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E-book market: recent developments and competitive concerns
 

E-book market: recent developments and competitive concerns

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Master project, Competition and Market Regulation 2011

Master project, Competition and Market Regulation 2011

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    E-book market: recent developments and competitive concerns E-book market: recent developments and competitive concerns Document Transcript

    • MASTER PROJECTE-book marketRecent developments and competitive concerns June, 2011 Rocío Prieto Julieta Schiro Master in Competition and Market Regulation 2010/2011
    • E-BOOKS MARKET Recent developments and competitive concerns by Rocío Prieto and Julieta SchiroAbstractThe e-book market is starting to take off in the EU and several competition concerns arearising. Due to the novelty of this market and the lack of information and studies on thetopic, it is worth analyzing the main patterns, players, and strategies that have beenobserved so far, both in the US, where the market is more developed, and in the EU, wherethe market is still in an initial phase. In both cases, a main feature is the pricingarrangement in place between publishers and retailers (i.e. wholesale model vs. agencymodel). Each of these models implies different competition concerns (predation vs.collusion, respectively) but a common aspect is that, to be able to deal with these behaviorsfrom a European standpoint, a higher degree of harmonization in countries’ policies isnecessary.
    • Contents1. Introduction .................................................................................................................... 12. Background..................................................................................................................... 1 2.1. Brief characterization of e-books ........................................................................... 1 2.2. Development over time .......................................................................................... 2 2.3. Devices: e-readers................................................................................................... 43. Main players in the e-book market ................................................................................. 7 3.1. Publishers (wholesale market)................................................................................ 7 3.2. Retailers .................................................................................................................. 74. Pricing models: Wholesale versus Agency model ......................................................... 8 4.1. The wholesale model .............................................................................................. 9 4.2. The agency model................................................................................................... 95. Competitive Concerns .................................................................................................. 11 5.1. The wholesale model ............................................................................................ 11 5.2. The agency model................................................................................................. 12 5.3. International experience ....................................................................................... 14 5.3.1. US ................................................................................................................. 14 5.3.2. EU................................................................................................................. 166. Concluding remarks...................................................................................................... 177. References .................................................................................................................... 198. Appendix ...................................................................................................................... 23 A.1: Main e-readers .......................................................................................................... 23 A.2: Main publishers ........................................................................................................ 24 A.3: Main retailers ............................................................................................................ 25
    • 1. IntroductionThis project is aimed at providing a descriptive analysis of the newly developed e-bookmarket and, in particular, at describing the main sources of competitive concerns that mayarise within it. Indeed, one of the motivations of this study comes from the fact thatinvestigations by the European Commission (EC, hereafter) and several NationalCompetition Authorities are being carried out concerning price fixing on the part of e-books’ publishers after the adoption/undertaking of the agency pricing model.The report is organized as follows: in Section 2, a brief description of the e-book, of itsdevelopment over time, and of the supporting devices is provided. Section 3 analyses themain players in the industry -publishers and retailers. Sections 4 and 5 deal with the pricingmodels more generally applied in the e-book market -wholesale model and agency model-and the competitive concerns arising from them. Finally, concluding remarks are providedin Section 6.2. Background 2.1. Brief characterization of e-booksFollowing Gardiner, Eileen and Ronald G. Musto, an e-book is a book-length publication indigital form, consisting of text, images, or both, and produced on, published through, andreadable on computers or other electronic devices1. It must be noticed that some books areborn digital, i.e. there is no equivalent printed version.E-books are often read on specialized hardware devices called e-readers or e-book devices.Additionally, personal computers and some mobile phones can also be used to read e-books.1 Gardiner, Eileen and Ronald G. Musto. “The Electronic Book.” In Suarez, Michael Felix, and H.R. Woudhuysen. The Oxford Companion to the Book. Oxford: Oxford University Press, 2010, p.164. 1
