional retail channels.
A market in rapid transition
The Book Industry Study Group says ebook market share tripled from under 5 per cent in October 2010 to almost 16 per cent in August 2011 — a period of only 10 months. Other industry surveys put current market share somewhere above 20 per cent, and expect it to bump up by 10 points annually until traditional books are niche purchases.
Against that backdrop, pricing is incredibly crucial, and Apple's strategy is deliberately aggressive to set optimal price point expectations before the rest of the market has a chance to weigh in. Even if the company loses or settles every case, Apple now sits on a $110 billion cash pile thanks to quarter after quarter of record-setting performance. It can afford to play the game for a while.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. firstname.lastname@example.org