Apple to control Music, Amazon to control Books – Apple’s Wishful Thinking

Wow! The DOJ’s Trial against Apple is the gift that keeps giving. Yesterday we found out that Apple claims 20% share of the ebook market, 100% growth in ebook sales in 2012, and 100 million customers of the iBookstore.

Today, we find out two big things (thanks to Eddy Cue, the senior most Apple executive questioned so far (SVP of Internet and Services)).

  1. Apple considered splitting Books & Music between Amazon and Apple. The key part from CNet’s coverage of DoJ vs Apple

    Eddy Cue, Apple’s senior vice president of Internet software and services, who took the stand Thursday in district court in lower Manhattan, also said Apple considered splitting the market with Amazon in a setup where Apple would control the music market, while Amazon would monopolize books.

  2. Apple’s Eddy Cue pretty much admitted that ebook prices went up because of Apple’s deal with Publishers.

This is a bit of a surprise. On the one hand, Apple claims it did nothing wrong. On the other hand, their senior executives are admitting Apple’s moves led to higher ebook prices.

Apple’s Reality Distortion Field affects Apple Executives too?

Apparently, Mr. Cue got testy when asked what he thought about ebook prices going from $9.99 to $12.99 to $14.99. He didn’t think it hurt consumers. Here’s what he said –

“Our consumers were protected by my price points,” he said. “I thought we were going to treat our consumers very, very fairly.”

Wait a minute. Books were $9.99. Then Apple struck a deal with Publishers and caused prices to rise to $12.99 to $14.99.

Apple executives actually thought by doing this they were protecting consumers?

That’s some good Kool-Aid they’re serving at Apple’s SpaceShip One HQ.

Apple to control Music? Amazon to control Books?

The juiciest part of this entire conversation is this:

Apple considered splitting the market with Amazon in a setup where Apple would control the music market, while Amazon would monopolize books

Let’s get this straight – In the middle of a collusion/price-fixing trial, Apple’s most senior executive questioned so far, brings up the fact that Apple was discussing what would be an EVEN MORE ILLEGAL arrangement.

Amazon to control Books and in return Apple gets to control Music.

Bonus Points for using ‘control the music market’ and ‘monopolize books’. Let’s not leave any room for doubt, shall we.

This is just madness. Why on Earth would you mention this? Does anyone see any reason for Apple to mention it was considering this whole ‘Let’s collude with Amazon and split and monopolize the Music and Books markets’ idea?

It’s an interesting thought. There are probably all sorts of illegal arrangements and secret/silent partnerships that happen all the time. However, bringing up that you were considering it in the middle of a DoJ trial – that’s just amazingly foolish.

How would an ‘Apple to control Music, Amazon to control Books’ arrangement work?

Apple probably considered music very important for selling iPods and for maintaining its ‘coolness’. It perhaps thought Amazon valued books a lot because Amazon had the Kindle and a huge revenue stream from selling paper books.

Perhaps Apple was thinking about asking Amazon to end Amazon Music and/or channel it to iTunes. In return, Apple would channel iBooks to Kindle Store. The arrangement would work well. However, DoJ would come after Apple and Amazon. Perhaps it would be a secret deal where iBooks either stalls or Apple secretly promotes Kindle a ton. In return, Amazon would ramp down Amazon Music.

At this point, it seems pretty obvious that the DoJ needs to investigate how many of these ‘secret’ partnerships there are between the big technology companies.

Apple wanting to partner up with Amazon and secretly carve out monopolized markets for each other. Wow! Every day you learn something new.

Was Apple the Sole Architect of the Agency Model?

The Justice Department is painting Apple as the ringleader of the Agency Model. So says The New York Times.

Quick Reminder of the Agency Model.

  1. 5 of the Big 6 Publishers and Apple got together to introduce something called ‘The Agency Model’.
  2. It was seen by some as an attempt to exploit ereader owners and make them pay a ridiculous price for ebooks ($12.99 to $14.99).
  3. It was seen by others as an attempt to slow down the rise of eBooks and eReaders. Perhaps it was both.
  4. Update: From the articles today it seems it might have been Apple’s attempt to stall Amazon’s rise in eBooks.
  5. It led to a long stretch where we had really ridiculous prices for newly released ebooks.
  6. It led to a lot of pain for readers as they either didn’t buy the over-priced ebooks or waited until they were below $9.99. Those that did pay also suffered as they had to pay really high prices.
  7. It has also led to the current situation – Where lots of Publishers think it’s OK to introduce new releases at $12.99 and $13.99 and $16.99.

The Agency Model, in short, was the biggest threat to the rise of eBooks and eReaders. It’s only due to the fact that eBooks had already gathered too much momentum that it failed. Also helping it fail was the strong resistance by readers. Measures by readers such as the $9.99 boycott – which boycotted any books over $9.99 – played an important part.