    • There are over 25 different e-books formats, differing in many features, such as the contentthey support (only text, images, tables, colors, sound, interactivity, etc.) and the devices inwhich they can be read (supporting hardware). 2.2. Development over timeThe origin of e-books can be traced to the beginning of the 70´s, when Michael S. Hart, astudent in the University of Illinois, started the Project Gutenberg with the objective ofmaking works of literature available in electronic format for free. Project Gutenberg grewand became an organization that, nowadays, offers over 36.0002 free e-books that can beread in many devices.In accordance to the limited use of the Internet, and even computers, early e-books weregenerally written for specialty areas and a limited audience (i.e. technical manuals forhardware, manufacturing techniques, etc).The general availability of the Internet in the early 90´s made transferring electronic filesmuch easier, including e-books. As a result, many e-book formats emerged andproliferated, some supported by major software companies such as Adobe with its PDFformat, and others supported by independent and open-source programmers. These formatsgave rise to the development of multiple devices, most of them specializing in only oneformat, and thereby fragmenting the e-book market.How this market has evolved around the world is, by no means, equivalent. In the UnitedStates, the success of e-books started mainly in public libraries, which began providingthem for free in 1998 through their websites and associated services, though they were notdownloadable. Later on, in 2003, libraries began offering free downloadable popular fictionand non-fiction e-books to the public. This trend has continuously grown over time, with66% of public libraries offering this service nowadays in that country.2 http://www.gutenberg.org/wiki/Main_Page. 2
    • The use of e-books has extended widely ever since, ranking as the top selling format amongall categories of trade publishing in February 2011. During that month, e-book sales totaled$90.3 million, expanding 202 percent compared to the same period last year.The story has been different in Europe, where even today “selling e-books can be achallenge”, as was stated by Cristina Mussinelli, a digital publishing consultant at theItalian Publishers Association. Europeans consumers apparently have been slower thantheir American counterparts to adopt e-readers. In 2010, Europe experienced a 20% growthin e-commerce book sales, but in some continental countries the e-book share of the marketis still only 1%. The recently growing adoption of the iPad is expected to foster e-bookspenetration. In any case, until recently, e-books seemed to be mostly ground of earlyadopters.A fundamental problem faced when assessing the state of an European-level e-booksmarket is the fact that there is no central entity collecting information in an organized way,and how the different countries collect data may not be comparable.In the rest of the world, with the noticeable exception of Japan, the scope and penetration ofe-books is really limited.The most fundamental milestones that took place in the e-books industry are shown in thefollowing table.Table 11971 • Michael S. Hart launches Project Gutenberg • Digital Book, the first software to read digital books, is patented. First digital book is published1993 • Digital Book, Inc. offers the first 50 digital books in floppy disk with Digital Book Format (DBF) • Bibliobytes, a project of free digital books online in Internet1995 • Amazon starts to sell physical books on the Internet • First e-book readers: Rocket ebook and SoftBook1998 • Cybook / Cybook Gen1 (by French Cytale until 2003, then by Bookeen) • Websites selling e-books in English, like eReader.com and eReads.com • American publishing Baen Books opens up Baen Free Library - digital library of science1999 fiction and fantasy • Webscriptions (a web services company) starts selling unencrypted (without DRM) e-books2000 • Microsoft Reader with ClearType technology (Microsoft program for the reading of e-books) 3
    • 2001 • Todoebook.com, the first website selling e-books in Spanish2002 • Random House and HarperCollins start to sell digital versions of their titles in English2004 • Sony Librie with e-ink • Sony Reader with e-ink2006 • BooksOnBoard opens and sells e-books and audiobooks in six different formats • Amazon launches Kindle in US2007 • Bookeen launched Cybook Gen3 in Europe • Adobe and Sony agreed to share their technologies (Reader and DRM)2008 • Sony sells the Sony Reader PRS-505 in UK and France • BooksOnBoard is first to sell e-books for iPhones • Bookeen releases the Cybook Opus in the US and in Europe • Sony releases the Reader Pocket Edition and Reader Touch Edition2009 • Amazon releases the Kindle 2 and Kindle DX in the US • Barnes & Noble releases the Nook in the US • Amazon releases the Kindle DX International Edition worldwide • Bookeen reveals the Cybook Orizon at CES • TurboSquid Magazine announces first magazine publication using Apples iTunes LP format • Apple releases the iPad with an e-book application called iBooks (from April to October, it sells 7 million units) • Kobo Inc. releases its Kobo e-reader to be sold at Indigo/Chapters in Canada and Borders in the US2010 • Amazon.com e-book sales outnumbered sales of hardcover books during the 2nd quarter of 2010 • Amazon releases the third generation kindle, available in 3G+Wi-Fi and Wi-Fi versions • Kobo Inc. releases an updated Kobo e-reader which now includes Wi-Fi • Barnes & Noble releases the new NOOKcolor • Sony releases its second generation Daily Edition PRS-950 • PocketBook expands its successful line of e-readers in the ever-growing market • Google launches Google e-books • Barnes & Noble releases the new Nook - The Simple Touch Reader2011 • Amazon.com announces in May that its e-book sales now exceed all of its printed book sale 2.3. Devices: e-readersAn e-reader is a portable electronic device that is designed primarily for the purpose ofreading digital books and periodicals. E-readers differ among them according to severalfeatures. Apart from the formats that the device may support, e-readers vary depending ondifferent attributes such as those related to the screen (type, size, pixels, touch screen, andshades), weight, operating system, and other characteristics associated to the functionalityof the device (connectivity, text-to-speech, dictionary integration and/or organization,internal storage, card reader slot, replaceable battery, web browser, library compatibility,USB peripherals and user controls). 4
