Apple’s iPad bullies Amazon’s Kindle, rips off consumers

February 2, 2010 in Technology by pacejmiller

Amazon's Kindle and Apple's iPad

[Thanks to my blogger friend at inspired worlds who brought this to my attention.]

Looks like Apple is being a market bully again at the expense of consumers.  Check it out.  You don’t have to be an anti-trust lawyer to smell something fishy here.

On 29 January 2010, books from publisher Macmillan started vanishing from Amazon.  Apparently, Macmillan was unhappy with the US$9.99 price tag for the majority of the NY Times Bestseller e-books for Amazon’s Kindle (e-book reader), and wanted to raise the price to US$12.99-US$14.99.  That’s the price at which e-books will be sold for on Apple’s iPad, which is also an e-book reader and Kindle’s main competitor in the market.

Even though both the iPad and Kindle have their own proprietary formats, Kindle will bring out a ‘Kindle for iPad’ application which will effectively allow people to buy e-books from Amazon (rather than Apple) and read them on the iPad.  If you own or intend to own an iPad, you must be thinking – why would I pay $14.99 per e-book from Apple when I can get them for 33% cheaper at Amazon?

Well, it looks like you can’t.  Not anymore.

(Click on ‘more…’ to read the rest of this post)

On 31 January 2010, Amazon caved and put Macmillan’s books back up with the following message as explanation:

Dear Customers:
Macmillan, one of the “big six” publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.
We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book. We don’t believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.

Kindle is a business for Amazon, and it is also a mission. We never expected it to be easy!

Thank you for being a customer.

On the surface, this looks like just another case of an upstream monopolist using its market position to hold downstream suppliers at ransom, but a recent interview with Apple’s Steve Jobs on the Wall Street Journal on 27 January 2010 suggests there might be more to it.  When asked about the price discrepancy of e-books between Amazon and Apple, Jobs said, “Well, that won’t be the case.”  When further clarification was sought, Jobs simply said confidently, “The prices will be the same.”

This suggests to me that Jobs not only already knew for certain that MacMillan was going to raise e-book prices, he also knew exactly what those prices would be (ie US$12.99-US$14.99).  How could he have known this (two days before Amazon decided to take down Macmillan’s books) unless Macmillan and Apple had been discussing the prices Macmillan would be charging Apple’s competitor Amazon? 

Apple CEO Steve Jobs

Amazon is right in that Macmillan has a monopoly over their own titles, but Macmillan would never have been able to pull off this price hike without the backing of Apple.  It’s because Apple has unbelievable market power and is happy to sell e-books at inflated prices that Macmillan is able to bully Amazon around. 

I can totally envisage the following three conversations:

1. Apple saying this to Macmillan: “Look, we can all make more money out of this.  We’ll sell our e-books at the inflated price of $US12.99-$US14.99 because we’re Apple and people love us.  We’ll give you a bigger cut of sales if you ensure our competitor Amazon doesn’t sell their e-books less, or else they’ll be able to undercut us.  We’re the biggest player in the market and if you want our business that is what you’ll have to do! (followed by maniacal laughter)”

2. Macmillan saying to Apple: “Look, you guys want more money and so do we.  Why don’t you sell e-books at the inflated price of $US12.99-$14.99, give us a bigger cut, and we’ll force Amazon to sell at the same prices?  Win-win for everyone.  What could Amazon possibly do?  Say no and lose the entire market to you guys? (followed by maniacal laughter)”

3. Apple and Macmillan saying to each other: “Look, let’s all make more money by fixing e-book prices at US$12.99-US$14.99.  Don’t worry about Amazon.  They’ll be forced to accept or else they’ll be excluded from the market! (followed by double dose of maniacal laughter)”

Of course, even though Amazon kicked up a stink over the whole thing, I doubt they’re losing much sleep over it.  Why would they?  Accepting the inflated e-book prices from Macmillan will ensure they don’t lose market share to Apple while giving them more profit!

And the people who ultimately lose out?  Us, the consumers.

I don’t want to go into the specifics of the legal side too much because that would require thinking and that’s just not my thing.  What I will say is that unless some deal has already been worked out, this debacle raises potential competition (anti-trust) issues and deserves a closer look. 

I’m not too familiar with the anti-trust laws under the US Sherman Act, but under both the Australian Trade Practices Act and Article 81 of the EC Treaty, price fixing and cartel conduct is one of the most serious types of anti-competitive conduct there is and carries with it criminal sanctions for individuals involved.  And there are also additional concerns of abuse of market power, resale price maintenance, exclusive dealing and other types of exclusionary conduct which should be thought through (but not by me).

[PS: In other news, the release of Apple’s bigger, more advanced version of the iPad scheduled for later this year (called the ‘Max iPad’) is being delayed due to chinks in the technology.  During testing the Max iPad has been malfunctioning every month and the screen flashes ‘F- you’ for no apparent reason.  All rational explanations have been ruled out.]