May 16, 2013 at 7:50 p.m. PST
Recent developments in the e-books case against Apple reveal damaging information. The government released an email conversation between Steve Jobs and James Murdoch. In this conversation, Jobs is seen as pushing Murdoch to accept Apple’s price-fixing scheme. Murdoch repeatedly tries to resist and point out fallacies in Jobs’ contentions. These emails shed new light on the scope of this scandal. The Justice Department contends that Steve Jobs was the ringleader, playing hardball with the publishers to fix e-book prices.
The question remains as to whether this action is illegal. The emails only depict Jobs pitching different pricing models to a publisher.
This is actually good news for Tim Cook and Apple. Perhaps Jobs was more reckless as he approached his demise. He didn’t get someone else to do his dirty work. There is no mention of Tim Cook in the emails.
Eddie Cue may be in the hot seat. As the senior vice president in charge of e-books, it appears there is some solid evidence that he coerced Random House into accepting Apple’s e-book pricing model, by threatening to withhold app approval. In an email from Cue to Jobs, he mentions that Random House accepted Apple’s pricing structure due to “…the fact that I prevented an app from Random House from going live in the app store”.
The released emails clearly show Jobs trying to convince Murdoch that unless HarperCollins raises the price of e-books, publishers and authors will suffer. At one point, Steve Jobs even suggests that HarperCollins withhold sales of e-books to Amazon in order to encourage piracy.
Jobs presented three options to Murdoch. The first was to cooperate with Apple. The second was to do business with Amazon and experience shrinking profits. The third option was to not sell e-books to Amazon, so people would pirate them:
“Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I’ve seen this happen with my own eyes.”
Although this seems awful, and it is, this is not the alleged illegal act. It is perfectly legal for a company to withhold sale of a product to a retailer, even if encouraged by another company. As creepy as it may sound, this is the harsh reality of corporate America. These situations are not unique to Apple. For example, professional hair care products are only sold at salons. The companies refuse to sell these high-end products to drug stores, supermarkets, and mega-stores.
The illegality is in colluding with an entire industry to force price-fixing. HarperCollins was holding out on collusion. Murdoch wanted to control prices and sales. He responded to Jobs:
“I think we are worried more about the absolute holdback of product elsewhere, and our ceding of pricing to Apple, than we are about the actual haggle over what the prices will be.”
Steve Jobs continued his attempt to persuade Murdoch into collusion. He claimed that Apple only wanted to make a slim margin on e-books, as they did with iTunes. Jobs claimed that the savings would go to the customer:
“Apple is proposing to give the cost benefits of a book without raw materials, distribution, remaindering, cost of capital, bad debt, etc., to the customer, not Apple. This is why a new release would be priced at $12.99, say, instead of $16.99 or even higher. Apple doesn’t want to make more than the slim profit margin it makes distributing music, movies, etc.”
It is true that iTunes does not make a huge profit.
However, a book that costs $12.99 instead of $9.99 is not a great bargain for the customer.
Jobs claimed that Amazon would create an e-books market that would hurt the bottom line for both publishers and authors. Shortly after mentioning how the pricing structure would benefit customers, he claimed it would benefit publishers and authors:
“As for the artists, giving them the same amount of royalty as they make today, leaving the publisher with the same profits, is as easy as sending them all a letter telling them that you are paying them a higher percentage for ebooks. They won’t be sad.”
Murdoch doesn’t fall for this. He responds to Jobs, informing him that publishers and authors make money with Kindle. Murdoch points out that only Apple benefits from the cost-savings from e-books:
“The economics are simple enough. Kindle pays us a wholesale price of $13 and sells it for $9.99. An author gets $4.20 on the sale of a hardcover and $3.30 on the sale of the e-book on the Kindle. Basically — the entire hypothetical benefit of a book without raw materials and distribution cost accrues to Apple, not to the publisher or to the creator of the work.”
Murdoch also adds that they don’t want Apple to dictate that HarperCollins cannot sell an e-book to a particular retailer:
“The other big issue is one of holdbacks. If we can’t agree on the fair price for a book, your team’s proposal restricts us from making that book available elsewhere, even at a higher price.”
Murdoch did eventually agree to Apple’s terms. Shortly after this email exchange, HarperCollins forced all e-book retailers to adopt this pricing structure for their e-books.
The trial will begin on June 3rd in New York. The outcome for Apple will probably not be severe. Steve Jobs was the ringleader. He is no longer alive. Tim Cook seems to have nothing to do with this debacle.
The media is surprisingly calm about the whole affair. The e-books scandal has garnered only a fraction of the attention of antennagate or mapplegate. The e-books scandal is a bit more complicated and may not affect consumer demand for Apple products. I personally never bought an e-book from Apple. I use the Kindle app on my iPad and iPhone, because Kindle e-books are less expensive. Despite his intentions, Steve Jobs didn’t get his way. Amazon was still able to sell e-books at a price that undercut Apple.
My hunch is that Apple will win the case. The terms of the settlement are not severe. If they won’t settle, they must have a great strategy. “Oh, the guy who dunnit is dead.” Perhaps it is not a strategy, but the reality.
Also, before we start screaming bloody murder at Apple, ask yourself why Amazon is selling an e-book below cost. Murdoch mentions that Amazon pays $13 for the e-book, and sells it for $9.99. This may be to drive adoption of the Kindle, however, the end game is domination. When the competitors have given up on selling e-books, Amazon will have a monopoly and can charge whatever they want.
While I don’t condone Steve Jobs’ actions, I certainly understand them. He wanted to stop Amazon from dumping e-books below cost in order to dominate the market. Perhaps I will stop buying Kindle books, even though they are inexpensive. In the end, we will all pay a high price for e-books if Amazon dominates this market.