    • Nevertheless, there is an essential feature that buyers tend to take into consideration whendeciding which device they may acquire and it relates to the number of authors or genresthey will be able to read. In short, the number of titles the e-reader will be able to include.This way, competing e-readers manufacturers (such as Sony, Barnes & Noble, Amazon,etc) try to attract buyers emphasizing the large number of titles in their e-book collection.For instance, Amazon’s Kindle Book store currently boasts over 865,000 e-books availablefor download, while Sony e-book reader product pages boast over 2 million titles in itsreader Store.Regarding the timeline of these devices, it is important to point out the fact that theappearance of the electronic ink (e-ink) was a milestone. Before the e-ink, one could findthe following devices: Rocket eBook (NuvoMedia, 1996), SoftBook reader (SoftBookPress, 1998), Millennium reader (Librius, 1998), Everybook (1999), LunchBook (1999),Franklin Ebookman (2000) and Cytale (2000). The e-ink, which enables reading in brightsunlight and a lower battery consumption, brought about a number of devices incorporatingnew features such as USB peripherals, card reader slots, touch screens or WiFiconnectivity. Among this group of e-readers one can find iLiad (Philips, 2006), Reader(Sony, 2006), HanLin (JinKe Electronic Company), STAReBOOK (2007), Cybook Gen3(Booken, 2009), FLEPia (Fujitsu, 2009) and Kindle3 (Amazon, 2007).In addition to e-readers, there are several devices that are able to display text on a screen. Inthis sense, apart from tablet computers, some portable multimedia players and smartphonesinclude a text viewer, which enables to turn them into suitable e-book viewers (Cowon D2,Samsung Omnia, etc.). Furthermore, there are certain operating systems that make cellphones useable for reading e-books (e.g. PalmOS based devices and phones). Regardingtablet computers, Apple’s iPad (as well as iPhone and iPod Touch) is increasinglyacquiring an e-reader status through a large variety of e-reader applications. However,compared to tablet computers, e-readers are characterized by a better readability of theirscreens, especially in bright sunlight, and a longer battery life, which is achieved by using3 More detailed information about e-readers can be found in the Appendix (A.1). 5
    • electronic paper technology to display content. Therefore, any device that is able to displaytext on a screen can act as an e-book reader, but without the advantages of the e-papertechnology.An important issue in this report regards competition between Amazon and Apple. Amazonis an e-book retailer and an e-reader manufacturer (Kindle) and it has a strong presence inthe market for digital books. On the other hand, one of the Apple’s products is becoming atough competitor for Kindle though not being an e-reader itself: iPad. Due to this fact, acomparison between the two devices is worthy. The main difference that must be noticed isthat iPad is a multi-purpose device while Kindle is a dedicated e-reader, aimed atdisplaying e-books for their reading. Thus, prices of both devices differ, being Kindlecheaper than iPad. As regards the latter, it offers a wide range of applications: movies(including HD), TV, pictures, web browsing, games, among others. Additionally, its screen,which is touchable, is larger than Kindle’s and some of their functions include Bluetooth,WiFi and 3G. With reference to Kindle, it is focused on reading, it is more compact, thinnerand lighter than iPad, it has a life battery of 2 weeks with wireless off and 1 week withwireless on (as opposed to iPad, that offers a battery life of 10 hours), it is readable in directsunlight, and it also includes WiFi and 3G.Regarding e-books main sources for these devices, it should be said that iPad’siBooks Store, the website where e-books for iPad can be purchased, is partnered withPenguin, HarperCollins, Simon & Schuster, MacMillan, and Hachette, some of the mostimportant e-book publishers. With respect to Kindle Store, it has cheaper prices on e-booksfrom non-agency model publishers, whereas the same price as in iPad’s iBooks Store willbe found when books belong to publishers on the agency model. In other words, Kindlehas lower prices (except for agency model books, for which it has the same price as iPad).In addition, Kindle Store has almost 900,000 titles whilst iBooks has around 200,000. 6
    • 3. Main players in the e-book marketIn the market for e-books there are two main players on which this report will focus:publishers (upstream market) and retailers (downstream market). In the following lines adescription of the main activities that these agents carry out will be made. 3.1. Publishers (wholesale market)Publishers’ main activity used to be the distribution of printed works (books, newspapers,magazines, etc.) as a way of disseminating culture/literature or information. Nevertheless,the Internet and the advent of digital information systems have expanded the scope of theirbusiness. Indeed, apart from the distribution of printed stuff, publishers have included intheir supply electronic resources such as e-books and electronic versions of periodicals aswell as micropublishing4, among others.Publishing involves different stages that are previous to the mere distribution of the work.Firstly, there is a development phase which is followed by acquisition, in which books,newspapers, magazines and other kinds of works are purchased by the publisher. At thenext stage, works are copyedited and graphically designed. After this process, workproduction and printing are carried out. Finally, marketing strategies are designed in orderto distribute the final product5. 3.2. RetailersRetailers are those in charge of supplying digital books to final consumers. Among them,we can find commercial booksellers and e-book websites intended to sell content for4 Micropublishing is when an individual or group use efficient publishing and distributiontechniques to publish a work intended for a specific micromarket. Typically, these works are notconsidered by conventional publishers because of their low economy of scale and mass appeal andthe difficulties that would arise in their marketing.5 More detailed information about publishers can be found in the Appendix (A.2). 7