Now, based on the picture The Justice Department is painting, it seems the architect of all of this malarchy may have been Steve Jobs and Apple.

Here’s an email from Steve Jobs to James Murdoch of News Corporation –

“Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.”

It’s pretty clear that, at least in this case, it’s Apple that’s trying to convince a Publishing Company into the Agency Model.

The Justice Department certainly thinks so –

According to the Justice Department, that e-mail is part of the evidence that Apple was the “ringmaster” in a price-fixing conspiracy in the market for e-books

It’s also quite clear that Apple wanted to block Amazon’s rise –

the government said that Apple and the publishers conspired to fix e-book prices as part of a scheme to force Amazon to raise its e-book price from a uniform $9.99 to the higher level noted by Mr. Jobs in the e-mail, which publishers wanted. That, the department said, resulted in higher prices to consumers and ill-gotten profits for Apple and its partners.

The Justice Department is really going after Apple. It’s settled with The Evil 5 Publishers and now Apple is the sole defendant –

Apple is the only defendant left in the lawsuit after five publishing companies — Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster — agreed last year and earlier this year to settle the charges.

This is really interesting. Wonder why Apple didn’t settle.

Power Corrupts? Apple strong-arming Publishers?

The Justice Department paints a really crazy picture – One where Apple is not only sweet-talking Publishers into joining the Agency Model Mafia, it’s also threatening and coercing them.

Here’s a gem –

In July 2010, Mr. Jobs, Apple’s former chief executive, told the chief executive of Random House, Markus Dohle, that the publisher would suffer a loss of support from Apple if it held out much longer, according to an account of the conversation provided by Mr. Dohle in the filing. Two months later, Apple threatened to block an e-book application by Random House from appearing in Apple’s App Store because it had not agreed to a deal with Apple, the filing said.

After Random House finally agreed to a contract on Jan. 18, 2011, Eddy Cue, the Apple executive in charge of its e-books deals, sent an e-mail to Mr. Jobs attributing the publisher’s capitulation, in part, to “the fact that I prevented an app from Random House from going live in the app store,” the filing reads.

Who would have thought that Steve Jobs set up the Agency Model. All this time we might have been accusing Publishers of being greedy – they might just have been Apple’s Puppets. If all this is true, and that’s an IF at this stage, then it pretty much means the Publishers got conned/threatened/cajoled/blackmailed into joining the Agency Model. That they were just Apple’s puppets to use against Amazon.

Also, remember when Publishers and Amazon were engaging in feuds and books were going missing. Well, Apple had its hands in that too.

the documents quote Mr. Dohle as saying that an Apple executive counseled him that the publishing company could threaten to withhold e-books from Amazon to force Amazon to accept the higher prices.

This is very different from what I had thought the situation was.

Are we to Believe that Publishers were merely Sheep? Being used as Pawns by Apple to fight Amazon’s lead in eBooks?

That’s certainly the picture that The Justice Department is painting.

If this happens to be true, then my (non-legal) thought would be –

Couldn’t every single person who

  1. Had to pay more than $9.99 for a book.
  2. Had to wait for months for a book’s price to drop to $9.99.
  3. Had to skip a book because it was $9.99.

Couldn’t every single person in these three categories sue Apple for money lost and anguish caused?

Surely, if we waited 1 entire year to read a book by our favorite author because we weren’t willing to pay $13.99. Then we wouldn’t be very happy with Apple if Apple were the ringleader. Apple who hatched this entire plan? Apple who convinced Publishers and even threatened them into joining? Apple was the cause of our wait and discomfort?

Apple, inadvertently, tried to destroy the entire rise of eBooks and eReaders.

This bit from Reuters clearly shows Steve Jobs and Apple didn’t care about readers –

 the Justice Department said that Steve Jobs, Apple’s CEO at the time, “conceded the price-fixing conspiracy” when he told his biographer that Apple had “told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.'”

‘Yes, the customer pays a little more’. Who cares about the readers?

Who cares if readers have to shell out more money. Who cares if some person has to wait an entire year to read a book they really, really would have loved to read when it was released.

Amazon might come out smelling of roses. Consider this part from The Washington Journal –

Apple said Amazon also considered the agency model and spoke in detail to publishers who at one point offered an exclusive arrangement that would cut out Apple.

Wonder what happened there. Did Amazon not take the exclusive arrangement because it wanted to do the right thing? Because it thought the Agency Model would kill eBooks?

Summary of What we Might or Might Not know about the Agency Model

So, it’s all a bit convoluted –

  1. Apple may or may not have started the idea of the Agency Model.
  2. Apple seems to have played go-between and facilitator between Publishers.
  3. Apple threatened at least one Publisher and perhaps that played a part in that Publisher joining the Agency Model.
  4. Steve Jobs’ solution involved ‘the customer paying more’. If true, it shows a striking lack of empathy for readers. Which would make sense given Steve Jobs though ‘people don’t read any more’.
  5. Amazon was offered something akin to the Agency Model and an ‘exclusive’ and either declined (for what reason?) or something else happened.

