Will Apple Antitrust Lawsuit Change the Landscape of the E-Book Business?


April 27, 2012
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Business attorney NYCThe U.S. Department of Justice has filed an antitrust lawsuit in New York against Apple Inc. and several leading publishers, alleging that their stifling of retail price competition resulted in consumers paying millions of dollars more for their e-books. The lawsuit highlights that what might be considered a keen “business decision” could be characterized as anti-competitive by the government and lead to a potentially costly antitrust lawsuit.

In this case, the Justice Department contends that the CEOs of Hachette Book Group, HarperCollins Publishers, Macmillan, The Penguin Group, and Simon & Schuster met regularly to discuss how to prevent Amazon.com from offering steep discounts on electronic versions of their books.

“Publishers saw the rise in e-books, and particularly Amazon's price discounting, as a substantial challenge to their traditional business model," reads the complaint. "The Publisher Defendants feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid," it further states.

To protect profits, the five publishers allegedly reached an arrangement with Apple that increased the price of many best-selling e-books to $12.99 or $14.99. The agreement involved shifting from traditional wholesale pricing—where retailers set the price of both digital and physical books—to an agency model under which publishers establish e-book prices and retailers receive a commission.

The publishers then worked together to pressure Amazon and other e-book retailers to accept the new model, according to the DOJ. "Our goal is to force Amazon to return to acceptable sales practices," a publishing CEO wrote in a December 2009 email cited in the suit. "To succeed our colleagues must know that we entered the fray and follow us."

The publishers also agreed to pay Apple a 30 percent commission for each e-book purchased through Apple’s iBookstore and promised, through a retail price-matching most favored nation (MFN) provision, that no other e-book retailer would sell an e-book title at a lower price than Apple.  As stated in the Justice Department’s complaint, Apple’s then-CEO Steve Jobs said, “the customer pays a little more, but that’s what you [publishers] want anyway.”

The Department of Justice has already settled with Hachette, HarperCollins, and Simon & Schuster. They must terminate their agreements with Apple and other e-books retailers and will be prohibited for two years from entering into new agreements that constrain retailers’ ability to offer discounts or other promotions to consumers.  The settlement does not prohibit Hachette, HarperCollins and Simon & Schuster from entering new agency agreements with e-book retailers, but those agreements cannot prohibit the retailer from reducing the price set by the publishers. The antitrust litigation will proceed against Apple and the remaining publishers.

At this point, it is unclear how the antitrust lawsuit may impact the e-book industry. Like the music industry, the publishing industry has struggled to adapt to the digital world.  It is alleged that the pricing scheme was an attempt to make e-books a profitable part of their operations.  The lawsuit will likely require the companies to develop new and alternative commercial relationships with other retailers, but those agreements cannot prohibit the retailer from reducing the price set by the publishers.

 

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