What is ‘below cost’ in e-book pricing?

“Today’s big overnight news is that Apple has settled with consumers and states in a pricing suit, the details of the settlement as yet undisclosed,” John Biggs reports for TechCrunch. “Don’t worry: you won’t have to register a $10,000 windfall with the IRS because Apple asked publishers to raise prices and force Amazon to do the same in order to beat Bezos’ $9.99 stranglehold on the e-book giant. Instead, lawyers will get a lot of money and Amazon will win again.”

“In short, Apple was sued for working with publishers to get out of a nasty relationship with Amazon,” Biggs reports. “While no one is blameless here, this lawsuit shouldn’t have happened.”

“But within the news is a very interesting point: It’s the idea that Amazon was selling ebooks ‘below cost’ at $9.99 and that there was a real cost involved in selling access to a conglomeration of bits,” Biggs reports. “What is ‘below cost’ in publishing? Given falling author advances, the move from printed books to e-books, and the general lack of interest in long form reading except in young adult and niche publishing, I doubt anyone knows what a book ‘costs’ anymore.”

Read more in the full article here.

MacDailyNews Take: Apple did nothing illegal (there simply is no evidence) and we hope justice will finally prevail upon appeal in the hands of a competent judge.

This settlement is contingent upon the outcome of appeal.

Related articles:
Apple’s Star Chamber: An abusive judge and her prosecutor friend besiege the tech maker – December 5, 2013
In pretrial view, judge says leaning toward U.S. DOJ over Apple in e-books case – May 24, 2013
Lawyers have complained for years that Judge Denise Cote pre-judges cases before she enters the courtroom – August 14, 2013

Apple settles e-book antitrust case with U.S. states; contingent on outcome of Apple’s appeal. – June 17, 2014
Stephen Colbert goes after Amazon, offers ‘I didn’t buy it on Amazon’ stickers – June 5, 2014
Amazon’s Bezos has gone too far: The e-book monopolist may finally face a court of law – May 25, 2014
U.S. Federal Puppet Denise Cote: ‘Apple’s reaction to the existence of a monitorship underscores the wisdom of its imposition’ – January 16, 2014
Judge Denise Cote denies Apple request block her friend as ‘antitrust compliance monitor’ – January 13, 2014
Antitrust monitor Bromwich rebuts Apple accusations of ‘unconstitutional’ investigation – December 31, 2013
Apple seeks to freeze its U.S. e-books ‘antitrust monitor’ – December 15, 2013
The persecution of Apple: Is the U.S. government’s ebook investigation out of control? – December 10, 2013
Apple’s Star Chamber: An abusive judge and her prosecutor friend besiege the tech maker – December 5, 2013
Apple takes aim not just at court-ordered e-books monitor, but also at U.S. District Judge Denise Cote herself – December 2, 2013
U.S.A. v. Apple: Judge Denise Cote assigns DOJ monitor in Apple ebook price-fixing case – October 17, 2013
U.S.A. v. Apple: Judge issues injunction against Apple in ebooks antitrust case; largely in line with what DOJ wanted – September 6, 2013
U.S.A. v. Apple: Judge Denise Cote says Apple needs third-party supervision after ‘blatant’ ebook price fixing – August 28, 2013

33 Comments

    1. There is cost in publishing a book – authorship, editing, marketing, distribution, and business overhead. ebooks eliminate the printing and physical distribution costs, but probably incur some amount of other costs in place of the ones specific to hardcopy books.

      An ebook costs money, and the cost difference between an ebook and a hardcopy book may not be as large as some people seem to want to believe.

      1. Well, for Amazon, it is amazingly simple. “Selling Below Cost” is when Amazon sells an item below the amount of money they have to pay the producer [be it a major label, book publisher, product manufacturer, whatever].

        And that was/is exactly what Amazon has been doing with ebooks. Taking a loss of several dollars on most ebooks they sell [that are from major publishers, as they have the smaller ones under their thumb already].

  1. “… because Apple asked publishers to raise prices and force Amazon to do the same in order to beat Bezos’ $9.99 stranglehold on the e-book giant.”

    What utter bullshit.

    There has never been presented a single bit of evidence that Apple asked publishers to raise prices. The closest to that concept of anything presented was a quote from Steve Jobs acknowledging to the publishers that they *wanted to raise prices. Acknowledging a desire of another company does NOT constitute collusion. (Steve Jobs also famously acknowledged that Microsoft had won the desktop OS wars. This does not mean that he *ever* agreed with Microsoft doing so!)