If the accusations made by The Justice Department are correct, then it paints a really bad picture of Apple as ‘Instigator of the Agency Model’, ‘Bully that threatened Publishers with dire consequences, including not approving Apps, if Publishers didn’t join’, ‘A company that doesn’t care about readers and customers, which suggested price increases for customers that went beyond reasonable prices for ebooks’.

It’s not a pretty picture. If The Agency Model really does turn out to be Apple’s brainchild, that would mean a lot of trouble for Apple. Beyond the obvious PR damage, it might open up Apple to a lot of lawsuits from a lot of people very upset about having to pay extra for ebooks. From people angry they had to skip/delay reading books they really wanted to read. It’s also not the right thing to do. Perhaps Apple’s moral antenna was not receiving the right signal. You’re just holding it wrong, Apple. It’s supposed to point to Heaven, not Hell.

Kindle, Amazon, new Kindle devices Versus iPad, Apple, iPhone

The focus is on the Kindle 3 and its new, imaginary battle with the iPad. Yet, Kindle vs iPad is merely misdirection.

Today’s Kindle 3 advertisement is puzzling since a $139 dedicated reading device is about as different as possible from a $499 dedicated do-everything device.

Why would Amazon attack iPad and kick-off a pretend Kindle 3 vs iPad battle?

Well, perhaps Amazon is just setting the stage for the bloody War that will be in full swing by end 2010 or early 2011 – Apple Vs Amazon. The prize is billions of dollars a year in profits from digital movies, TV, music, games, and books. Apple and Amazon (and perhaps the company behind Xbox) are the companies best positioned to win.

Amazon and Apple both want to control all digital downloads

Apple and Amazon have been putting things in place to take over selling digital downloads of books, music, movies, and games.

Consider what Amazon has lined up –

  1. Amazon has the following offerings already –, Kindle, Kindle Store, Digital Movie & TV downloads, MP3 Store, Game Downloads.
  2. It also has the following confirmed and rumored technology – TouchCo’s multi-touch screen technology, whatever eInk can come up with, possibly Qualcomm’s Mirasol display, Amie Street’s music technology.
  3. There are also rumors and patents that suggest Amazon has some of the following lined up – Kindle Phone, Kindle Gaming Device, Color Kindle, Kindle Electronic Pen, other new products from Lab 126.

There isn’t any type of digital download that Amazon isn’t interested in selling. In fact it’s already selling movies, books, TV shows, and games in digital format. The only device it has is the Kindle 3 but by end 2010 there may be new additions.  

Apple is even more invested in digital downloads –

  1. Apple has the following channels in place – Apple Store, iPhone, iPod Touch, iPad, Mac, iTunes Store.
  2. It also has a lot of technology and patents and new and upcoming products – an iPad 2 supposedly focused on reading, a new Apple TV, lots and lots of patents. 

Apple is already selling apps and movies and books and TV shows. It hasn’t gotten into digital game downloads (it seems to prefer selling $1 game apps) – However, that might change.

Apple vs Amazon is inevitable – The quest for digital download domination makes them natural enemies

Apple has the advantage of having over 125 million iOS devices out in customers’ hands. Amazon probably has only 5 million or so Kindles in customers’ hands.

Amazon has the advantage of everyone already associating with buying things. Tens of millions of people already buy books, movies, music CDs, and dozens of other categories of products from Amazon and if Amazon offers digital downloads customers will likely buy those too.

Both Amazon and Apple are trying to become the buying destination for all things digital. Sooner or later there is going to be war and 2010 is the year both of them decided to take the first step. For Apple it was iBooks and for Amazon is was today’s Kindle 3 vs iPad ad. These are the first obvious public moves – However, they’ve probably been thinking about this for a long, long time. Apple since 2000 when Steve Jobs started thinking about the iPad and Amazon since 2003/2004 when work on the Kindle was started.

Their recent actions are great indicators that both Apple and Amazon are positioning themselves for a war

Amazon just bought digital music site Amie Street which lets you stream or download music. This adds on to its existing mp3 store. It has started hiring lots of gaming executives and there are rumors of a Kindle Phone or a Kindle Gaming Device. It started working on an app store in January of this year and released two sample apps a few months ago. It just expanded to Best Buy which until now sold only iPad and Nook. It’s most recent step is today’s Kindle 3 vs iPad advertisement.

Apple’s acquisitions are mostly hardware companies and maps-related companies. However, it has made a number of moves that target the Kindle. It’s rumored to be building an iPad 2 focused on reading. It released iBooks and has taken pains to position iPad as a legitimate reading option for readers. It’s supposedly expanding iPad retail to Target which is the only retail chain currently selling Kindle 3.

