Scheme to set artificially high ebook prices orchestrated by Steve JobsThe US government’s price-fixing lawsuit against Ap...
CEO of HarperCollins. It detailed the publisher’s opening bid in the negotiation, withfive days remaining until the iPad’s...
for new ebooks at $12.99—three dollars higher than the typical rate at that timeon Amazon—and take a 30% cut of each sale....
Also, we are worried about setting prices to high—lots of ebooks are $9.99. A newrelease window with a lower commission (s...
James,A few thoughts to consider (I’d appreciate it if we can keep this between you and me):1. The current business model ...
ever sold during the first few weeks they are on sale. If you stick with just Amazon, Sony,etc., you will likely be sittin...
next few months or weeks, whether or not some of these loose ends can be tidied up?”Murdoch wrote. The iPad announcement w...
company at our core, NWS [News Corp.] should be more engaged with Apple, and Ithink Apple could be more engaged with NWS, ...
1. Throw in with Apple and see if we can all make a go of this to create a real mainstreamebooks market at $12.99 and $14....
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Scheme to set artificially high ebook prices orchestrated by steve jobs

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The US government’s price-fixing lawsuit against Apple goes to trial next month in New York. Ahead of its court date, the US released emails that purport to show Apple was the “ringleader” in a scheme to set artificially high ebook prices with some of the largest American publishers, which have already settled the case.

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Scheme to set artificially high ebook prices orchestrated by steve jobs

  1. 1. Scheme to set artificially high ebook prices orchestrated by Steve JobsThe US government’s price-fixing lawsuit against Apple goes to trial next month in NewYork. Ahead of its court date, the US released emails that purport to show Apple was the“ringleader” in a scheme to set artificially high ebook prices with some of thelargest American publishers, which have already settled the case.The emails have mostly been viewed in the context of the lawsuit, but they also providean extraordinary view of high-stakes negotiation between the leaders of two powerfulfirms, Apple and News Corp. They start far apart, but over the course of five days,Apple’s then-CEO Steve Jobs successfully pulls the son of News Corp. CEO RupertMurdoch over to his side.Jobs was a famously hard-nosed negotiator who won these kinds of battles all the time.Before book publishers, there was the movie industry. And before that, music recordlabels. But most of those negotiations were hidden from view. What follows are theemails released last week along with some context; spelling and grammar have beenpreserved from the originals.* * *News Corp.’s opening moveIt was a Friday morning, January 22, 2010. Apple was preparing to release its newestproduct, a long-rumored tablet computer, the following week. Part of the iPad’s appealwas supposed to be the vast array of media that could be consumed on it, but one of thelargest American publishers, HarperCollins, was holding out from signing a deal tosell its ebooks in Apple’s iTunes store.Those were the stakes as Eddy Cue, Apple’s head of iTunes and the App Store, visitedexecutives of HarperCollins and its parent company, News Corp. The substance of thatmeeting was conveyed in an email sent to Cue later that day by Brian Murray, the
  2. 2. CEO of HarperCollins. It detailed the publisher’s opening bid in the negotiation, withfive days remaining until the iPad’s unveiling.Eddy,Thanks for coming in again this morning. We’ve talked over the proposal and I want tomake sure that you have a summary of the deal that HarperCollins would be willing todo in your timeframe.1. Pricing: We need flexibility to price on a title by title basis outside the prescribed tiersin the contract. We will use our best efforts to meet the tiers we discussed.2. MFN ["most favored nation" status]: In the event that HarperCollins and Appledisagree on a consumer price for a title, HarperCollins needs the ability to make thattitle available through other agents who support the higher price.3. Commissions: We need a lower commission on new releases for the economics towork for us and our authors. We believe a 30% commission will lead to more authorsasking for ebooks to be delayed a result that will not work for Apple or HarperCollins.4. The new release window: We need to have flexibility on the agency window. Webelieve this window should be 6 months rather than 12 months in the event that one ormore large retailers do not move to an agency model.Leslie will be sending Kevin a contract that reflects these points in the event you wish tomove forward on these terms.ThanksBrianThose terms were never going to fly with Apple, which had successfully signed dealswith HarperCollins’s rivals, like Penguin (a division of Pearson) and Simon &Schuster (part of CBS). Those deals would allow Apple and the publishers to set prices