    In point of fact, the contracts signed at the time actually state the exact opposite of the concept of Apple pushing for higher prices. Apple gave up all control and input into the pricing of e-books. The contracts explicitly gave control of pricing to the publishers, and in certain circumstances would have resulted in LESS income for Apple.

    The most the contracts did was through the Best Customer clause, which stated that if the publishers allowed another company (even Amazon) to sell a book for $9.99 (or even $0.99) then Apple’s customers would get the right to buy the book at that price too. The BC clause leveled the playing field. Amazon couldn’t get away with buying the market and thereby drive others from the market.

    Additionally, absolutely zero evidence was presented (and not even any circumstantial evidence was presented) to show, or constructively imply, that Apple asked the publishers to raise prices to Amazon. This author is just making this stuff up!

    1. I will agree that Apple did not want ‘higher’ prices for ebooks over HC books, but did contribute to setting SPECIFIC pricing tiers AND caps for the publishers to use AND inserted a MFN clause to prevent the publishers from not just selling to anyone else at a lower price but also made it so that if a retailer sets a lower price than the publisher set at the iBookstore Apple had the right to change the price to match for that ebook. This clause alone forced the publishers to change ALL their wholesale contracts or risk losing even more money selling ebooks through Apple. So yes, I can agree that a certain degree of freedom was given to publishers in pricing but Apple effectively created a ceiling for that pricing. I would not say that Apple gave up control of pricing at all.. They simplly put the publishers in a box.

    2. Simply through the “Best Customer” clause Apple effectively forced the publishers to raise prices across the board. This was agreed upon by Apple and the publishers and was done with the intent to drive Amazon’s prices up, so Apple could insure the probability of turning a profit by not losing sales to ebooks being sold below cost. Everyone involved knew what they were doing which is why most of the publishers settled out of court. Apple has the money and the arrogance to fight the suit that these publishers don’t have. This whole thing stank when news was first breaking about it around the launch of the first iPad. I’m not at all surprised with the decision, nor do I disagree with it.

      All Apple had to do was leave the “Best Customer” clause out of the contract and none of this would have happened. Then you could say that they were letting the free market decide who was going to win the ebooks war. If Apple felt Amazon was a monopoly and using predatory pricing practices to increase market share and drive competitors like Apple out of the market, they could have then taken the money they are now wasting on this suit and appeal, and turned it around against Amazon by bringing a more effective suit against them.

      I have a strong distaste for Apple dictating to anyone what a competitor should sell their products for. What industries that you know of that manipulate their vendors to ensure none of the competition sells products cheaper than them? How would sales ever happen??? Black Friday would be tossed out the window because everyone would have the same products at the exact same price!! Why send out all the circulars in the Sunday paper? I would know that whatever store I went into would have the exact same item at the exact same price. This might be a nice ideal to work towards, but it’s not reality.

      As a vendor I would love to never have to compete on price, and if I did my supplier would take the hit and not me, but that’s not how the world works. Apple got their hand caught in the cookie jar and does not want to admit it.

      I have no doubt Amazon is a monopoly at this point, but I equally have no doubt that Apple went about this whole thing the wrong way.

      1. “Best customer” clauses are not illegal. They are standard business practice in many fields. They prevent discriminatory pricing to different customers in the same class of trade.

        The publishers putting Amazon e-book sales on the agency basis is also not illegal. Amazon sells most of its stuff on the agency basis. But the fact Amazon insists on selling publishers’ e-books as if they (Amazon) were the “principal”, rather than a distributing agent for the publishers, and they insist on maintaining this unusual arrangements, reveals that Amazon has an ulterior motive. Think about it: Why does Amazon insist on selling e-books as principals when they sell almost everything else as a middleman?)

        It was only prices of the publishers’ “new and best-selling books” — the ones that were set at predatory prices — that increased. As others have noted, the older and lower-selling books were not priced low. So the fact that the prices of the new and best-selling prices went up (from too low) does not really prove anything.

        1. That is true to the extent that it does not affect how you deal with other customers. Unfortunately that clause in conjunction with the price caps Apple insisted on in the contract made it essentially unavoidable for Publishers to keep both Wholesale and Agency pricing viable and killing retail competition for ebooks as a whole. Also, if the clause only referred to the revenue the publisher received instead of the price to the customer it would have been a much weaker argument for Apple’s statement that they were only looking for their own business interests. For example, If the publisher received $7 per book that would mean pricing would be $10 at Apple and whatever the retailer wished to price the ebook at their own store. Apple would appear to have no hand in forcing prices and Publishers would get the same amount from both models. If Amazon should broker a contract for a lower price, the publishers would be forced to adjust the Agency price to match by their contract with Apple. In this case also Apple affects no one outside of the relationship they have with the Publisher. In effect Apple’s involvement with price fixing would not stand because it would be the contract forcing Publishers to adjust prices based on the movement of retailers (the free market) and not the other way around.

