Breakout

E-Book Ruling Cements Amazon’s Virtual Monopoly

Jeff Macke
Breakout

A federal judge ruled on Wednesday that Apple (AAPL) had conspired with major book publishers in an effort to raise the prices of e-books. On the surface the widely expected ruling is a win for consumers who have yet to benefit from the minimal production and distribution costs of e-books. In reality, the decision does little more than extend Amazon.com's (AMZN) dominance in books from retail into publishing.

Short of colluding with one another or an outside vendor like Apple, publishers have almost no pricing power. Barnes & Noble (BKS) is the last national bookseller standing and they've recently signaled a retreat from e-books back to their brick and mortar stores.

The lack of viable competition gives Amazon monopolistic power in the still growing e-book business. The question is what the company is going to do with it.

Hitha Prabhakar, retail analyst and author, says Amazon is already signalling its intentions with its subscription-based Amazon Prime service.

"What you can do is borrow and lend books, either from your friends or from the stores," Prabhakar explains. "I think this is something you're going to see Amazon do in a widespread way very soon."

The idea of borrowing books isn't new, but monetizing the service is. Library cards have been free or nearly free for hundreds of years. With Amazon now having near total control over the book pricing model the only question is whether or not the company thinks going into the lending business makes sense when the company can still make handsome margins while undercutting publishers and competitors on price.

Citing digital content distribution companies like Netflix (NFLX) in video and Spotify in music, Prabhakar says Amazon will go into lending and subscription services because that's what the customer wants. "More people are going to want to go ahead and use a lending subscription as opposed to just buying books," she predicts.

Ultimately Amazon can only retain its stance at the top of the publishing food chain by giving the customers what they want in as many forms as possible. CEO Jeff Bezos' defining traits have been customer service and flexibility. Despite the court ruling giving Amazon the legal right to gouge publishers and pass the savings onto customers ala Walmart (WMT), it's more likely that Bezos will opt to keep e-book prices more or less where they are while increasing the number of distribution channels.

The bottom line after the ruling against Apple is that Amazon has more power than ever to distribute digital content however it sees fit. Analysts estimate as much as a quarter of Amazon's revenues will come from digital content distribution in 2014. Look for Amazon to offer monthly subscriptions, social network-like book borrowing options, the traditional one-click tablet distribution model, and even books made of paper, ink and glue for the dwindling number of old-school consumers.

In other words, the court's effort to strike down price fixing has done little more than cement Amazon as king of the book selling empire. Consumers can only hope Jeff Bezos is a benevolent ruler.

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