Devices like Kindle, iPhone, iPad become critical

There are a few assumptions we can safely make –

  1. In the absence of owning a device customers are likelier to buy digital goods from the ‘buying destination’ i.e. Amazon.
  2. In the presence of a device customers are likelier to buy digital products using the default store on their device.
  3. Customers are likelier to buy from a company that has their credit card information and from which they already buy things (Ex: Amazon, Apple). 
  4. A company that has a direct channel to customers (via a device) not only is free of middle-men like search engines it can supplant them. Apple isn’t buying map companies for fun – it intends to teach Google a lesson.   
  5. Apple and Amazon are painfully aware of all of these points.

Both of them know that a customer who owns an iPhone or a Kindle is a captive customer – likely to make most of her/his purchases through the device (or from the company’s website). We already have indicators of this –

  1. iPods helped Apple take over digital music and even become the #1 music seller.
  2. Amazon has talked of Kindle owners buying 2.7 times the books they used to.  
  3. Kindle owners have turned ebooks into a threat with even Publishers admitting some books are selling more ebooks than hardcovers.
  4. iPhones and iPod Touches have helped Apple become a threat to gaming companies – Sony is now running ads targeting the iPhone.
  5. B&N has talked about sales to Nook owners going up 28%.  

Every company sooner or later comes to the conclusion that owning the device is absolutely critical. Even Google is trying to find ways of doing it by releasing Nexus One – it’s supposedly also working on a Google Tablet.

It’s the new Kindle devices that will fight the War against iPhone and iPad

There are a ton of indicators that the Kindle family is probably going to get a member in 2010 (or early 2011) focused on something other than reading –

  1. Amazon is hiring quite a few gaming executives. 
  2. The Kindle App Store seems far more suited to a phone or a gaming device than a Kindle. 
  3. The patent for gesture recognition is reminiscent of Kinect and doesn’t seem like anything an eReader would use.
  4. The gesture recognition patent also includes images of a device that looks a lot like a smartphone or handheld gaming console.
  5. Amazon’s acquisition of a company that has multi-touch technology (TouchCo) which would be far more useful on a multi-purpose device than on an eReader.
  6. Lab 126 hiring a lot of people from Palm and Handspring early on.
  7. The continued insistence of Amazon that Lab 126 will build other products plus various rumors that Lab 126 is doing more than just Kindle.

Amazon has seen customers buy 2.7 times the numer of books they used to from Amazon once they became Kindle owners. There was probably also an increase in non-ebook purchases from Amazon. Any smart company would wonder what other devices it could make to tap into this loyalty/affinity factor.

Before the Kindle Amazon wasn’t a hardware company but now it most certainly is one. It also needs to be one.

Amazon needs new devices to preserve CD and DVD sales

Kindle provides Amazon a hedge against a decline in physical book sales. It needs Kindle Phone and Kindle Gaming Device and Kindle TV to hedge against a decline in sales of physical DVDs and boxed games and music CDs.  

Amazon has to be worried about the decline of physical media – While its Electronics sales grew by 69% its Media Sales (books, CDs, DVDs, etc.) grew just 18% (last quarter’s earnings report, year over year).

Kindle has transformed Amazon from a company that sold a lot of physical books but was in danger of getting left behind if ebooks took over to a company that might dominate all of Publishing if ebooks take over and the current status quo (Kindle and Kindle Store both being #1) remains.

If Amazon can create a Kindle Gaming Device and a Kindle Phone and a Kindle Pad and win one or more out of games, music, and movies it’s suddenly put itself right back into a position of dominance – one that’s even better than its earlier position as the top online retailer of physical media.

The Kindle Ad is more about Apple vs Amazon than iPad vs Kindle

Amazon seems to have decided to send Apple a message – We can play the advertising game too and we aren’t shy of attacking your shiny products.

A lot of people don’t understand that Apple is far more vulnerable to attacks than a normal company. You run a million PC vs Mac ads but most people are still going to buy PCs – they just don’t care that much about social proof and popularity and coolness. However, If Amazon can run enough ‘Loser Guy with Apple Product’ ads they’ll end up taking a lot of the shine off of Apple’s shiny devices.

Apple is very vulnerable to the very strategy that helped it find success – selling coolness in product form and associating rival products with non-cool qualities. The Kindle Ad shows that people are finally becoming aware of it.

The perfect next ad would be an iPad owner talking about how the iPad taps into his creative genius and identifies him as part of the intelligentsia while a bunch of monkeys use iPads in the background while eating bananas and prancing about. Then pan out to show its hundreds and hundreds of monkeys all wearing the same black suits and all using iPads. End with a slogan – Stop monkeying around if you want to read – Get a Kindle 3.