  3. 3. for new ebooks at $12.99—three dollars higher than the typical rate at that timeon Amazon—and take a 30% cut of each sale.But HarperCollins wanted the freedom to set its own prices and worried that $12.99 perebook would hurt its sales on the new iPad as well as the Kindle. It also didn’t want togive up 30%. To back up its position, James Murdoch, a high-ranking News Corp.executive, forwarded Murray’s email to Apple’s then-CEOSteve Jobs, and included thefollowing note. It was still Friday.Steve,Thanks for your call earlier today, and for the time last week.I spoke to Brian Murray and Jon Miller [then the head of digital media at News Corp.]—and Brian is sending a note to Eddy today. I thin I have a handle on this now. In short—we we would like to be able to get something done with Apple—but there are legitimateconcerns.The economics are simple enough. [Amazon] Kindle pays us a wholesale price of $13and sells it for 9.99. An author gets $4.20 on the sale of a hardcover and $3.30 on thesale of the e-book on the Kindle.[A portion of this email was redacted by the court.]Basically—the entire hypothetical benefit of a book without raw materials anddistribution cost accrues to Apple, not to the publisher or to the creator of the work.The other big issue is one of holdbacks. If we can’t agree on the fair price for a book,your team’s proposal restricts us from making that book available elsewhere, even at ahigher price. This is just a bridge too far for us.
  4. 4. Also, we are worried about setting prices to high—lots of ebooks are $9.99. A newrelease window with a lower commission (say 10[%]) for the first six months wouldenable us to proce much more kenly for Apple customers. We’d like to da that.More on this below in Brian’s note to Eddy. We outline a deal we can do.Feel free to call or write anytime over the weekend to discuss if you like.I am in the UK (so eight hours ahead of CA). My home number is [redacted]. I check theemail regularly.Steve, make no mistake that across the board (TV, Studios, Books, and Newspapers) wewould much rather be working with apple than not. But we, and our partners whoproduce, write, edit, and otherwise make all this with us, have views on fair pricing, andcare a lot about our future flexibility. I hope we can figure out a way, if not now and intime for this launch of yours, then maybe in the future.Best,JRMJobs digs inJobs wasn’t willing to compromise. He sent this reply to Murdoch the same day, arguingthat Amazon’s pricing wasn’t sustainable and would train people to think that ebookswere cheap. Jobs also reminded Murdoch of Apple’s vast reach—”over 120 millioncustomers with credit cards on file.” You need us more than we need you, he seemed tobe saying.
  5. 5. James,A few thoughts to consider (I’d appreciate it if we can keep this between you and me):1. The current business model of companies like Amazon distributing ebooks below costor without making a reasonable profit isn’t sustainable for long. As ebooks become alarger business, distributors will need to make at least a small profit, and you will wantthis too so that they invest in the future of the business with infrastructure, marketing,etc.2. All the major publishers tell us that Amazon’s $9.99 price for new releases is erodingthe value perception of their products in customer’s minds, and they do not want thispractice to continue for new releases.3. Apple is proposing to give the cost benefits of a book without raw materials,distribution, remaindering, cost of capital, bad debt, etc., to the customer, not Apple.This is why a new release would be priced at $12.99, say, instead of $16.99 or evenhigher. Apple doesn’t want to make more than the slim profit margin it makesdistributing music, movies, etc.4. $9 per new release should represent a gross margin neutral business model for thepublishers. We are not asking them to make any less money. As for the artists, givingthem the same amount of royalty as they make today, leaving the publisher with thesame profits, is as easy as sending them all a letter telling them that you are paying thema higher percentage for ebooks. They won’t be sad.5. Analysts estimate that Amazon has sold more than one million Kindles in 18+ months(Amazon has never said). We will sell more of our new devices than all of the Kindles
