On April 11, the U.S. Department of Justice filed an anti-trust complaint against Apple and five publishers (Hachette, HarperCollins, Macmillan, Penguin Group, and Simon & Schuster) over eBook pricing. While it is a US action, the implications are global. The action not only effects the pricing of eBooks, but has an impact on paper books. The book world is essentially divided between publishers and distributors. In this civil lawsuit, Apple is the distributor. The target of the pricing is Amazon, and the winners could be readers, wherever they live.

In the book world, publishers do not distribute books and distributors do not publish books. The issue is the wholesale model versus the agency model for pricing of eBooks. Under the wholesale model, the publisher sold eBooks to the distributor at a discount, but did not set the final price of the eBook. Under the agency model, the publishers determine the pricing for eBooks, and distributors cannot sell an eBook for less than that price. The story leading to this lawsuit would make a great movie.

Over the past thirty years, there has been a lot of changes in the publishing industry. In the 1980’s there were far more independent publishers. The acquisition binge of the 1990’s saw a consolidation of the publishing industry into just a few international publishers. For example, The Penguin Group is actually a division of Pearson, PLC. Pearson PLC is holding group for Education, the Finance Group, and the Penguin Group. The Education division includes such publishers as Scott Forseman, Prentice Hall, Addison-Wesley, Allyn and Bacon, Benjamin Cummings, and Longham.

In “How a Book is Born: The Making of ‘The Art of Fielding’,” Keith Gessen describes the process of bringing a book to life. It is a fascinating story of the publishing industry, and the problems they are having with the eBook revolution. Publishers have a marketing model based on paper books, and eBooks threaten their way of doing business. Publishers intentionally delay the release of eBooks to boost paper book sales. Consequently, cheap ebooks threaten the sales, and pricing, of paper books.

During the same period, the distribution chain for books has undergone radical changes. Until the late 1980’s, the independent book seller dominated the sales market. Salesman for distributors would visit the book stores to push the latest books, and insure prominent placement. Barns&Noble and Borders changed the rules to the game by creating a massive network of bookstores. By the end of the 1990’s, the independent bookseller was a dying breed. A similar trend occurred in grocery stores, who are also booksellers. Distributors now talked to corporate buyers, instead of store owners.

With the Internet age exploding on the scene, Amazon changed the rules of the game, yet again. Amazon purchased books at a wholesale price, and sold them with a very small markup. It was not long before Amazon became a dominant bookseller. When Amazon filed for an IPO, Len Reggio, CEO of Barnes&Noble, blocked Morgan Stanley’s bid to handle the IPO. Jeff Bozes, CEO of Amazon, responded by discounting all books by 50%, during Barns&Noble IPO. Thus, began the bad blood between the two CEOs. When Amazon released the Kindle in 2007, B&N responded by releasing the original Nook in 2009, with Wi-Fi & 3G connectivity. In June of 2011, B&N released the Nook Color, and Amazon responded by releasing the Kindle Fire. The winner in this match is Android, and the loser was Borders. Borders was late getting into Internet sales and never was a player in the eBook market.

To boost Kindle sales, Amazon was selling eBooks for $9.99. While taking a loss on eBooks, Kindle sales sky-rocketed. The pricing of eBooks below the wholesale price did not exactly make publishers happy, but Amazon was also their biggest single customer. The low prices threatened the price of traditional books. Steve Jobs, CEO of Apple, was never happy with Amazon, and saw the Kindle as a threat to his vision of the iPad for eLearning. In a series of secret meetings at exclusive restaurants, and with instructions to double-delete all emails, Apple and the publishers devised the agency model. Publishers were now in control of eBook pricing, and forced sellers to fall in-line with the new model.

Using the new model, Apple pushed to get iPads and their line of eBooks, and learning tools, into the college market. The problem was that the price of the eBooks was only slightly less than the traditional book, and some were more expensive. In spite of its marketing skills, students couldn’t justify the cost of an iPad and eBooks, over the cost of traditional books. The benefactors in this game were Barnes&Noble and Follett, who are the primary suppliers of traditional books to college bookstores. Textbook publishers were happy, because it sustained the sales of their traditional books, and slowed the growth of eBooks. The losers were the students, who continued to pay exorbitant prices for textbooks.

Paragraph 6 of the complaint quotes Steve Jobs as saying: “We’ll go to [an] agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” The publishers went to Amazon, and said: “You’re going to sign an agency contract or we’re not going to give you the books.” When the agreement went into effect in April 2010, the price of new titles for eBooks increased to the prices set by the publishers. It was this collusion to increase prices that led to the filing of the anti-trust complaint by the Department of Justice. On the day the complaint was filed, Hachett, HarperCollins, and Simon & Schuster settled with the Department of Justice. Apple, Macmillan, and the Penguin Group have vowed to fight the complaint in court. The two remaining publishers are heavily involved in the college textbook market, and have close ties with Apple regarding eLearning applications.

The troubles are not over for Simon & Schuster, as they are included in a complaint filed by 16 state attorney generals over price fixing. The other defendants in this suit are Apple, Macmillan, and the Penguin Group. Australia’s Competition and Consumer Protection Commission is considering launching an investigation into Apple over eBook price fixing.

The publishing industry’s bold attempt to set eBook pricing, and slow the growth of the eBook market, is coming to an end. With the lowering of the price of eBooks, the low cost tablet market is going to put more pressure on the price of eBook readers. Publishers are going to need to deal with eBooks as a market segment, and will have to change their business model to survive.

For Costa Rica, the price of eBooks are going to drop. The growth of mobile devices is going to attract more users to eBooks. As eBook sales grow, there is going to be more pressure on bookstores to adapt to the changing market. The book market is changing, and the consumer is the winner.