The Complete 2012 User's Guide to the Amazing Amazon Kindle: Covers All Current Kindles Including the Kindle Fire, Kindle Touch, Kindle Keyboard, and Kindle (3 page)

Second, the Apple Agency Agreements contained pricing tiers (ostensibly setting maximum prices) for e-books—virtually identical across the Publisher Defendants’ agreements—based on the list price of each e-book’s hardcover edition.  Defendants understood that by using the price tiers, they were actually fixing the de facto prices for e-books.  In fact, once the Apple Agency Agreements took effect, Publisher Defendants almost uniformly set e- book prices to maximum price levels allowed by each tier.  Apple and Publisher Defendants  were well aware that the impact of their agreement was to force other retailers off the wholesale  model, eliminate retail price competition for e-books, allow publishers to raise e-book prices, and  permanently to change the terms and pricing on which the e-book industry operated.

The negotiations between Apple and Publisher Defendants culminated in all five Publisher Defendants signing the Apple Agency Agreements within a three-day span, with the last Publisher Defendant signing on January 26, 2010.  The next day, Apple announced the iPad at a launch event.  At that event, then-Apple CEO Steve Jobs, responding to a reporter’s question about why customers should pay $14.99 for an iPad e-book when they could purchase that e- book for $9.99 from Amazon or Barnes & Noble, replied that “that won’t be the case. . . .     The prices will be the same.”  Jobs later confirmed his understanding that the Apple Agency Agreements fulfilled the publishers’ desire to increase prices for consumers.  He explained that, under the agreements, Apple would “go to [an] agency model, where [publishers] set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what [publishers] want anyway.”

Those, friends, are smoking guns.

Meanwhile, Amazon played its hand in masterful fashion. And thanks to existing assets as well as smart moves that it had been making all along, it had a great hand to play. While the company certainly has its detractors among competitors, some publishers, some authors, and progressives who decry the company’s labor practices, it is nonetheless an enormously popular company. So progressives like me might wring our hands over the conditions faced by Amazon’s warehouse workers, but at the end of the day Amazon has more progressive titles and more progressive customers than any other bookstore. And publishers and authors might lament this, that, or the other thing about Amazon, but we all know they were not checking their sales rankings every hour on Barnes and Noble.

When it launched the Kindle, Amazon began with an unbeatable combination of the 4 Cs — customer base (more online customers than any bookstore in the world), catalogue (more online titles than any bookstore in the world), connectivity (easy, seamless, free wi-fi and 3G allowing customers to download any of its Kindle titles in seconds from almost anywhere), and convenience (the bookstore environment that it began building in the mid-’90s appeared in the Kindle Store on Day One, so that every customer knew how to use it from the get-go, and it only got better).

But of course those 4 Cs weren’t the only factors in establishing Kindle dominance. Amazon’s corporate wealth and power enabled it to take the notion of loss-leaders to a new level under the terms of the wholesale pricing model that had existed in the book trades for decades. From the DOJ
court documents
:

Under this wholesale model,  publishers typically sold copies of each title to retailers for a discount (usually around 50%) off  the price printed on the physical edition of the book (the “list price”).  Retailers, as owners of the books, were then free to determine the prices at which the books would be sold to consumers.  Thus, while publishers might recommend prices, retailers could and frequently did compete for sales at prices significantly below list prices, to the benefit of consumers.

By selling nearly every new release issued by a mainstream publisher at breakeven or a loss, Amazon made the Kindle a compelling money-saving gadget for avid readers. Although ebooks had existed as a futuristic dream with antecedents in the Palm Pilot, Project Gutenberg, and Doug Adams’ 1979 novel The Hitchhiker’s Guide to the Galaxy, it wasn’t until the Kindle’s launch late in 2007 that the ebook revolution began in earnest. Amazon sold out of its first Kindle units in under six hours and continued to dominate the small but growing ebook space throughout 2008. Oprah Winfrey ignited a new wave of Kindle love when she devoted a show to the little eInk gadget in late October 2008, and Amazon further cemented its dominant role with new Kindle models in early 2009 and mid-2010 and free apps that allow readers to “buy once, read anywhere” on any computer, smartphone or handheld device.

Although the Defendants’ launch of the agency model left Amazon with no short-term choice but to go along, the company understood the value of a symbolic fight in making it clear to its very loyal Kindle  customers that it opposed the new higher prices:

Starting the day after the iPad launch, Publisher Defendants, beginning with Macmillan, quickly acted to complete their scheme by imposing agency agreements on all of their other retailers.  Initially, Amazon attempted to resist Macmillan’s efforts to force it to accept either the agency model or windowing of its e-books by refusing to sell Macmillan’s titles.  Other Publisher Defendants, continuing their practice of communicating with each other, offered Macmillan’s CEO messages of encouragement and assurances of solidarity.  For example, one Settling Defendant’s CEO e-mailed Macmillan’s CEO to tell him, “I can ensure you that you are not going to find your company alone in the battle.”  Quickly, Amazon came to realize that all Publisher Defendants had committed themselves to take away any e-book retailer’s ability to compete on price.  Just two days after it stopped selling Macmillan titles, Amazon capitulated and publicly announced that it had no choice but to accept the agency model.

After Amazon acquiesced to the agency model, all of Publisher Defendants’ major retailers quickly transitioned to the agency model for e-book sales.  Retail price competition on e-books had been eliminated and the retail price of e-books had increased.

