No More Prix Fixe Lunch: Justice Department Sues Apple, Publishers

OK, so this is big. Today the Justice Department’s Antitrust Division sued Apple and five of the big six major publishers—Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster—claiming they conspired to thwart Amazon by artificially raising prices on eBooks. The alleged collusion originated with the introduction of Amazon’s Kindle in 2007, and the company’s tactic of pricing new first-run eBooks as low as $9.99, leading to “entrenched customer expectation,” according to the complaint. The Justice Department is accusing the publishers of putting their heads together with Apple to inflate prices in order to keep profit margins higher for both sets of parties, adopting what they called the “agency model.” Under this system publishers set eBook prices at their ends, rather than the prior practice of a “wholesale model,” where retailers paid publishers a set amount and were then free to charge buyers what they liked. The new model also granted Apple “most favored nation” status, and a 30% commission on eBooks sold through its iBookstore. Apple CEO Steve Jobs was quoted as describing the strategy thus: “We’ll go to [an] 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.” In other words, it couldn’t have happened without everyone’s full cooperation.

This is a small corner of U.S. commerce, true, but antitrust laws have always been a big deal in this country, and there’s certainly a precedent to be set here. The plan, which went into action in 2010, set the costs of eBooks at $12.99, $14.99, or $16.99 on a sliding scale according to the price of the corresponding print book. Considering the fact that you aren’t actually getting ownership of anything for that money, the Justice Department thinks that’s some pretty straight-up price fixing, and accordingly actionable.

Publishers Lunch has outlined the potential settlement pretty clearly: The publishers are to pay an as yet to be determined fine and agree not to “restrict, limit, or impede an e-book retailer’s ability to set, alter, or reduce the retail price of any e-book or to offer price discounts or any other form of promotions to encourage consumers to Purchase one or more e-books” for the next two years. They’re also not to enter into any agreements with retailers, who are in turn free to set their own prices on eBooks, and decide their own profit margins. The publishers are also obligated to void any eBook contracts with Apple, although they’re free to renegotiate under the new model.

As of this writing Hachette, HarperCollins, and Simon & Schuster have agreed to settle, although they steadfastly deny the collusion charges. Macmillan doesn’t wish to, and while Penguin hasn’t issued a formal statement yet, presumably they’re not going gently either. It looks like they’re in for a long litigation. Conspicuously not named in the suit was Random House, who switched over to the agency model much later and isn’t being accused in the collusion scenario.

This is a big affirmation for Amazon. Who’s not happy here? Well, the publishers, obviously. And the Authors Guild, who’ve been unhappy with what they see as Amazon’s predatory practices for a while now. It’s unclear to me how this is going to bounce back on Apple—could it be playing Brer Rabbit in the eBriar Patch? Apple’s playing it opaque, as usual. The resulting lawsuit should be something of a circus, though, so we’ll have more than enough opportunity to see how it all plays out.

And for now, it’s probably a great time to load up that Kindle with some bestsellers.

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1 Comment to No More Prix Fixe Lunch: Justice Department Sues Apple, Publishers

  1. April 13, 2012 at 3:54 pm | Permalink

    One wonders what it means for authors. Will more people actually buy/read one’s book if the ebook is priced low?Will author advances completely disappear? Inquiring/anxious minds want to know…

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