          As for why Amazon sells everything else at Agency pricing is because any individual item being sold in that model has multiple points of origin, thus preserving free market competition amongst vendors. This is not true of the huge majority of books, each title a unique product originating from only ONE source.

          Unless you have proof that it was only the “new and best-selling ebooks” that went up in price that is supposition. The opinion of others not actually involved in the pricing of ebooks at retailers also amount to rumor so the fact that prices of new and best selling books went up does not negate the fact of the assorted reports of “prices of ebooks” going up for publishers using the Agency model. (see: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/10/a-judge-says-apple-fixed-e-book-prices-this-chart-shows-how-they-did-it/)

          An article about why Agency pricing works in one type of market over another:
          http://www.voxeu.org/article/apple-s-pricing-and-ebooks

          1. You error is that Amazon would not be “brokering a price” with the publishers. Under agency model, which Amazon accepted, the publishers established the pricing of the books they wanted to sell, and Amazon and Apple received a commission for facilitating the sale for the publisher. Apple’s commission rate was 30%. Amazon could set a rate of their own choosing. No pressure to use 30%. Your example has it backwards. The compensation to Amazon or Apple is based on the sales price of the e-book. . . If the book sells for $10, Apple or Amazon gets $3 (assuming both are at 30% commission) and the owner of the e-book, the publisher, the actual seller, gets $7. Amazon has NO INPUT into the selection of the price that e-book will sell for. . . that choice is made by the publisher with which Apple has a valid contract establishing that the publisher MUST make the book available to Apple’s customers at the same lower price they are selling it for on Amazon. Perfectly legal. “If you sell your book there for $10, you must also sell it here for $10.” Amazon is not involved. It’s basically an anti discrimination clause. This clause is standard business fare and NOT illegal until Judge Cote rewrote the law by whim.

      2. Sorry. You haven’t a clue what you are talking about. “Most favored nation” or “most favored customer” clauses are neither illegal or uncommon. Nor, as you claim, do they have the effect of forcing prices upward. On the contrary, they tend to drop prices, regularizing the markets. Price fixing between “publishers” is almost impossible. Why? Because not one of them sells the same product!

        Publisher A sells “Thriller A” written by Author A while publisher B sells “Romance B” written by Author B. . . And publisher C sells “Mystery C” written by Author C, none of them the same product at all. . . just in the same product category: e-books. Saying they are interchangeable is a false equivalence. Books are not nuts or bolts. Readers do not jump from one Best Selling Genre based on price. . . they follow genres, authors, series, types, styles, and other reasons for selecting their reading choices other than price.

        The DOJ and Judge Cote made the erroneous assumption that all e-books are equal and price is the primary deciding factor in consumer choice and that given a few dollars difference, one publisher could gain an advantage over another for his product. They are wrong. In publishing, advantage is gained by securing the hot author, title, or series. . . or latching on to a specific subject matter like vampires that appeal to a subset of the market. Price has very little to do with it.

  2. Cote is Bozos puppett.
    This whole case is ludicrous… But i dont see how apple is going to get out of this.
    This is not about justice… This is about something else! Payola…Manipulation, Politics… Etc.. Anything but justice!

  3. The cost is what Amazon has to pay the publisher to sell a copy of an ebook. If the publisher demands $13 for a book and Amazon sells it for $10, they have sold it “below cost” (which means they’re losing money on each sale but hoping to make it up on increased hardware sales).

    I can see having below cost sales on specific books as a “loss leader”, but to make this standard policy across the board seems like an attempt to drive other retailers from the market, resulting in a monopoly. This really should be illegal, but I can’t see how to enforce it in a free-market economy…

    1. Gee I thought the idea was cheap hardware (razor, inkjet printer) and expensive expendables (razor blades, ink cartridges). Can’t have both be on the cheap – no money in it but that’s how Amazon rolls.

    2. It seems there is a mistaken idea here that ALL new books from the big 6 publishers were being priced at $9.99 at Amazon.com. The majority of new books are sold at ‘competitive’ prices and the Best Sellers, and the books on the NYT list were sold at that price for a limited time (usually 2-3 week) before increasing in price to a ‘normal’ level. So yes, they did have below cost sales on specific books as a “loss leader” for their kindle hardware and no it was not standard policy across the board (which I assume you mean across ALL new books).

