Would Apple be better off if it sold ebooks using wholesale(when iBookstore debuted)?

[EbookReader]

Would Apple be better off if it sold ebooks using wholesale(when iBookstore debuted)?

Pro:

- compete head to head with Amazon Kindle Store on prices will mean higher market share (today ibookstore marketshare is around 10%)
- no DOJ lawsuit (no idea how costly this will be)


Con:

- very low margin on ebooks (Amazon Kindle profit margin is small, but Amazon "has consistently turned a profit on eBooks since they began selling them." Source: The DOJ investigation (page 9, paragraph 30))




Apple is selling these digital products:

Digital Music: wholesale (the major content owners are the 4 Major Labels)
Digital Movie/TV: wholesale (the major content owners are the 6 Big Studios)
Digital Movie/TV rental: wholesale (the major content owners are the 6 Big Studios)

Apps: agency (the major content owners are ???)
Ebooks: agency (the major content owners are the Big 6 Publishers


So there is precedent that Apple has done business using the wholesale pricing.

Just curious, who are the major content owners of Apps in the Apple Apps Store? (the equivalent of the Major Record Labels, or the Big 6 Hollywood Studios or the Big 6 Book Publishers)

blevins321 has an interesting take on it and I agree.

I think this would work out well. If you think about it, Apple and Amazon have entirely opposite models. Amazon sells their Kindles at a reasonable loss (the Fire more than the e-ink models) in exchange for drawing you into their media sales to make money. Apple on the other hand sells their software/hardware at a high markup in exchange for reasonably-priced digital media (not very reasonable for videos yet, but that's probably coming). It would be a huge draw for people to spend the money for their devices in exchange for reasonably-priced media to put on them.

Apple could compete head to head with Amazon on ebooks prices. (Apple is in fact in a much better position to compete because

1) vast cash reserve (close to $100 billion)
2) high profit margin on hardware

Amazon has very low margin. They can't compete as effectively as Apple.




Apple would have done much better and settled that DOJ case. Why? because Apple can't loss money on selling ebooks........even in a price war with Amazon. See below.


This is the settlement that the 3 Publishers agreed to:

Basically, no ebookstore could make a LOSS on selling ebooks. It could use the loss-leader strategy but the store has to make a profitable overall. (even $0.01 counts as a profit).


http://news.cnet.com/8301-1023_3-57412592-93/whats-the-future-of-e-book-pricing/

HarperCollins, Hachette, and Simon & Schuster, which is owned by CBS, the parent company of CNET, will have a couple of pricing models to choose from. Either they can go back to the old way of charging wholesale pricing (retailers buy a book for right around half its list price and then sell it for whatever they want) or they can simply set the price for the book (as they are doing now under the "agency" model) and give a 30 percent cut to the retailer. Apple operates both its iBookstore and App Store under the latter terms.

The big change will be that retailers will be allowed to discount the price of e-books. Under the terms of the current agency model that caught the eye of the DOJ and precipitated the investigation and eventual antitrust lawsuit, no retailer could set a price for a book below Apple's price in its iBookstore. That so-called "most favored nation" (MFN) clause has been removed as part of the settlement.

So retailers are free to discount under the new terms -- but not without a caveat. The terms are only good for two years. After two years, publishers can negotiate a new agreement that would allow them to go back to the current terms and restrict discounting.

If that's not complicated enough, a retailer like Amazon, which was aggressively discounting titles to $9.99 under the former "wholesale" model (and losing money on bestselling titles), isn't permitted to take an overall loss on a publisher's catalog. In other words, a retailer's commissions have to at least equal the amount of discounts its offering. For example, if a retailer makes $100,000 from the 30 percent commission it gets from the catalog of publisher X, it can only discount (take a loss) of up to $100,000.

Apple should just settle and use wholesale to compete.
Sure, profit margin will no longer be 30% but it guaranteed to be above 0%.

The DOJ lawsuit will be costly even if Apple wins.
Negative press, lawyers fee, public perception of Apple etc....