    • particular devices. On the other hand, retailers are also those who publish free content orwho archive copies of out-of-copyright works.Apart from supplying e-books, some retailers established another business: themanufacturing and sale of e-readers devices, which allowed them to offer a set ofcomplement products. Originally, some of the retailers that supplied both e-books and an e-reader sold the former so as to be read only at their own device. By this technologicaltying, Amazon, for instance, used to sell e-books that would only be read at its Kindle e-reader (no other e-reader supported its specific format6). Nevertheless, this has changed insome sense. Indeed, some of these retailers/manufacturers have made available a set ofapplications which allow displaying their e-books in devices that are different from theirown ones and which did not previously support the format in question7. This is the case ofAmazon, which has launched several free applications that enable Apple’s iPod, iPhone andiPad, Android devices, Blackberry and PCs to display the same e-books as Kindle doestherefore allowing Amazon to sell electronic books to a wider range of devices’ users.However, an important point that has to be borne in mind here is that these applicationscover devices that do not directly compete with e-readers, that is, devices that are not e-readers themselves. This strategy has been used by some other e-books and e-readersproviders such as Barnes & Noble and Sony8, who also offer free applications for mobilephones as well as for other intended e-readers (iPad, Android and PCs)9.4. Pricing models: Wholesale versus Agency modelIn the e-book industry, there are two broadly used pricing models: the wholesale modeland the agency model. These differ mainly in who sets the final price (retailer orpublisher), and more broadly the scope that each participant enjoys to decide on strategic6 Amazon is the proprietary of the format .azw, which was supported only by Kindle.7 Amazon launched applications for iPhone and iPod Touch (08/09), Windows PC (2009) and Phone7 (01/11), Mac (2010), Blackberry (02/10), iPad (04/10) and Android (06/10). Barnes & Noblelaunched applications for iPad (05/10), iPhone (08/10), PC, Blackberry and Android (06/10).8 Sony offers e-books just for its Reader and for Android.9 More detailed information about retailers can be found in the Appendix (A.3). 8
    • marketing variables (discounts, bundling, etc.). These differential features haveimplications in the strategic behavior of the agents involved and, consequently, differentcompetition concerns arise.It must also be stressed that the particular pricing model comes up from direct negotiationsbetween the retailer and each publisher. 4.1. The wholesale modelTraditionally, paper books have been priced under the wholesale model, so, when e-booksemerged, they were priced with this mechanism as well. It must be noticed that this modelhad also been applied to other digital contents, such as songs. The wholesale model mainlyconsists in the publisher selling the e-book to the retailer at a Recommended Retail Price(RRP) or list price (of which the author is entitled with a given percentage, say, 25%, as aroyalty) minus a discount. The retailer has complete power to decide over final price for thee-book, as well as over other marketing strategic variables such as bundling, discountpolicies, etc. Along with the higher degree of control over the product’s sales conditions,this model implies inventory risk for the retailer, though when it comes to digital content,inventory risk is not very relevant. 4.2. The agency modelOn the other hand, under the agency model, retailers become agents through whichpublishers sell books directly to consumers. Publishers set prices and retailers simply“pass” books to consumers, receiving a commission on sales, and not being allowed tomake any sort of discount apart from the previously agreed with the publisher (typically5%) and in a given period of time.As it can be seen, the nature of the upstream-downstream relationship (between publisherand retailer) changes completely with the two pricing models. 9
    • The agency arrangement is pretty similar to the one that is in place in many Europeancountries for print books (the so called Fix Book Price Agreements or Fix Book PriceLaws – FBPA or FBPL, respectively). This, basically, is a retail price maintenanceclause, aimed at promoting non-price competition between booksellers in order to foster thesale of little-known, difficult or otherwise culturally interesting books rather than cateringonly to blockbuster readers. This vertical restriction, by protecting retailers’ margins,provides booksellers incentives to embark in pre-sale efforts, to carry larger inventories,etc. Under the EU competition law, RPM clauses are considered as hardcore restrictions,nonetheless, agency agreements are a priori excluded.To clarify how these models work out, an example is given in the following lines.THE WHOLESALE MODEL Publishers sell books to retailers at a RRP less a discount (e.g. $30 PUBLISHERS and 50%) RETAILERS Retailer determines the final selling price to consumersRetailer buys the e-book from the publisher and pays $15 (of which a given percentage, say25%, $3.75 goes to the author as royalties). The retailer may well choose to sell the e-bookfor less than $15 (i.e. at a loss).THE AGENCY MODEL PUBLISHERS Publishers set the price Retailers act as agents. They take a 30% commission and pass the RETAILERS remaining 70% to publishers 10
    • The publisher set the e-book price at $15. Under a 70/30 scheme, the publisher gets $10.50(the author is credited with $2.625) and the retailer gets $4.50, which is less than what theywould earn under the alternative model. However, the retailer would have to sell the e-bookfor the set price (or with a maximum discount of 5%).5. Competitive Concerns 5.1. The wholesale modelAs it was mentioned before, the wholesale model implies a complete control over decisionvariables in the hands of the retailer. The main competitive concern that arises under thismodel is that it gives room to use the price of the e-book as a strategic variable to promotethe sale of the related device. In this way, by pricing e-books below cost, retailers foster theconsumption of their e-readers. The problem with this cross subsidies becomes clear whenone takes into account the existence of retailers who do not manufacture e-readers, andhence, cannot afford to follow this strategy as they cannot recoup the losses made by the e-book sales. Eventually, this would lead to the marginalization and exclusion of smallerretailers, which need not be less efficient. Indeed, this could result in a reduction ofconsumers’ choice since these small retailers are often focused on specific niches, notcommonly covered by large booksellers (though elasticity of demand in this segment maybe lower).Moreover, this strategy can have effects on competitors in the e-reader manufacturingsector, specifically on those who also provide e-books (retailers/manufacturers). In thissense, a sort of technological tying is typically present since those retailers who alsosupply devices only offer e-books that can be displayed on their own e-readers. Sincepotential consumers take into account this technological restriction when makingpurchasing decisions, prices in the aftermarket of e-books will be a fundamental factor inorder to determine the device choice. Therefore, if e-books offered by oneretailer/manufacturer are priced below costs, this would affect the market for competing 11
