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Vulnerable e-Book Pricing Smashed by Amazon

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In a perfect example of what can happen when the price of a category of products is no longer protected by suppliers and resellers, e-book prices have been slashed in the US.

The Department of Justice announced on Wednesday that it would be suing the five major book publishers and Apple for the price-fixing of e-books. The DOJ almost immediately settled with three of those companies in an series of events that initially looked like a big win for consumers.

The repercussions of the break in price-fixing agreements could be more complicated, however. Amazon, retail giant and the world’s largest online bookstore is now in a true position of strength when it comes to e-books. After the DOJ announced its plan to file a lawsuit, Amazon almost immediately announced plans to reduce e-book prices. In some cases, major titles are set to drop from US$14.99 to US$9.99 or less.

Consumers will immediately see the benefit of the price reductions, but both publishers and booksellers say that this can only mean bad news further afield. In breaking the practice of price-fixing, they say, the effect of the anti-trust suit will be to exchange a perceived monopoly for a real one. Now Amazon will have complete control over the e-book trade.

Michael Norris, a book publishing Analyst with Simba Information said, “Amazon must be unbelievably happy today. Had they been puppeteering this whole play, it could not have worked out better for them.”

The US government alleged that book publishers HarperCollins, Hachette, Simon & Schuster, Penguin and Macmillan secretly colluded with Apple to develop a policy that would allow them to set their own retail prices, before attempting to hide these discussions.

HarperCollins, Hachette and Simon & Schuster were the first of the publishers to fold in out of court settlements on Wednesday. The break in ranks has only made it easier for Amazon to move ahead with plans to lower book prices in order to build upon its existing 60 percent hold on the e-book market. Amazon, it is speculated, will then begin to dictate its own terms to suppliers and consumers.

This is also an issue for bricks-and-mortar bookstores, which have already suffered catastrophic losses due to the online market add well as the e-book trade. If the price gap between hardcopy books and softcopy e-books continues to widen, what is left of their dwindling market share will most likely dry up completely.

“To stay healthy, this industry needs a lot of retailers that have a stake in the future of the product,” Norris said. “The bookstore up the street from my office is not trying to gain market share. They’re trying to make money by selling one book at a time to one person at a time.”

The example of e-books in the US is a perfect example of what the big brand Australian retailers fear will happen to many of their products if they are sold readily and cheaply online.

In order to avoid competition with international online retailers, many Australian retailers seem to have brokered similar deals with their suppliers and manufacturers as Apple did with those five publishers. Fashion, footwear and makeup are all categories that currently exhibit some level of protectionism to one degree or other. Now, these businesses may not be fixing the price of the product, but they are restricting where and how the product can be sold in order to achieve the same ends.

Many people are tempted to sympathise with the brands on this point – and fair enough, too. Australians don’t want an Amazon-style monopoly to occur for each category of product. However, the current system is far from being a free and open market either.

The moratorium that certain brands have placed on international shipping, and even on distributing through online channels at all, is putting a large amount of pressure on pureplay online retailers. The behaviour is anti-competitive and it prevents consumers from being able to accurate perceive the true dollar value of a product. But more importantly, this behaviour erodes the trust that consumers have in brands, placing them back in the stereotype of ‘big, evil corporation’, the likes of which dogged Nike for so long.

The good news is that the Australian Competition and Consumer Commission has announced that it plans to focus on fighting these practices this year, with a view to make life easier for the smaller, local online players. It has already taken aim at Flight Centre, with allegations that the online aeroplane ticketing agency was colluding with airlines to protect prices.

As a retailer, how do you feel about competition and what would you consider to be effective, legal alternatives to reducing competitive pressures?

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