Ebooks' $9.99 problem: How Apple's deal with world's top publishers created problems for Amazon

April 3, 2010 was a milestone in tech history. It was the day the very first iPad hit stores in the United States, inaugurating a revolution in consumer technology and an era of billions of dollars more in profits for Apple. Apple sold 40 million iPads in 2011 alone.

But even as Apple fans lined the streets to get their hands on the new device, another, far less well-known event took place. It was the day that a landmark agreement, signed between Apple and five of the world's top publishers, who between them have published some of the biggest heavy hitters in the literary world, William Gibson, Stephen King, Kazuo Ishiguro and Orhan Pamuk just to name a few, took effect. 


That agreement seemed straightforward enough, it set the terms on which Apple could sell those publishers' books in digital format on its newly inaugurated iBookstore on the iPad.

Two years and one week later, the US Department of Justice (DoJ) has cried foul and filed a case against Apple and the publishers, Hachette, Penguin, Simon and Schuster, Macmillan and HarperCollins, claiming that the agreement violated American anti-trust law. What the players were doing, said the US government, was attempting to fix prices in the ebook market. Their target? Amazon.

The 35-page complaint by the DoJ gives us a fascinating insight into the manoeuvres and machinations of the world's most powerful publishers as they desperately seek to battle Amazon's dominance of the ebook market, a category which had barely existed three years before the Apple deal, but which now threatened a business model in place for decades, even a century.

Amazon was doing, or threatening to do, to the publishing industry, what Apple had done with the music industry a decade earlier, and what it would eventually do to the computer industry with the iPad.

Amazon Wins Wholesale

The standard way to sell books has been the wholesale model. In India for instance, the publisher specifies a maximum retail price of the book (printed on the back), but he sells it at a discount to a wholesaler, who then sells it to a retailer.

The total discount at which the publisher sells could be as high as 40-45% of the maximum retail price (MRP). The end price is set by the bookseller, not the publisher. A book might have an MRP of Rs 100, but it might be sold for Rs 90 or Rs 80 or even less, by the bookseller so as to attract customers, or get a slow-selling book off the shelves.


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