Advantage Amazon in the E-book Industry

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Last week's antitrust lawsuit filed by the US Department of Justice against Apple (NASDAQ: AAPL) and five of the world's largest book publishers threatens to once again have the e-book publishing industry be dominated by one company, (NASDAQ: AMZN). The publishers named in the suit are: Hachette – owned by France's Lagardere, Holtzbrinck – owner of Macmillan, Harper Collins – owned by News Corp. ADR (NASDAQ: NWS), Simon & Shuster – a subsidiary of CBS (NYSE: CBS) and Penguin – part of Pearson PLC ADR (NYSE: PSO). 

Only Apple, Penguin and Macmillan have decided to fight it out in court with the government. Apple and the two publishing companies disagree with the Department of Justice stating, “The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon's monopolistic grip on the publishing industry”.  

The publishing industry and Apple do have a point. Amazon quickly gained a 90 percent market share of the e-book market after launching its Kindle e-readers in 2007 and discounting new titles and bestsellers to a $9.99 price. E-books had been sold under a model in which publishers charged retailers including Amazon a wholesale price, but retailers could decide to raise or lower the price as they chose. On the plus side, the Amazon model did increase the retail market for e-books to 10 percent of the general interest market. 

Today, Amazon accounts for 20-25 percent of most publishers' sales, so it is no surprise they have become more and more fearful of Amazon. Scaring publishers even more, Amazon increased its power in the publishing industry another way. It began to build its own e-book publishing business which threatened traditional publishers very core as the intermediary between writers and readers. 

So when Apple launched the iPad, the publishers jumped for joy that there would be a viable competitor to Amazon. The five companies in question quickly signed an agreement with Apple to set the retail price of their e-books at usually between $12.99 and $14.99, while giving Apple a 30 percent cut. This model was fairly successful with over 180 million downloads from the iBookstore in its first 18 months of existence. 

But now the Department of Justice suit threatens to once again make Amazon the preeminent player in the industry. Its market share of the e-book market had fallen to 60 percent from 90 percent. But now it will once again be the one dominant buyer, buying from several sellers, a so-called monopsony. But the US government doesn't seem to care as long as Amazon drives the price of e-books down. 

As can be imagined, Amazon is ecstatic and said of the action, “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books.” Translation: this lawsuit is a huge win for Amazon and puts them back into the driver's seat for the e-book industry. 

The e-book publishing industry is relatively healthy and profitable when compared to the book publishing industry overall. Estimates are that e-book sales soared 150 percent in 2010 to $913 million which is spectacular in an industry where overall sales through 2015 are projected to increase at only a compound annual rate of 0.3 percent. 

Based on the industry's growth, the DOJ action is an obvious boost for Amazon, negative for the publishers, but will have little effect on Apple.

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