  6. 6. ever sold during the first few weeks they are on sale. If you stick with just Amazon, Sony,etc., you will likely be sitting on the sidelines of the mainstream ebook revolution.6. Customers will demand an end-to-end solution, meaning an online bookstore thatcarries the books, handles the transactions with their credit cards, and delivers thebooks seamlessly to their device. So far, there are only two companies who havedemonstrated online stores with significant transaction volume—Apple and Amazon.Apple’s iTunes Store and App Store have over 120 million customers with credit cardson file and have downloaded over 12 billion products. This is the type of online assetsthat will be required to scale the ebook business into something that matters to thepublishers.So, yes, getting around $9 per new release is less than the $12.50 or so that Amazon iscurrently paying. But the current situation is not sustainable and not a strongfoundation upon which to build an ebook business.[A portion of this email was redacted by the court.]Apple is the only other company currently capable of making a serious impact, and wehave 4 of the 6 big publishers signed up already. Once we open things up for the secondtier of publishers, we will have plenty of books to offer. We’d love to have HC amongthem.Thanks for listening.SteveMurdoch starts to bendMurdoch’s reply came the following afternoon, Saturday, January 23. Jobs had madeclear that Apple wouldn’t budge. Murdoch was about to indicate that HarperCollinswould. He proposed two possible compromises, then noted that News Corp. and Applewere negotiating on a number of fronts. “Is it worth considering in the round, over the
  7. 7. next few months or weeks, whether or not some of these loose ends can be tidied up?”Murdoch wrote. The iPad announcement was four days away.Steve,I think the crux of this is our flexibility to offer product elsewhere at price-points youdon’t like.If we could offer to you that a certain percentage of releases (>50%) would be availablewithin your pricing structure (< or = 14.99), does that give you enough comfort?I think we are worried more about the absolute holdback of product elsewhere, and ourceding of pricing to Apple, than we are about the actual haggle over what the price willbe.I haven’t shared this with HC directly—so this is only hypothetical. But if you werewilling to accept that a supplier can exploit other avenues (at prices not disadvantageousto you), with a guarantee of substantial volume through Apple—maybe I could workwith HC to get to some common ground.Please let me know.A different question: we have four areas of discussion (related to our product) betweenour teams right now: Books, US Video, Int’l Video, and newspapers. All at differentstages of maturity, these discussions are all centered, for us, around the desire to makeour product widely available, and to make yours and our products more attractive forour customers. It seems though that we in each one we largely encounter a “take it orleave it” set of terms, and predictably we’ve so far failed to really strike the kind ofpartnerships that could move things forward.Is it worth considering in the round, over the next few months or weeks, whether or notsome of these loose ends can be tidied up? It’s clear that Apple is already becoming anattractive platform for so many of our customers—all over the world. As a creative
  8. 8. company at our core, NWS [News Corp.] should be more engaged with Apple, and Ithink Apple could be more engaged with NWS, globally, than either of us are today.Best,JRMJobs goes in for the killWith Murdoch indicating that HarperCollins was willing to compromise, Jobs pressedharder. “As I see it, HC has the following choices,” he wrote in a reply to Murdoch thefollowing morning, Sunday, January 24. Jobs outlined three stark choices. Accept ourterms, he was saying, or good luck with Amazon. “Maybe I’m missing something, but Idon’t see any other alternatives,” Jobs wrote, almost daring Murdoch to spurn Apple.“Do you?”James,Our proposal does set the upper limit for ebook retail pricing based on the hardcoverprice of each book. The reason we are doing this is that, with our experience selling a lotof content online, we simply don’t think the ebook market can be successful with pricinghigher than $12.99 or $14.99. Heck, Amazon is selling these books at $9.99, and whoknows, maybe they are right and we will fail even at $12.99. But we’re willing to try atthe prices we’ve proposed. We are not willing to try at higher prices because we arepretty sure we’ll all fail.As I see it, HC has the following choices:
  9. 9. 1. Throw in with Apple and see if we can all make a go of this to create a real mainstreamebooks market at $12.99 and $14.99.2. Keep going with Amazon at $9.99. You will make a bit more money in the short term,but in the medium term Amazon will tell you they will be paying you 70% of $9.99. Theyhave shareholders too.3. Hold back your books from Amazon. Without a way for customers to buy your ebooks,they will steal them. This will be the start of piracy and once started there will be nostopping it. Trust me, I’ve seen this happen with my own eyes.Maybe I’m missing something, but I don’t see any other alternatives. Do you?Regards,SteveOn Tuesday, a day before the iPad announcement, HarperCollins agreed to Apple’sterms. The publisher’s ebooks were included in the iBookstore unveiled on January 27along with new tablet, more than 100 million of which have now been sold.

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