    • devices, potentially excluding others retailers/manufacturers and limiting consumers’choice.A potential advantage of this model is that, by centralizing pricing decisions, the retailer isable to better internalize the effect that each publisher imposes to its competitors whensetting wholesale prices. This kind of effect becomes more relevant in markets like this one,where indirect network effects are present. In this context, indirect network effects relateto the fact that the more users of specific e-readers, say Kindle, the more publishers will bewilling to deal with that retailer/manufacturer (Amazon). The importance of these effects isrelated to the degree of substitutability between both, two different titles in the same formatand a given title in two different formats. 5.2. The agency modelThe agency model basically consists in a Resale Price Maintenance (RPM) clause bywhich a minimum retail price is set by the publisher and through which the retailerbecomes an agent entailed to receive a certain commission (computed as a percentage ofthe price and typically based on a 30/70 scheme). Consequently, price decisions arecompletely controlled by publishers. Apparently in the e-book market, these kinds ofagreements are accompanied by Most Favoured Customer (MFC) clauses, i.e. whensettling an agreement with a given retailer the publisher commits not to set lower prices forcontracts with other retailers. It must be stressed that the main publishers use commonagents to sell their e-books.This pricing scheme, together with the MFC clause, removes all intra-brand pricecompetition in the downstream market. Additionally, these two clauses solve thecommitment problem of the publishers, which are “monopolists” in the titles they offer.Nevertheless, before concluding that this type of vertical restraint will certainly lead toconsumer harm, possible efficiencies need to be assessed. In general, the most commonlyalleged efficiencies when it comes to restraining intra-brand competition, is to avoid free- 12
    • riding between retailers regarding pre-sales services, to give incentives to retailers to carrylarger inventories, and to solve the double marginalization problem. With reference to thefirst two arguments, they would not be completely relevant in this context because (i) pre-sales services are not significant (in the e-books case, an important pre-sale service couldbe the provision of information about title, author, ISBN, review, genre, etc. but all thesedata come from publishers) and (ii) retailers are not space-constrained, so they can carrylarge inventories (and have the incentives to) without the need for a vertical restraint. Withrespect to the double marginalization problem, it is not really clear that the retailers willhave the incentives to apply high margins. The demand for e-books that aretailer/manufacturer faces comes from two main sources: those consumers owning the e-reader manufactured by himself and those consumers that do not own an e-reader (but asmartphone, PC, tablet, etc.). So if the retailer/manufacturer was to increase the e-bookprice, then he would not only lose the second group of consumers but he would alsoprobably lose potential demand for its e-reader. That is, the retailer/manufacturer does notonly sell e-books but also a complementary product. Therefore, double marginalizationproblem, in principle, shall not be severe in this market.Also, in this setting, the concern that immediately arises is related to the possibility thatpublishers collude on prices given that they are fully aware of rivals’ pricing strategies.As regards this concern, there are additional factors that could enhance the likelihood ofcollusive agreements in this market. Among structural factors, concentration in the marketis one of the elements that facilitate collusion; as it will be shown in the next section, this isthe case in the publishing industry. In addition, publishing sector is characterized by multi-market contacts since there is a wide range of products supplied by publishers (such aseducational books, collections, magazines, etc.), which would help collusion. Moreover,publishers interact constantly in the market and an increasing trend in demand is expected.With reference to other factors, there is almost full transparency and observability of prices(agency model + MFC clause); there are also associations of publishers that meet regularlyand where “executives from publishing houses come together annually for a daylong 13
    • national conference, produced by AAP, to explore industry trends and exchange ideas withcolleagues in an informal setting” in the case of the Association of American Publishers. 5.3. International experienceIn what follows, a brief characterization of the main facts that took place in both US andEU is given. In conducting the analysis, it must be borne in mind that it is hard to make aEuropean-wide analysis because there is still no harmonization of policies related to thebook industry, neither print nor digital. In some countries the aforementioned Fixed BookPrice Agreements or Laws are in place, so that the introduction of the agency model doesnot mean a completely different approach. Nevertheless, these agreements/laws cover bothprinted and electronic books only in some countries (Spain and recently France), while inothers the latter are not explicitly included (Portugal). Therefore the agency model wouldmake a difference in those countries where e-books fall outside the agreements/laws.Another factor that distinguishes the European market is the fact that the VAT charged toprint books differs considerably from the one applicable to e-books, and this duality varieswidely across countries. The general pattern is, however, that the VAT charged on e-booksis greater since they are considered as a form of electronic service, as opposed to the VATfor printed books (considered as cultural items), which in certain countries, such as UK, iszero. This would, in principle, contribute to less disparity between the prices of printedbooks and e-books. 5.3.1. USThough there existed e-books and e-readers (iLiad, 2006; Sony Reader PRS-500, 2006),this market really took off in the U.S. in 2009. The main player in the market was Amazon,which already had developed its Kindle, and set prices under the wholesale model. Mostretail prices were set equal to $9.99, regardless the novelty or genre of the e-book. Aspublishers noticed in many occasions, this strategy implied losses for Amazon in manytitles. A justification of this tactic carried out by Amazon is the fact that being aggressive in 14
