EU Investigates E-Book Pricing

Zacks Investment Research
updated | Zacks.com

Apple Inc. (NASDAQ:AAPL) is currently under the radar as the European Union’s antitrust team is investigating if the technology giant unlawfully enabled five publishers hike e-book prices in 2010. In the middle of 2010, Apple had launched its revolutionary iPad tablet and also launched iBook, the company’s own e-book service.

The five e-book publishers that are being investigated into are Hachette Livre (Lagardère Publishing France), Harper Collins (News Corp., U.S.A.), Simon & Schuster (CBS Corp., U.S.A.), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of Macmillan, Germany).

What sounded fishy was the significant change in price determination of the e-books concurrent with Apple’s launch of iPad and iBook. The Commission is looking into the alleged price rise of e-books through the agency pricing model that Apple adopted for the publishers. Per the agency pricing model, publishers could set the retail prices of the e-books.

However, up until then, e-books were much cheaper than the hardbound and paper back covers, as publishers were allowed to set the wholesale price of e-books, while retailers had the power to fix the retail prices and also give discounts at times.

Amazon.com. Inc. (NASDAQ:AMZN), through its Kindle e-book reader and a discounted pricing model, is a strong player in the e-book market that Apple looked to break into. Thus, the agency pricing model was a strategic ploy by Apple. Since this development, many online retailers shifted to the new model. After some brief resistance, Amazon eventually gave in to the demand of publishers. This led to e-book costs equaling the physical ones at times.

For example, the e-book version of Steve Jobs’ biography had a price tag of approximately $17 at the time of its launch. This was nearly as costly as the hardcover book. Gone are the days when Amazon used to charge only $9.99 for e-books.

The total e-book sale is expected to generate revenues of $3.2 billion, which would rocket to $9.7 billion by 2016. According to analysts, with the rapid adoption of tablets, almost 30% of the e-books will be downloaded through these devices by 2016. Both Apple and Barnes and Noble have been trying to get into the e-book space that has been dominated by Amazon. This is a billion dollar pie that the e-book distributors are targeting to get a bite of.

Though law will take its own course, there seems to be a genuine problem with incremental e-book prices. If the investigation unearths the alleged fraudulent practices, then we might get cheaper e-books like earlier times.

It will be interesting to see how Apple handles these investigative headwinds, particularly so, since it would be bad for the company’s public image if found guilty. Moreover, investors would keep their eye on Apple’s ability to cater to the growing demands of the industry. Though we expect Apple to remain a leader in several markets, we think that these could be significant challenges for Apple going forward.

We remain Neutral over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, which implies a Buy rating in the near term.

 
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