It’s an Apple and Amazon World…
The DOJ suit against Apple wrapped up its first week of testimony yesterday. It has been fascinating to see the internal emails and discussions. The verdict of the trial will have little impact for the effects have already been seen.
What becomes clear from reading the transcripts is that Amazon and Apple are setting the rules.
Amazon created the modern eBook market: Kindle was introduced in 2007. Amazon immediately grabbed over 90% of the market. Kindle proprietary files created a “walled garden” and shut others out. Once they got publishers on board, they started to demand more. Amazon played hardball with publishers and punished them by pulling titles for sale and charging below-cost for best-sellers.
Throughout the trial, concern about Amazon flexing its muscles is a common theme:
- “When you go on the Kindle website it could be the Random House home page. Amazon is showing us what they do to people who do not do what they want.” ~ Penguin’s David Shanks to B&N’s Steve Riggio.
- “I believe that within a few weeks Amazon will try and punish us in some way.” ~ S&S’s Carolyn Reidy to CBS head Leslie Moonves.
- “There is no question in my mind that we will not cave in to the bullying.” ~ Shanks to his boss John Makinson.
As digital grew from 1% to over 20%, Amazon solidified its grip on eBook selling. While there were pretenders to the throne, each one fell away quickly.
Sony, B&N Nook and Google all fail to seriously challenge Amazon: Sony was first in, but the store never got traction and is stuck at <1% of the market. Barnes & Noble launched the Nook and quickly grabbed 20% of the market. But they never capitalized on this share and are riddled with internal issues. The biggest news re: B&N is the recurring courtship from Microsoft.
When Google entered eBooks, many in publishing were thrilled that finally a company with sufficient resources would compete with Amazon. But after a failed experiment with Indie booksellers and other stumbles, Google remains small in eBooks. Apple’s Keith Moerer emailed Eddy Cue (Apple chief negotiator), “no one views Google as a particularly serious eBook commerce partner.” Plus yesterday’s testimony of Google director Tom Turvey illustrated how much Google was out of the loop.
When Apple came along as a potential competitor to Amazon, publishers were excited and hoped that there finally would be competition. Apple had a visionary celebrity leader in Steve Jobs; was a pioneer in selling digital goods with iTunes; had millions of users and was introducing one of the most celebrated consumer devices of all time with the iPad.
Apple as the “White Knight” to Amazon’s power: Apple starts to contact publishers and states that they are going to sell eBooks and would like to have them on-board. Publishers are thrilled to have Apple open up a bookstore. But to work with Apple, it must be done the Apple way.
Apple was not interested in negotiating with publishers:
- “Maybe I am missing something, but I don’t see any other alternatives. Do you?” ~ Steve Jobs to News Corp’s James Murdoch.
- “Apple is the only other company currently capable of making a serious impact.” ~ Jobs to Murdoch.
- “Here’s the pricing I think will push them to the very edge.” ~ Eddy Cue to Steve Jobs.
- “We can not agree to your proposed changes. It needs to be if there is a lower price out there then you will match it.” ~ Apple’s Kevin Saul to Wiley’s Deidre Silver.
Apple sent out their required terms of sale and they didn’t budge. They required an Agency plan. They got it. They refused to move off of 30% commission. They got it. They demanded a MFN clause. They got it. Apple knew they were negotiating from a position of strength. They knew that publishers were desperate for competition to Amazon.
Apple’s attitude towards publishing can be summed up:
- “I actually think he is an idiot.” ~ Eddy Cue to Steve Jobs in reference to Harper’s Brian Murray.
- “I prevented an app from Random House from going live in the App store.” ~ Cue on how Apple finally convinced RH to join (although a year later).
- “David, do you have a phone number for Eddy Cue (or is it Que?)” ~ Reidy to Hachette’s David Young.
The trial has a few weeks to go but the impact has already been felt and there are a number of winners:
Amazon is a winner. They went from losing money on eBook bestsellers to making money on each sale. They lost market-share but are now making more money. Amazon has control over pricing and continues to rule the market. Amazon innovates with subscription plans, eBook lending and publishing original content.
Apple is a winner. Even if they lose the lawsuit, the fine will not even be a blip on their cash reserves. Apple will be able to continue their 30% commission and TOS. The MFN will go away but they don’t need the price protection. Plus all this publicity informs the public that Apple actually does sell eBooks!
Random House is a winner. They were not part of the lawsuit and didn’t have the disruptions of defending the DOJ suit. During the time, their parent company Bertelsmann purchased Penguin. Now Random House will have almost 30% of the trade market and over 50% of bestsellers. The new Random Penguin is larger than the other four next biggest. Plus the five publishers in the suit settled for over $150-million.
I look forward to the next few weeks of the trial to see what else develops.