    • the e-book market would enhance the demand of Kindles. This can be seen as part of amore comprehensive business strategy, by which Amazon intended to build a strongposition in this growing market. In this sense, it is worth mentioned that during 2009Amazon developed several free applications that allow other devices (not e-readersthemselves) to display its titles, which formerly could only be read on Kindles (see footnote6).It must also be noted that discomfort among publishers was arising because of the effect one-books’ perceived image by consumers, whose valuation and willingness to pay for e-books was being damaged. This is particularly dangerous when a product is beingestablished in the market since it would probably set “precedents” of a low cost/value good.This scenario completely changed when Apple started setting the terms for e-books for itsforthcoming iPad (the closest non-e-reader competitor of Kindle) in early 2010. From thevery beginning, Apple negotiated with the main publishers in U.S. a wholly differentpricing model to supply e-books to iPad users through the iBookstore, the agency model.Macmillan was the first publisher with whom Apple reached an agreement, which led toretaliation of Amazon, who temporally removed the “buy” buttons for Macmillan’s titlesfrom its website. The main publishers agreed with Apple into the agency model (theAgency Five: Macmillan, Simon & Schuster, HarperCollins, Penguin, and Hachette; lateron, in March 2011, Random House also switched to the agency model) and pressureAmazon into undertaking the same arrangement, who finally succumbed in February 2010.It needs to be stressed that this contract model, which implied prices of $12.99 to $14.99for most fiction and non-fiction titles (including best-sellers), yielded lower revenues forpublishers, who received a 70% of the final price. This “sacrifice” was supposedly acceptedby publishers to prevent Amazon from gaining a stronger position and more bargainingpower and to preserve e-book value.This agreement extended to the commercial relationships between the main publishers andretailers, provoking a great similarity in prices for different titles (and, of course, for thesame title in different retailers as a consequence of the aforementioned MFC clause), 15
    • thereby raising competitive concerns. Indeed, from the very beginning, both the attorneygeneral of Texas and of Connecticut were cautious about this prices agreements andinitiated investigations that are still in course. A potential aggravating factor in this sense isthe level of concentration in the market. In fact, five of the six publishers involved heldaround 60% of the overall sales in the market in 2009 according to different sources. 5.3.2. EUIn Europe, the adoption of the agency model took place earlier in the path of the Europeane-book market development. This is probably so because it was simultaneous to theintroduction of iPad and its associated agency model.In early 2011, this model gave rise to competitive concerns among Office of Fair Trading(OFT, hereafter) officers, who started an investigation working closely with the EC. Theconcern was related to the suspicion of e-books price fixing among publishers in UK, giventhat e-books were found to be priced as much as twice their printed versions. This facttriggered a European wide investigation in which the EC is working with the nationalcompetition authorities, though the specific publishers raided are unknown. Theinvolvement of the EC does not necessarily mean that a pan-European cartel is beingsuspected (among publishers present in several countries), but the fact that e-books are soldacross borders.In this sense, the parallelism with the case of U.S. is not straightforward. There are severalelements that differentiate the European e-book market, making the analysis more difficult.As regards intra-brand competition, it must be noticed that, as it was mentioned before,there are countries in which prices of books, or even books and e-books, are allowed to befixed by law (e.g. France and Spain), which means that price fixing, and thus the agencymodel, is legal. Of course, this does not imply that coordinating on prices among publishersis permitted but it is just simpler to reach. On the other hand, in some countries in which 16
    • such laws are not in place, the agency model is also present (e.g. UK). The potential anti-competitive effects of these agreements are aggravated by the existence of MFC clauses.This limited, or null, downstream competition enhances the likelihood of a collusiveagreement among publishers.With respect to upstream competition, a common practice among publishers is theestablishment of platforms through which an individual publisher, or even a group, sellsbooks directly to final consumers or retailers. This, together with the existence ofassociations of publishers, increases transparency and observability in the market, leadingto fast detection of deviations from the agreement and to a timely punishment.Also, the existence of multi-market contacts, given that publishers may meet in severalcountries and regarding several products, enhances the likelihood of collusion.Nevertheless, the existence of differences in VAT among countries for printed andelectronic books may obscure the final prices set by publishers, making coordination moredifficult, from a pan-European perspective.On the overall, it seems highly plausible for publishers to reach collusive agreements onprices of e-books, calling for a deep investigation in this matter.6. Concluding remarksThe development of the e-book market in the EU needs to be cautiously monitored.International experience, particularly in the US, has shown that both pricing models giveroom for different strategic anti-competitive behaviors and hence, competition concerns.Specifically, the wholesale model has been used to predate in the e-book retail market,cross-subsidizing the losses with the sales of e-readers (which could be done ought to theexistence of a technological tying). As regards the agency model, the main competitiveconcern is that it facilitates collusive agreements among publishers. 17