      1. There is a huge difference between predatory pricing and a “loss leader”. A loss leader is typically one product that is low-priced and is intended to draw people into a (bricks-and-mortar) store. Also, loss-leaders are often sold in limited quantities: “While supplies last!”

        Amazon was under-pricing the publisher’s new and best-selling titles. These were the most popular ones: plural. But the fact that Amazon did not underprice all e-books, including the ones that did not sell many units, does not really make a relevant difference.

        A loss leader is designed to create an increase in the store’s total sales during the — usually limited — sale period. Predatory pricing is designed to put the hurt on competitors for longer-term “strategic” goals, like putting them out of business, gaining an unfair market advantage, or basically making some other party “cry uncle”.

        1. While i can agree with the first part of you definition of a ‘loss-leader’ there is no stated limit on the total number of items available to be sold in the definition. Though I have to say that may be one method retailers use to limit loss. Other ways retailers limit their loss is the quantity that may be purchased in any single transaction.

          Actually the fact that Amazon did NOT underprice all ebooks probably saved them from the charge of predatory pricing and allowed Amazon to show that its ebook segment sales were not as a whole a profit losing operation.

          Yes, I agree that it is used to increase the store’s total sales as evident in their Kindle and other ebooks sales and yes, the $9.99 pricing IS for a limited time usually 3-4 weeks. I suppose if all ebooks were the same format readable by any app/device the argument that Amazon corners the ebook market would be more believeable. Perhaps the combination with Amazon willing to create readers that make Kindle books accessible to all sorts of devices and readers also gives them an ‘unfair’ advantage over Apple who decides not to..

          1. Except that Amazon NEVER demonstrated anything of the kind! Amazon is a loss leader operation. . . with many if not most of its products sold at cost or below cost once shipping and handling are considered. Amazon seldom shows an overall profit on its books, never breaks out division revenues, much less profits, for ANY sector of its business. No one can show any legitimate DOJ investigation of Amazon’s book or ebook operations that have essentially destroyed the brick and mortar book stores in this country by undercutting EVERY book. The best seller and new release categories are the “bread and butter” of the book sellers, accounting for 80% of books sold. It is not the back bench B list and remainder older books that all book stores keep in inventory that make up the other 20% of sales that keep them viable. Yet it was the 80% that DID keep the doors open of Mom&Pop’s Books that Amazon was selling, at super-discounted retail prices, below Mom&Pop’s wholesale costs, that put Mom&Pop out of business! Even the publishers could not sell the books and e-books at Amazon’s prices and make a profit! That is predatory pricing by definition.

    3. The problem is that they are simultaneously claiming to sell the Kindles at a loss to spur content—i.e. e-book—sales! Bezos wants us to believe it works both ways!

  4. Below cost is when the owner values the product at $X, and the retailer says he won’t sell it for more than $Y The COST for any “book” is dependent on a wide range of factors: payments to authors, payroll of editors and proofreaders, fact checking, advertising and promotion being just a few. Amazon wants to tell publishers that all books are created equal, regardless if it is a best selling novel or short story by an unknown author. Apple rightly sided with the position that the content creator should have a say in the value of the product based on their investment in the project. Publishers want to sell books. They won’t keep a price higher than needed to continue the sales. Look, there are some people that want to be culturally current. A new movie comes out and they willingly pop $50 bucks to see it the first weekend at the local multiplex. Others wait for it show up on the iTunes Store or their local Red Box. Others wait for Netflix. I’m not saying that most electronic books shouldn’t cost less than $10. I just don’t think Amazon, IN ITS POSITION OF NEAR MONOPOLY FOR ONLINE BOOK SALES should be allowed to force a publisher/author to settle for $10 bucks when the market would easily bear $12/$13/$14…whatever; especially when the digital book represents a 50% or more savings from the printed version. Bottom line is that there should be pricing flexibility to suit the market demand. Why shouldn’t a really great author earn more for their writing than a hack?

    1. To be clear, Amazon never forced the publishers to accept less than their own wholesale price. The publisher, author, etc. got paid the full set wholesale price, but Amazon was then selling the books at retail for less than the wholesale cost and eating the loss. The cost to the publisher wasn’t in making less on eBooks–it was in having the cheap eBooks cannibalize the far more profitable trade in best selling hardbacks.

      Apple provided the publishers with a way out. Unfortunately, the short term result was that eBook retail prices went up because they were no longer being sold at a loss. The antitrust idiots in 30 states and the federal government looked only at the impact on consumers of the price rise, and not at the long term benefits of keeping Amazon from tightening its chokehold on both eBook and print book sales.

