Retailers such as Amazon may soon be allowed to sell eBooks cheaper than Apple, which could lead to a $5bn revenue increase for the company behind the Kindle, it has been reported.
At present, Apple's 'agency model' of eBook pricing means that publishers can set the retail prices of their eBooks but are not allowed to sell through other retailers such as Amazon for a lower price.
Reuters reports that the US Justice Department is close to reaching a settlement with Apple in an antitrust lawsuit, which is expected to eliminate Apple's agency model. The report sources two people close to the negotiation, who say that the reason behind the settlement is that Apple and some major publishers are 'suspected of colluding to push up electronic book prices'. The first formal news from the US government warning Apple that it will sue them for pricing collusion came on 9 March, two days after the new iPad was unvelied.
The settlement would benefit both consumers and retailers such as Amazon. "It would be positive for Amazon because the company's greatest strength is a high-volume, low-price retailer and the wholesale model plays into that," said Jim Friedland, an analyst at Cowen & Co.
Apple is said to have made agreements with five publishers, including Simon & Schuster Inc, Penguin Group and Macmillan, around the launch of the iPad in 2010, aiming to lower Amazon's dominance in the eBook market. These agreements introduces the agency model, and forced Amazon to change its pricing model.
Amazon's 'wholesale model' meant that publishers could sell eBooks directly to Amazon, which could then decide what price it sold the eBooks to customers for. Many publishers worried that this model would lower sales of paperbacks and hardbacks in retail shops.
In his best selling autobiography of Steve Jobs, Walter Isaacson quotes the late Apple co-founder as saying: "So we told the publishers, 'We'll go to the agency model, where you set the price and we get our 30 per cent and yes, the customer pays a little more but that's what you want anyway.'... So they went to Amazon and said, 'you're going to sign an agency contract or we're not going to give you the books.'"
Friedland has estimated that giving Amazon the ability to return to the wholesale model could lead to an increase in the company's revenue of up to five billion dollars in 2013, but he points out that gross profit may not increase due to discounts that the wholesale model would allow.
Friedland also points out that Apple only generates a tiny portion of its revenue from eBook sales, so the outcome of the settlement will have a minimal impact on the company.