All of that worked very well for Amazon, but no strategy has paid off more handsomely in Amazon’s path to dominance than the one that, of course, would never have occurred to the big publishers: Amazon made a multi-faceted commitment to emerge as the publisher of choice for thousands of authors. These authors ranged from the self-published to previously published authors who wrested their backlist rights away from legacy publishers for the chance to handle their own marketing, control their own retail prices, and earn 70% royalties that allowed them to make as much per-unit on Kindle books priced under $5 as they had ever received from legacy publishers on print books priced five times as high. Amazon saw authors and small publishers as its customers, too, and understood that more authors meant more readers just as more readers meant more authors.

Amazon’s Kindle Digital Publishing (KDP) platform was just the beginning. Over the course of the last two years the company’s new imprints, willingness to sign new deals with a wide range of authors, and hiring of Larry Kirshbaum —
the former Time Warner Book Group CEO called “the ultimate publishing industry insider” by Business Week
— to run its own New York publishing operation made Amazon Publishing not only part of the conversation in publishing but a potential dominant player within the next year or two.

The hundreds of thousands of ebooks published via these new channels have made for dramatic changes in the shape — and the pricing — of the offerings in the Kindle Store. Amazon was able to ensure that nearly all of these titles were priced at $9.99 and below. And many thousands of these ebooks proved to be quality books that consumers wanted.

Many Kindle Store customers didn’t like paying 30% to 100% more for ebooks under the agency model, and Amazon’s ability to let a (few hundred) thousand flowers bloom in the Kindle Store gave those customers lots of other places to go. A phenomenal array of promotional pricing programs such as the
Kindle Daily Deal
, the long-awaited opening of
zero-price promotions
to KDP authors, the
Kindle Owners’ Lending Library
, and Amazon’s monthly offering of
100 Kindle Books for $3.99 or Less
put the spotlight on those places and rubbed the Defendants’ noses in what they were missing to such an extent that one wouldn’t blame some of the Defendants if they had breathed a sigh of relief when the anti-trust lawyers came knocking on the door to save the Defendants from themselves.

And they went to those other places, by the millions. Or, to put it another way, the Defendants lost millions of ebook sales over the past couple of years to indie authors, small presses, and the innovative publishers we mentioned earlier, including Amazon Publishing and its imprints. They lost extremely valuable real estate on the ebook bestseller lists, and they may not get it back. In many cases they lost the readers themselves: among 2,377 respondents in
the Winter 2012 recent Kindle Nation Citizen Survey
, 61% said they “agree” or “agree strongly” with this statement:

Higher prices for new releases from the big publishers have driven me to try more and more indie authors, and I like what I have found

While we have observed numerous indicators over the past two years that have shown the agency model’s lethal effect on the Defendants’ market share, we also have these remarks from the single individual who probably has more access to ebook sales and pricing data than anyone else in the world, in
a June 2010 Fortune interview
with Amazon CEO Jeff Bezos:

Fortune:
In the past, you’ve been a big proponent of lower prices for ebooks and an open opponent of the book publisher agency model, which allows the publisher to set the final retail price whether there’s an intermediary retailer or not. Now that you’ve switched to an agency model, will ebookstores like Amazon’s get hurt?

Bezos:
No. First of all, there are a bunch of publishers of all sizes, and they don’t all have one opinion. There are as many opinions about what the right thing to do is as there are publishers. So you’re seeing that some of them are being very aggressive on prices, pricing their books well below $9.99.

Others are trying to do everything they can to make prices as high as possible. And what you’re going to see is a share shift from one group of publishers to this other group of publishers.

Fortune:
Do you expect a significant share shift? When do you see that happening?

Bezos:
It’s a significant shift and we’re seeing it already.

The point, of course, was that Fortune’s inaccurately premised question notwithstanding, Amazon did not “switch to an agency model.” Amazon acquiesced in the decision by some publishers to force the agency model on it, and then took all possible steps to expose its readers to as many non-agency titles as possible.

To put it another way, the Department of Justice statement in court documents that “retail price competition on e-books had been eliminated and the retail price of e-books had increased” due to the agency model is not accurate. Amazon’s multi-pronged initiatives with authors, other publishers, and its own new publishing imprints meant that that there would be a different kind of price competition: price competition between the Defendants’ titles and all the other titles in the Kindle Store. And the retail price of all those other ebooks would be lower, not higher than in the past.

On April 1, 2010, the day that the agency model went into effect for its proponents, there were 480,236 ebooks in the Kindle Store, and 23% of them were priced at $10 and up.
As of April 15, 2012, the total Kindle catalogue had almost tripled, to 1,356,286, and fewer than 14% of those titles were priced at $10 and up
. At that same point on Sunday, April 15, only three of the top 20 bestselling titles in the Kindle Store were published by the Defendants (two by Hachette and one by MacMillan), and two of those three were priced at under $8.

With trends like these, it’s probably fair to say that the agency model would have died, eventually, even without Dept. of Justice intervention. Apple’s failed iBookstore never grew to a point where it would have provided real cover for the Defendants if Amazon had called their bluff and started picking them off one at a time. By most accounts the iBookstore accounts for no more than 10% of the ebook market, and our anecdotal impression is that the Kindle App accounts for far more reading on the iPad and other Apple devices than iBooks. The Google books initiative that was touted (however ludicrously) as the savior of indie bookstores just a couple of years ago is dead.