      1. This is what I don’t understand about the entire thing, outside of the publsher’s fear that consumer’s will expect ebook prices to be ‘low’ the publisher stands to make just as much or more revenue than ever… This is how I see it with the Wholesale model.. The publisher sells a HC book retailing at $30 for a wholesale price of $15 and does the same for ebook. At this point from the publisher’s point of view they are making just as much revenue for the ebook as the HC. The retailer then sells the HC at cost $15 and prices the ebook at $9.99. The ebook sells more than the HC due to low pricing but this results in more overall copies of the book (HC + ebook) than they would have sold HC alone. So any arguments saying that publishers are losing money overall seems pretty weak. Are they worried that over the life of the book/ebook there will be less revenue? Let’s say that because the book has been out a year a PB version is released and they sell less of that version, the publishers actually got some of those sales earlier via the ebook sales AT A HIGHER wholesale price. A win in revenue overall.

        1. As I suggested above, the problem for the publishers was that Amazon was making it impossible for anybody to make money on best selling print books. That drove Borders and most local bookshops out of business and was rapidly creating a situation where the Amazon juggernaut could dictate terms to the publishers, and thus to the authors and the rest of the industry.

          1. Strange then how in the past few months you can do a simple web search for “Hardcover book sales rise” and get a whole slew of articles that state that HC book sales have increased in the past few years. This despite Amazon’s continued sale of ebooks at whatever pricing. Here are 2:
            http://www.thebindingedge.com/stories/052914/book-binders-find-life-digital-age.shtml#.U6EFlfldU90

            http://www.magellanmediapartners.com/index.php/mmcp/article/a_bit_of_windfall

            As a side there were a few articles arguing for self publishing based on royalty differences between physical and ebooks the publishers were paying out to authors. Here are 2:

            http://www.slate.com/articles/technology/technology/2014/05/amazon_hachette_dispute_how_the_big_five_publishers_could_have_avoided_the.html

            http://www.hughhowey.com/big-publishing-is-the-problem/

      2. Thanks for your perspective.
        Reminds me though of a time (’70s I think) where Toyota or some other Japanese got into some trade hot water doing exactly this. Selling their cars for zero or less profit in order to grab market share. In that instance the Federal Gov was all over them to stop the dumping practice. This time the Feds seem to be running protection for Amazon’s insatiable appetite for marketshare at any cost.

  5. Steve Jobs did not tell publishers to raise prices. He simply pointed out that if publishers sold e-books to Amazon on the agency basis, the publishers would retain legal title to the e-books and so could determine the selling prices of same. (By selling e-books to Amazon on the wholesaler basis, Amazon obtained legal title to the e-books and is legally entitled to do whatever Amazon wants with them, which includes selling them for less than the publishers sold them to Amazon for.

    For publishers, the issue is bigger than e-books alone, because the publishers are trying to manage two closely related markets: the market for physical books AND the (incremental?) market for e-books. What Amazon has done is taken the publishers’ new and best-selling books — these are the only ones the publishers really make any money on — and is selling them at prices below what Amazon paid the publishers for them and, needless to say, at prices well below what the publishers intended or would like to see. Essentially, the publishers are watching Amazon cannibalize their own physical books business. And the DOJ is letting it happen. At the very least, the publishers should simply put Amazon on the agency basis for e-books, and then the publishers can determine the prices of their e-books in the same fashion the publishers determine the prices of their physical books.

  6. “I doubt anyone knows what a book ‘costs’ anymore.”

    How about 2 years of your life? (If you’re an author – remember them?).

    If there’s no money in writing, guess what? No-one will do it and in years to come we’ll be hunting in digital bookstores for ‘antiques’.

  7. Publishers have used a tiered pricing model for years. I read and collect SF books. Established best selling authors’ books come out in hardback for a premium price. A year later the paper back version comes out at a lower price. If you want the book early you buy the hardback, if you don’t mind paperback and can wait, you buy the paperback. I don’t like hardbacks and I am willing to wait. E-books throw a brick in that equation. The publisher wants to charge for an e-book as if it were a hardback minus the slight cost savings in the electronic format, but I haven’t seen any publisher offering to reduce the price of the ebook after a year to reflect a paperback price. The normal ebook price of $9.99 is a tremendous savings over a hardback but is a poor value compared to a paperbook. Publishers haven’t figured out charge people with money or an intense desire to have the latest book a premium price, while still being are to sell inexpensive versions to people with limited funds or the ability to postpone gratification.

  8. look I buy a pepsi for a $1 and sell it to you for 50c THAT”S BELOW COST
    Amazon bought books from publishers for $14 and sold then for $9.99 thats a LOSS of $4.01
    DO the math idiots

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