    • These issues are even more complicated in the EU since countries have different policiesregarding pricing and taxing books in general and e-books in particular. A higher degree ofharmonization is necessary in order to prevent potential arbitrage and to promote marketintegration.It needs to be stressed that this is a quite new market and the available information is veryscarce. Therefore, this is a gap that should be filled if further research in the topic is carriedout. 18
    • 7. References Adams, D.; The Agency Model. Not a bad idea, only illegal (in Australia) in The Digital Reader - 03/04/11 (http://www.the-digital-reader.com/2011/03/04/the-agency-model-not-a- bad-idea-only-illegal-in-australia/) Allen, K.L.; The Agency Model Redux: An Analysis After Six Months in the Diesel eBook Store Blog - 11/02/10 (http://blog.diesel-ebooks.com/?p=704) Angier, M.; Top Ten Reasons Why eBooks Are Better than Printed Books in Power Home Biz - 10/15/03 (http://www.powerhomebiz.com/vol127/ebooks.htm) Basten, A.; More raids in price-fixing probe. Publishers “explain” high ebook pricing in TeleRead – 03/04/11 (http://www.teleread.com/paul-biba/more-raids-in-price-fixing-probe- publishers-explain-high-ebook-pricing/) Bradbeer, M.; Why the agency model is flawed in FutureBook - 09/21/10 (http://www.futurebook.net/content/why-agency-model-flawed) Casassus, B.; E-book price-fixing law passed in France in The Bookseller.com – 05/18/11 (http://www.thebookseller.com/news/e-book-price-fixing-law-passed-france.html) Crowe, A.; Amazon.com caves in to higher e-book prices, consumers lose in Wallet Pop - 02/02/10 (http://www.walletpop.com/2010/02/02/amazon-com-caves-in-to-higher-e- book-prices-consumers-lose/) Cyran, R.; E-book market will be hot, flat and crowded in Reuters Brakingviews 06/25/10 (http://blogs.reuters.com/columns/2010/06/25/e-book-market-will-be-hot-flat-and- crowded/) Darnton, R.; Google & the Future of Books in The New York Review of Books - 02/12/09 (http://www.nybooks.com/articles/archives/2009/feb/12/google-the-future-of-books/) De Rocket e-book a Kindle: dispositivos e-book in ddg.com - 01/02/08 (http://despuesdeg.com/2008/01/02/de-rocket-ebook-a-kindle-dispositivos-e-book/) E-books and the agency model in The Society of Authors - 11/24 (http://www.societyofauthors.org/soa-news/e-books-and-agency-model) El ebook dobla su presencia en España hasta el 3% de la facturación del libro in El Mundo - 04/13/11 (http://www.elmundo.es/elmundo/2011/04/13/cultura/1302709536.html) EU probes allegations of price-fixing in e-books in EU Business – 03/02/11 (http://www.eubusiness.com/news-eu/competition-digital.8ua/) Forelle, C.; EU Officials Raid Book Publishers in The Wall Street Journal – Europe Technology - 03/03/11 (http://online.wsj.com/article/SB10001424052748703559604576176032102691822.html? mod=WSJ_hp_LEFTWhatsNewsCollection) Gans, J.; The $9.99 E-Book in CoRE economics – 02/05/10 (http://economics.com.au/?p=5065) Hagiu, A., 2007; Merchant or Two-sided Platform? in Review of Networks Economics. Vol.6, Issue 2, June 2007 Hobson, A and Smith, S.; E-book pricing: the clash between copyright and competition law in Media Bulletin from Reynolds Porter Chamberlain LLP – April 2011 19
    • Hoffelder, N.; Amazon will never monopolize the e-book market in The Digital Reader -02/18/11 (http://www.the-digital-reader.com/2011/02/18/amazon-will-never-monopolize-the-ebook-market/)Jesslyn; Revisiting the Agency model, in My Kindle Stuff - 6/10(http://www.knuckleheadnetwork.com/2011/02/revisiting-the-agency-model/)Jones, P. and Casassus, B.; European publishers offices raided by EC inspectors in TheBookseller.com – 03/02/11 (http://www.thebookseller.com/news/european-publishers-offices-raided-ec-inspectors.html)Jones, P.; Ten things about the agency model in the UK in FutureBook - 09/23/10(http://www.futurebook.net/content/ten-things-about-agency-model-uk)Jordison, S.; EU anger over ebook deal suggests hard times ahead for publishers in TheGuardian - 03/16/11 (http://www.guardian.co.uk/books/booksblog/2011/mar/16/hard-times-publishers-eu-raids-ebooks)Kindle claims 45% of eReader market, Sony claims 30% in the Best Tablet Review -09/01/09 (http://besttabletreview.com/kindle-claims-45-percent-of-ereader-market-sony-claims-30-percent/)Kindle vs. iPad Review in the iReader Review -01/27/10(http://ireaderreview.com/2010/01/27/kindle-vs-ipad-review/)Koleva, G.; Apple, Amazon targets of eBook price fixing probe in Wallet Pop – 08/04/2010(http://www.walletpop.com/2010/08/04/apple-amazon-targets-of-ebook-price-fixing-probe)Kunhardt, J.; eBook Pricing Deals May Violate Antitrust Laws; CT Attorney GeneralLaunches Investigation in HuffPost – Books – 03/08/10(http://www.huffingtonpost.com/2010/08/03/ebook-pricing-deals-may-v_n_667919.html)LeCharles Gonzalez, G.; eBook Market Needs Transparency, and Fast in the Digital BookWorld - 06/09/10 (http://www.digitalbookworld.com/2010/ebook-market-needs-transparency-and-fast/)Lowe, S.; The Advantage of an Ebook Agency Model in Publishing Bits - 06/03/10(http://publishingbits.com/ebook-strategy/30-advantage-of-an-ebook-agency-model.html)Manne, G.; An update on the evolving e-book market: Kindle edition (pun intended) inTruth on the Market – 03/01/11 (http://truthonthemarket.com/2011/03/01/an-update-on-the-evolving-e-book-market-kindle-edition-pun-intended/)Manne. G.; Amazon vs. Macmillan: Its all about control in Truth on the Market -02/07/2010 (http://truthonthemarket.com/2010/02/07/amazon-vs-macmillan-its-all-about-control/)Miller, L.; Kindle killer in Salon- 02/01/10(http://www.salon.com/books/laura_miller/2010/02/01/macmillan_vs_amazon)Murray, L.; eBook Sales Models: Wholesale vs. Agency in the ljinteractive.com - 04/05/11(http://www.ljinteractive.com/index.php/ebook-sales-models-wholesale-vs-agency/)Neate, R.; EU raids publishers in ebook price-fixing probe in The Telegraph – Finance -06/22/11(http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/8357983/EU-raids-publishers-in-ebook-price-fixing-probe.html)Nielsen, T.; The agency model as I understand it in Making Light - 02/05/10(http://nielsenhayden.com/makinglight/archives/012168.html) 20
