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DOJ trial reveals that iBookstore grew by 100 percent in 2012
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Jun 13, 2013, 02:51 AM
Such is the explosive growth of the e-book market that Apple, as revealed during the ongoing price-fixing trial brought by the US Department of Justice, grew its iBooks business by 100 percent in 2012 alone, and yet that was only enough for it to maintain its place at 20 percent share of the overall market -- suggesting that Amazon also saw a doubling of its e-book business that year as well. Apple has maintained that 20 percent share more or less since it entered the market in 2010.

The figures were revealed after a government prosecutor quizzically referred to the iBookstore as a "failure," despite being corrected by the head of the iBookstore, Keith Moerer, that the business had doubled and had over 100 million customers. The prosecutors's contention, which he failed to establish, was that Apple had done less well than Amazon because it had tried to collude with publishers to raise prices on e-books and that it "forgot to focus on customers." In fact, Amazon had around 90 percent of the e-book market prior to Apple's arrival, and now has about 60 percent -- with other competitors, including Apple, now having been able to establish their own pieces of the pie.

Moerer challenged the DOJ prosecutor's charge that Apple had "failed" by mentioning that the company had doubled sales in 2012 alone. The prosecutor replied that this was due to Apple dropping prices, since it had "sold fewer books because of the higher price caps" and that Apple's pricing "was unfair to customers." Moerer rebuffed the claims -- in fact, e-book prices have generally dropped since 2010 across the board, since caps of any kind do not stop publishers from discounting -- but did allow that sometimes Apple does does discount some titles, such as its free "book of the week." The prosecutor appeared not to notice that such discounting had not resulted in a substantial change in Apple's marketshare.

The government charges Apple with conspiring and in some cases leading publishers into a conspiracy to raise e-book prices above the $10 standard pushed by Amazon in part to "slow down the success of the Kindle" ahead of the iPad's release, and in part to force Amazon to use the "agency" model of pricing, where publishers set the price of e-books and resellers get a specified cut. Amazon had been using the "wholesale" model of buying books at half "cover" price, but then frustrated publishers by selling them at a loss, devaluing the e-books (in the view of the publishers) and leading inevitably to a scenario where publishers would be forced to accept lower wholesale prices because Amazon had built a monopoly.

Macmillian CEO John Sargent echoed those concerns during his time on the the stand, saying that Amazon's predatory pricing had kept others from being able to effectively compete. Even large companies such as Sony and Barnes & Noble were unable to establish a foothold, being unwilling to risk large losses in an untested market, he said. Amazon, he testified, had taken advantage of its "first mover" position and "established barriers to entry" for other companies, which had created a monopoly.

Amazon's behavior has emerged as a major theme of the trial, perhaps inadvertently, as the government is seen to be struggling to establish its case. Even a released portion of an (unsent) email from Steve Jobs that appeared to damage Apple's claim that it was favoring the agency model to level the playing field rather than to break Amazon's monopoly -- which at first appeared that it might be a "smoking gun" showing Apple conspired -- fizzled after the revelation that not only was the email never sent to anyone, the remarks were taken completely out of context and differed very substantially from the final email that was send -- making the government look like it was cherry-picking quotes from the former Apple CEO, who cannot defend or clarify his remarks.

Moerer also debunked much of the government's rather confused claim that the suggested price caps offered by Apple were a hard limit rather than a guideline for bestseller pricing. An earlier executive from HarperCollins, like other publisher representatives who have already testified, said that the publisher had plans to both increase prices on some titles and experiment with much lower pricing for other titles, trying to reach new audiences. Moerer said that Apple's model was intended only to avoid the practice of "windowing," where publishers would withhold e-book titles for a period of time to bolster printed sales and prevent the title from appearing online at heavily discounted pricing -- an Amazon practice that was having a penalizing effect on brick-and-mortar bookstores, which were at the time the publishers' main source of sales.

"Apple," he said, "is not against low price point," noting not only the discounted e-books Apple has always offered but that it uses the same model for music, movie and other media sales -- with prices for albums or videos as low as $3 in some cases. "We saw a lot of competition with the App Store on price, and we thought it would be good for e-books," Moerer added. Since then, e-book prices on average have indeed fallen -- even as Amazon itself eventually moved to an "agency" model.

Macmillian CEO John Sargent reinforced Apple's testimony, noting that prior to Apple's entry to the market Amazon had a stranglehold on the industry, which saw it undercutting cover prices in an effort to both grow the e-book industry as well as sell its own Kindle e-reader and establish itself as the dominant player. "Many companies were [trying to join] the market," noted Sargent, "but they lacked expertise or were undercapitalized and were proving to be unsuccessful ... Google wasn't a good retailer, Sony was a failure. There were lots of vendors with drawbacks." The move to agency pricing, which publishers favored due to the control over pricing it game them, allowed other companies to compete with Amazon.

Sargent denied that Macmillan believed it had to move all reseller to the agency model, also saying that there was no conspiracy among the publishers (excluding Apple) to push resellers in that direction. He did add that publishers had been unhappy with the way Amazon had abused the wholesale model, however. When asked why he had been interested in knowing if other publishers had signed on with Apple before committing Macmillan, Sargent gave a similar answer to Penguin CEO David Shanks: he felt that the more publishers involved with Apple, the higher a chance that the iBookstore would succeed "with a broad selection of titles."

Apple Senior Vice President of Internet Software and Services, Eddy Cue, is scheduled to testify on Thursday. He was the key negotiator with publishers, selling them on the iBookstore concept, suggesting the agency model and arranging the various details of the six separate deals Apple eventually signed with the publishers. For its own part, Apple is pressing forward with business as usual on the iBookstore, bringing iBooks software to the Mac at last with the release of OS X 10.9 "Mavericks" later this year.
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