Apple, Publishers, Face Trial for eBook Price Fixing

Apple Inc., and publishers Macmillan and Penguin Group will go on bench trial on 3 June 2013 for conspiracy to fix prices of electronic books. The US Department of Justice filed the antitrust case against Apple and five publishers last April, but three publishers have since settled with the DOJ: Hachette; HarperCollins; Simon & Schuster.

The DOJ said the five publishers did not like Amazon’s wholesale purchase of titles and selling “newly released and best-selling ebooks for $9.99 (S$12.77),” and wanted to sell ebooks for higher prices before consumers became used to buying ebooks at $9.99. The publishers also realized they would not be able to change Amazon’s mind on its wholesale business model, so they “teamed up” with Apple on “restraining retail price competition in the sale of ebooks.”

At the time the collusion was reportedly taking place among the publishers, Apple was going to introduce the iPad, and was setting up iBookstore. Instead of taking Amazon head-on, Apple got into most-favoured-nation (MFN) agreements with the publishers. Apple would act as an agent for the publishers and sell their ebooks for whatever price the publishers set, as long as Apple got its 30% commission for every sale. This “Agency Model” meant publishers would sell ebooks much higher than the $9.99 wholesale price offered by Amazon. If another retailer offered the same ebook at a lower price, iBookstore would match that price but still got its 30% cut — the publisher will absorb the loss.

The late Steve Jobs had a hand in negotiating with the publishers in 2009, helping them make tough decisions against retailers who might not want to agree to the “Agency Model” — Jobs reportedly told the publishers to withhold the books from reticent retailers. Jobs reportedly sent an email to one of the publishers’ CEOs offering a third option.

Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 (S$16.60) and $14.99 ($19.16).

The thought of losing out sales of popular new books to Apple reportedly made retailers sign agency deals — even Amazon. Jobs reportedly knew the agency model would raise ebook prices.

You set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.

The DOJ saw the Apple shift with its ebook business model as an “abrupt, contemporaneous shift from past behavior.”

Apple had committed to sell e-books on a model inconsistent with the way it sells the vast bulk of the digital media it offers in its iTunes store.

iTunes launched with a $0.99 (S$1.26) flat rate per song in 2003 after Steve Jobs wrangled with record labels into partnering with Apple. Cupertino took 35% of the sale for every song sold.

Nilay Patel’s analysis of the DOJ case is a very comprehensive yet concise summation of the US government’s lawsuit against Apple and the publishers.

The ebook market grew significantly after the iPad came out in January 2010,  despite the higher prices. But Apple claims it did not conspire with the publishers in “fixing prices.”

The Government starts from the false premise that an eBooks “market” was characterized by “robust price competition” prior to Apple’s entry. This ignores a simple and incontrovertible fact: before 2010, there was no real competition, there was only Amazon. At the time Apple entered the market, Amazon sold nearly nine out of every ten eBooks, and its power over price and product selection was nearly absolute. Apple’s entry spurred tremendous growth in eBook titles, range and variety of offerings, sales, and improved quality of the eBook reading experience. This is evidence of a dynamic, competitive market. These inconvenient facts are ignored in the Complaint. Instead, the Government focuses on increased prices for a handful of titles. The Complaint does not allege that all eBook prices, or even most eBook prices, increased after Apple entered the market.

The Cupertino lawyers went so far as saying “the Government sides with monopoly, rather than competition, in bringing this case.” Them’re fighting words, and Apple is going to fight it out till the end, it seems. NYU law professor Richard Epstein explained why the DOJ’s case is a mistake.

• First, there is no need for any collusion on this issue. If a single publisher had dreamed up this new scheme, it could have refused unilaterally to sell any books to Amazon or anyone else unless they bought into the model. Why is it illegal for Apple to come up with a bright idea that helps its competitive position with Amazon?
• Second, it is not clear that lower prices are necessarily in the long term interests of the public at large. As with all complex transactions, lower prices spell both low costs to consumers and low royalties to authors. The lower royalties translate into lower level of production of new books, so that we do not have here the usual cartel situation where higher prices reduce output. It is plausible that the higher royalties increase the number of titles available, and by increasing competition in the new book market, prices are lowered in the long run.
• Third, it is not clear why this arrangement is bad if done by all major publishers simultaneously. If it has justifications for each acting alone, those justifications remain when they act together. Under pure competition we would expect gravitation to a single new model if it proves better overall than its rival. That could be just what is happening here. The cooperative efforts speed the industry toward a more sustainable business platform.

Apple claims its entry into the ebook industry as an agent benefited customers because they now have a wider range of sellers to choose from: Amazon; Apple; Barnes & Noble and others.

And the pace of innovation has quickened, enticing more and more consumers to try eBooks. Apple introduced a number of innovative features, such as color pictures, audio and video, the read and listen
feature, and fixed display (critical for graphics-intensive books like cookbooks, travel books, and textbooks, many of which were unavailable before Apple’s entry).

Retailer Barnes & Noble agrees with Apple on the cultivation of competition (as opposed to Amazon’s 90% share of the ebook market prior to 2010) with the agency model. B&N filed a comment with the DOJ objecting to the settlement proposal for the defendants. B&N is not a respondent in the case, but has benefited from the market’s shift to the agency model after languishing behind Amazon in (actual and ebook) sales. Amazon’s share of the ebook market has since gone down to 60%.

The three publishers who settled early knew what was coming. But for Macmillan and Penguin, the long road to acquittal may be beyond their grasp. The DOJ has reports, emails and phone records detailing the times and dates the publishers’ CEOs met and contacted each other: “These private meetings provided the Publisher Defendants’ CEOs the opportunity to discuss how they collectively could solve ‘the $9.99 problem (Amazon).'”

Apple’s lawyers drafted an elegant yet scathing response to the DOJ’s suit, and the case promises to be a good read — at less than $9.99!

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