Justice Department Preparing Anti-Trust Suit Against Apple, Publishers Over Sale of E-Books

by Mike Mintz on March 29, 2012 · 0 comments

in Legal News and Trends,Legal Technology

The U.S. Justice Department is in the process of preparing an anti-trust lawsuit against Apple and some of the biggest names in U.S. publishing for their alleged price-fixing conspiracy. According to the proposed complaint, the parties agreed to raise the prices of e-books.  The publishers include some heavy hitters in the industry: Simon & Schuster, Penguin Group, HarperCollins and MacMillan.

Publishers traditionally sold books to retailers at the wholesale price which was approximately half the suggested cover price.  Booksellers were allowed to sell the book to consumers for less than the suggested cover price if they wanted to. This all changed when e-readers and e-books came on the scene.

When Amazon started selling e-books, it sold many at the low price of $9.99 in an effort to encourage consumers to buy its Kindle e-readers. If this pricing war sounds familiar, it should. Apple had a similar pricing model when it rolled out iTunes. It only charged 99¢ for songs, even the most popular ones, in an effort to get consumers to subscribe to iTunes. Needless to say, Apple became the dominant music player, much to the dismay of record companies.

The $9.99 price on the e-books, however, came at the expense of publishers who wanted to sell book titles at a higher price.  Publishers also became concerned that traditional book sellers such as Barnes & Noble could not compete with Amazon’s sharply discounted pricing on e-books.  They worried that eventually Amazon’s deep price cuts would drive the likes of Barnes & Noble right out of the e-book-selling business, thereby getting rid of the competition.

Back in 2010, at the time Apple was rolling out the first iPad, Steve Jobs suggested a way to counter Amazon’s draconian pricing practice.  He suggested that book publishers set the price of the e-books themselves and that Apple would take a thirty percent cut off the top.  Significantly, Apple and the publishers also agreed that the publishers could not sell the same e-book to other retailers at a lower price than the one being charged to Apple.

Once the publishers had Apple’s backing for this thirty percent pricing model, the publishers were able to impose this pricing structure across the board, including with Amazon.  According to the Justice Department, this arrangement amounts to price-fixing in violation of federal anti-trust laws.

The publishers deny that they colluded to raise prices, instead claiming that the new pricing model fosters competition by allowing more e-booksellers to prosper. According to Barnes & Noble, should this pricing model be abandoned, there would only be one entity, i.e. Amazon, in the e-book selling industry because it will undercut all other e-book sellers.

According to other retailers, before the thirty percent pricing model, Amazon was selling best-selling e-books for less than it paid for them, thereby trying to drive out all other retailers from the digital book marketplace.  The other e-book sellers argue that the pricing model Apple put into place has encouraged competition amongst the book sellers—all to the consumers’ benefit.

The Justice Department, however, is not convinced by this argument.  They wonder how competition could have increased if prices for e-books have increased thanks to the thirty percent model. Moreover, Apple’s contract with book sellers prohibits them from selling books to other buyers at a lower price.  Such pricing competition has traditionally been used to prevent competition, not encourage it.

Another issue the Justice Department investigated was the effort three years ago by some publishers to delay the publication of e-books of certain titles for a specified amount of time after the hardcover edition of the books were published so as to encourage the sales of the hardcover edition.  The publishers did not want their hardcover sales dented by Amazon’s $9.99 pricing on e-books.

Some of the parties are in negotiations with the Justice Department to settle the case.  These negotiations have been ongoing for quite some time, and it is not clear whether the talks will lead to a settlement, and which parties would sign on to such a settlement for that matter. Some publishers involved in the settlement negotiations with the Justice Department have suggested that they be allowed to keep the thirty percent pricing model, but allow for some discounts by book sellers.

A lot is at stake. Revenue from e-books is the fastest growing segment of the publishing business. The sales of physical books, on the other hand, has been declining steadily.  E-book sales doubled to $970 million in 2011 alone. As more consumers buy e-readers, the sales of e-books will continue to rise.

At the same time that e-books are gaining in popularity, the traditional bricks and mortar book stores are vanishing. Just last year, Borders Group, the second-largest book chain in the U.S. closed its doors for good.

Hence, there is a lot at stake in this dispute, not just for e-book publishers, retailers and Apple, but for consumers nationwide as well.


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