Regulators Bring Price-Fixing Suit Against Apple And E-Book Publishers
March 8, 2012

Regulators Bring Price-Fixing Suit Against Apple And E-Book Publishers

The U.S. Justice Department has reportedly accused Apple and five large American publishers of colluding to raise the price of e-books.

According to a Thursday article in the Wall Street Journal, the Justice Department will file an anti-trust lawsuit against the publishing companies, though insiders say a settlement will likely be reached before the case is taken to court.

The Journal cited several sources close the matter as saying that the involved parties are already in negotiations for an out-of-court settlement that could potentially lead to significantly cheaper e-books.

The newspaper identified the five publishers in question as Harper Collins Publishers Inc (part of News Corp.),  Macmillan (part of the German Verlagsgruppe Georg von Holtzbrinck GmbH), Pearson PLC´s Penguin Group, Lagardere SCA´s Hachette Book Group and Simon & Schuster Inc (part of CBS Corp).

However, the report noted that not all of the above publishers are as yet taking part in settlement talks.

All involved parties have refused to disclose any details regarding either the charges or a potential settlement as yet. The accused publishers did, however, tell the Journal that they were not involved in price-fixing.

The crux of the issue centers on the so-called “agency pricing model” first proposed by Steve Jobs shortly before the release of Apple´s first iPad.

Prior to the advent of e-books, the book industry used the “wholesale model” common to many industries. Retailers purchased books from publishers at a wholesale price of approximately half the book´s MSRP. Afterwards, retailers were free to sell those books to consumers at whatever price they chose, thus stimulating competition between rival retailers and driving the price down the prices.

Upon introducing its first e-reader, however, Amazon Inc adopted a new sales strategy, selling e-books at highly discounted rates, often at or below cost. Though making little or no profit on the sale of the books themselves, the company was thus able to stimulate sales of its e-reader devices.

Publishers, however, were not fans of this business model and quickly voiced concern that consumers would get addicted to cheap e-books and that they themselves would eventually be forced to lower their bottom line.

Moreover, publishers also feared that super-discounted e-books would sound the final death knell for moribund traditional retailers like Barnes & Noble, who had already been struggling for years to remain profitable.

Under the agency model proposed by Jobs, publisher´s fears of ever-falling prices would be assuaged by allowing them to contractually set the retail price for e-books, leaving distributors like Apple or Amazon to take a fixed 30% cut.

Most important, the deal stipulated that publishers could not sell their literary wares at a lower price to other distributors and that retailers could not sell the books at a lower price to consumers.

According to his biographer Walter Isaacson, in the lead-up to the release of Apple´s iPad, Jobs was quoted as saying: “We told the publishers, ℠We´ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that´s what you want anyway´.”

Thus assured of their profits thanks to the initial deal with Apple, publishers were then simply able dictate the terms of e-book sales to other online retailers like Amazon. If they didn´t want to participate in the new agency model, the publishers simply refused to provide them with their books and they forfeited their sales to Apple.

According to Jobs, publishers went to Amazon´s executives and essentially said “You´re going to sign an agency contract or we´re not going to give you the books.”

The publishers have since told federal investigators that the adoption of the agency pricing model was actually intended to increase competition in the e-book industry by making it possible for more detailers to survive.


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