Deal on ebooks to see titles get cheaper

Good news is on the horizon for readers as retailers such as Amazon are on the brink of being allowed sell ebooks cheaper than Apple.

The US justice department could reach a settlement in the next few weeks with Apple and some of the major publishers suspected of colluding to push up ebook prices, according to two people close to the negotiations.

The first formal news from the US government warning Apple that it will sue them for pricing collusion came on Mar 9, two days after the new iPad was unveiled.

The settlement is expected to eliminate Apple’s most favoured nation status, which had prevented the publishers from selling lower-priced ebooks through rival retailers such as Amazon or Barnes & Noble.

The deal could also force a shift, at least temporarily, in pricing control from publishers to retailers. Such a move to a “wholesale model” would not only benefit consumers but also Amazon, which had been the leading bargain ebook retailer with its Kindle reader.

“It would be a positive for Amazon because the company’s greatest strength is as a high-volume, low-price retailer and the wholesale model plays into that,” said Jim Friedland, an analyst at Cowen & Co.

The justice department is seeking to unravel agreements Apple secured from five publishers about two years ago, as the company was launching its iPad and seeking to break up Amazon’s dominance in the digital book market.

Apple is said to have made agreements with publishers including Simon & Schuster, Penguin Group and Macmillan. As part of the agreements, the publishers shifted to an “agency model” that allowed them to set the price of ebooks and give Apple a 30% cut.

Prior to that, Amazon had operated on the wholesale model, in which publishers sold books to retailers, which were free to set whatever price they wanted.

Amazon was able to charge only $9.99 (€7.50) for many ebooks, sometimes pricing new releases or popular ebooks below cost.

The tactic worried publishers who felt readers might get used to cheaper books and that Amazon would gain more market power, putting downward pressure on sales and prices of physical books.

The Apple agreements effectively barred publishers from allowing rivals such as Amazon to sell the same ebooks at lower prices.

Friedland estimated that a switch back to the wholesale model could increase Amazon’s revenues by about $1.1bn this year and $1.6bn in 2013, although gross profit may not increase as much because of the expected discounts.

The impact on Apple is expected to be minimal. Apple generates about $50m from ebook sales, a tiny portion of its revenue of more than $100bn.

When Apple entered the digital books market with its iPad in Jan 2010, Amazon had nearly 90% of the market.

Amazon now has about 65% of the ebook market, while Barnes & Noble has 20% and Apple has 10% at most, according to Cowen & Co estimates.