    • Oder, N.; Macmillan CEO Explains “Agency Model” for Selling Ebooks in the LibraryJournal - 03/03/10 (http://www.libraryjournal.com/article/CA6721294.html)OReilly, T.; Competition in the eBook Market in O’Reilly Radar - 01/25/09(http://radar.oreilly.com/2009/01/competition-in-the-ebook-marke.html)Page, B. and Phillips, L.; EU raids ebook publishers in price fixing investigation inguardian.co.uk – 03/04/11 (http://www.guardian.co.uk/books/2011/mar/04/ebooks-publishing)Pearlstein, S.; The Amazon-Macmillan book saga heralds publishings progress in TheWashington Post - 02/03/10 (http://www.washingtonpost.com/wp-dyn/content/article/2010/02/02/AR2010020203910_pf.html)Petrou, A.; Apple and Amazon called in over antitrust deals in TechEYE.net – 08/03/10(http://www.techeye.net/business/apple-and-amazon-called-in-over-antitrust-deals)Postrel, V.; Amazon vs. Apple: What Should E-Book Prices Be? In The Atlantic –Business - 02/02/10 (http://www.theatlantic.com/business/archive/2010/02/amazon-vs-apple-what-should-e-book-prices-be/35131)Roberts, A.; EU raids ebook publishers in price fixin investigation in Andy RobertsDARnet - 03/05/11 (http://distributedresearch.net/blog/2011/03/05/eu-raids-ebook-publishers-in-price-fixing-investigation)Sammy; Survey of Kindle, Nook, iPad, Sony and OverDrive eBook Store Collection Size inth eBook Reader Guide - 04/08/11 (http://www.ebookreaderguide.com/2011/03/13/kindle-nookcolor-ipad2-sony-overdrive-which-ebookstore-has-most-ebook-titles/)Sargent, J. (Macmillan CEO); On the agency model, availability and price in theMacmillan blog - 03/02/10 (http://blog.macmillanspeaks.com/macmillan-ceo-john-sargent-on-the-agency-model-availability-and-price/)Shartzkin, M.; The Agency Model and its effect on e-book pricing in the Association ofIndependent Authors (AiA) - 03/06/11 (http://www.independent-authors.org/forums/posts.asp?group=&topic=206861&DGPCrPg=1&hhSearchTerms=The+Agency+Model+and+its+effect+on+e-book+pricing&#Post206861)Shatzkin, M.; Agency vs. Wholesale Model: Apple’s disruption of the e-book market hasnothing to do with the tablet in Digital Publishing Trends-Semantic Press - 01/23/10(http://publishingtrends.posterous.com/agency-vs-wholesale-model-apples-disruption-o)Stone, B. and Rich, M.; Amazon Removes Macmillan Books in The New York Times –Technology – 01/31/10(http://www.nytimes.com/2010/01/30/technology/30amazon.html)Stone, B. and Rich, M.; Amazon Threatens Publishers as Apple Looms in The NewYork Times – Technology – 03/17/10(http://www.nytimes.com/2010/03/18/technology/internet/18amazon.html)Trachtenberg, J. and Bray, C.; Pricing of E-Books Draws Increased Antitrust Scrutiny inThe Wall Street Journal – Technology - 08/03/10(http://online.wsj.com/article/SB10001424052748704271804575405181858061108.html)Trachtenberg, J.A. and Fowler, G.A.; Amazon saca la bandera blanca en la primerabatalla de los libros electronicos in La Nacion - 02/01/10(http://www.lanacion.com.ar/1228297-amazon-saca-la-bandera-blanca-en-la-primera-batalla-de-los-libros-electronicos) 21
    • Travisvs; Continuing Saga: The EBook Agency Model in the E-book Readers Resource -02/11/10 (http://ebookreadersresource.com/ebook-readers-blog/ebooks-news/ebook-agency-model/)Van Slooten, T.; The Ebook Agency Model - Why Are Publishers and Retailers at OddsOver It? in Ezine Articles - 02/12/10 (http://ezinearticles.com/?The-Ebook-Agency-Model---Why-Are-Publishers-and-Retailers-at-Odds-Over-It?&id=3752112)Vega, M.; El e-book no despega en España en El Mundo – Tecnología - 04/28/11(http://www.elmundo.es/elmundo/2011/04/28/navegante/1303985933.html)Walters, C.; Ebook prices in 2004 vs. 2011: what’s changed? in Tele Read - 03/09/11(http://www.teleread.com/paul-biba/ebook-prices-in-2004-vs-2011-whats-changed/)Weinman, S.; Apples E-Book Pricing Prompts Antitrust Inquiry in DailyFinance - 06/02/10(http://www.dailyfinance.com/2010/06/02/apples-e-book-pricing-prompts-anti-trust-inquiry/?icid=sphere_copyright)Windwalker, S.; Is the Agency Model a Clear Case of Price-Fixing Collusion in the eBookMarket in Seeking Alpha - 06/07/10 (http://seekingalpha.com/article/208722-is-the-agency-model-a-clear-case-of-price-fixing-collusion-in-the-ebook-market)www.aglutinaeditores.comwww.fep-fee.bewww.libranda.comwww.publishers.orgwww.wikipedia.org 22
    • 8. AppendixA.1: Main e-readersManufacturer Model Introduction yearAlutarek Libre Pro eBook reader 2009 Libre Color eBook reader 2010 Libre Touch eBook reader 2011 Libre Air eBook reader 2011Amazon Kindle 2007 Kindle DX 2009 Kindle 2 2009 Kindle 3 Wi-Fi 3G 2010 Kindle 3 Wi-Fi 2010ASUS Eee reader DR900Barnes & Noble Nook 2009 Nook WiFi 2010 Nook Color 2010 Nook Simple Touch reader 2011Bookeen Cybook Gen3 2007 Cybook Opus 2009 Cybook Orizon 2010Condor Technology eGriver Touch 2010 eGriver IDEO 2010EBS Technology Agebook eBook reader 2010Ectaco jetBook 2008Elonex eBook 2009Endless Ideas BeBook Mini BeBook Neo BeBook One 2009 BeBook ClubEntourage eDGe 2010 Pocket eDGe 2010Fnac FnacBook 2010Foxit Software eSlick 2009Hanvon WISEreader N516 2009 WISEreader N518 2009 WISEreader N520 2009 WISEreader N526ICARUS reader ICARUS reader Go 2010 ICARUS reader Sense 2010Interead COOL-ER 2009iPapyrus iPapyrus 6 2009iRex Technologies iLiad 2006 Digital reader 1000 2008 Digital reader 800 2010 23
    • Manufacturer Model Introduction yeariRiver Story 2009italica GmbH Paperback 2010Jinke Hanlin V2 2006 Hanlin V3 2007 Hanlin V5 2008Kobo Kobo Wireless ereader Touch N647 2010 Kobo ereader N416 2010 Kobo ereader Touch 2011Kogan Technologies Kogan eBook reader 2010Kolporter eClicto 2007Notion Ink Adam 2011Onyx International Boox 60 2010 Boox M90 2011PocketBook PocketBook Pro 602 2010Samsung Papyrus 2009 E6 2010Sony Librié 2004 Reader PRS-500 2006 Reader PRS-700 2008 Reader PRS-505 2008 Reader Daily Edition PRS-900 2009 Reader Touch Edition PRS-600 2009 Reader Pocket Edition PRS-300 2009 Reader Pocket Edition PRS-350 2010 Reader Touch Edition PRS-650 2010Spring Designs Alex ereader 2010Stereo International ES600 2009Velocity Micro Cruz Reader Cruz Tablet T103 Cruz Tablet T301 2010Wolder Electronics Boox-S 2010Zzbook ereader HD 2010A.2: Main publishers • Albin Michel • Hachette Livre • Bloomsbury • HarperCollins • Simon & Schuster • La Martinière • Flammarion • Macmillan • Gallimard • Penguin • Hachette • Random House 24
    • A.3: Main retailersRetailer WebsiteAmazon www.amazon.comApple www.apple.comBarnes & Noble www.barnesandnoble.comBook Glutton www.bookglutton.comBooks on Board www.booksonboard.comBorders www.borders.comCokesbury www.cokesbury.comDiesel ebooks www.diesel-ebooks.comDirect ebooks www.directebooks.comDoc Stoc www.docstoc.comEbook mall www.ebookmall.comEbook shoppe www.ebookshoppe.comEbooks www.ebooks.comEbrary www.ebrary.comElectronic book seller www.electronicbookseller.comEreader www.ereader.comFeedbooks www.feedbooks.comFiction wise www.fictionwise.comFictionwise www.fictionwise.comGoogle eBooks www.books.google.com/ebooksInternet Archive www.archive.orgLecturalia www.ebooks.lecturalia.comLibrary www.lybrary.comManybooks www.manybooks.netPowell’s Books www.powells.comProject Gutenberg www.gutenberg.orgReader Library www.ebookstore.sony.comScribd www.scribd.comTodoebooks www.todoebooks.comTxtr www.txtr.comVook www.vook.comWikibooks www.wikibooks.org 25