Not worth the headache especially when ebook sales from iBookstore is a rounding error for Apple.

this post did an excellent job explaining the difference between WHOLESALE AND AGENCY

People here don't seem to get the different models.

The WHOLESALE model that Amazon prefers is essentially the same as any other good you purchase at a store. The store pays the wholesale price and then sells it at whatever price they want. MSRP's are still set by the manufacturer but the retailer can choose to offer any kind of discount they want, for whatever reason. For example, a book publisher (or in this case an ebook publisher) could set their MSRP at $15.99, and charge a wholesale price of $11.19 to the retailers. But the retailers are still free to charge a lower price if they want. That's the beauty of competition. In many cases, Amazon was willing to charge only $9.99 for the ebook, taking a loss on the sale in order to get customers to the store and potentially buying other items.

The AGENCY model that Apple uses for the iBookstore (as well as the App store) essentially takes the retailer out of the equation. The publisher (or app developer) sets their own pricing, determines when and if something goes on sale, and Apple gets a cut for acting as the seller's "agent" in the transaction (processing payments, allowing the item into their store, etc.) In the above example, the publisher could set it's price at $15.99, and Apple would pay them 70% ($11.19) for each one sold -- exactly the same as the wholesale model. The difference is that the only one who could choose to put an item on sale is the publisher -- Apple isn't acting as a traditional retailer, merely as the publisher's agent.

So, while the publisher makes the exact same amount in both scenarios, the agency model produces higher prices for consumers -- Apple's 30% can't be changed, while Amazon, under the wholesale model, can sell books at a loss if they want. The publishers can complain all they want about Amazon's pricing "devaluing" their product (despite the fact that they'd receive the same amount of money for each copy, and, logically, Amazon is going to sell a lot more copies at their lower price to consumers), but, really, publishers are just scared of Amazon becoming even more powerful -- eventually demanding lower wholesale prices. This is the way Walmart behaves. They become far and away a manufacturer's biggest retailer, then start demanding price cuts once the manufacturer can't survive without them.

I don't know if Amazon plans to do that or not, but I do think Amazon has a much better grasp of what electronic content (without any production and distribution costs that applied to physical items) can sell for, than do the book publishers. In other areas (particularly music), it was Apple who had to tell the "don't-get-this-whole-internet-thing" executives that their product wasn't worth what they thought it was, but, by selling at a lower price, they could sell far more product, and make more money in the end.

Anyway, since I can read Kindle books on my Kindle, iPad, Android tab, MacBook Pro and Air, and desktop, I'm looking forward to prices going back down. Apple makes a ton of money in other areas -- they don't need their bookstore to be super-profitable in order to be the most successful company on earth.

the last part is particularly telling:

Anyway, since I can read Kindle books on my Kindle, iPad, Android tab, MacBook Pro and Air, and desktop, I'm looking forward to prices going back down. Apple makes a ton of money in other areas -- they don't need their bookstore to be super-profitable in order to be the most successful company on earth.


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Apple could live with the iBookstore being a low margin selling, especially when it will sell more hardware, create customer loyalty, gain market share on ebooks

and best of all

settle the DOJ lawsuit like the other 3 Publishers did. Why stick to agency when wholesale maybe a better fit?

Another option is that the iBookstore could sell ebooks using agency model. And it will have the option to keep 30% - or use some of that 30% commission to discount ebooks.

Here's the settlement:

Either they can go back to the old way of charging wholesale pricing (retailers buy a book for right around half its list price and then sell it for whatever they want) or they can simply set the price for the book (as they are doing now under the "agency" model) and give a 30 percent cut to the retailer. Apple operates both its iBookstore and App Store under the latter terms.

The big change will be that retailers will be allowed to discount the price of e-books.

Other players: Googleplay, KOBO, NOOK, SONY.

http://www.telegraph.co.uk/finance/...-in-Europe-but-will-fight-case-in-the-US.html

Apple offers to settle ebook price fixing row in Europe but will fight case in the US