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Lower e-book prices ahead as government threatens Apple, publishers?

The Justice Department has told Apple and five major publishers that it's planning to sue them for fixing e-book prices.

By Husna Haq / March 9, 2012

The government's concern is that the fixed pricing model introduced by Apple – and adopted by five of the big six US publishers – has reduced competition in the e-books industry and raised e-book prices for consumers.

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E-books are at the center of a government crackdown and that might mean lower e-book prices ahead.

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The Justice Department has warned Apple and five major publishers that it plans to sue them for price fixing e-books, according to a report in The Wall Street Journal.

The antitrust lawsuit alleges Apple and five publishers, including HarperCollins, Hachette Book Group, Macmillan, Penguin Group Inc., and Simon & Schuster Inc., colluded to fix e-book prices. Some of those publishers have already moved to settlement discussions with the government before any such suit could be filed, in the hopes of avoiding a public fight, according to the WSJ report.

At stake: Apple’s signature agency pricing model. When the iPad was released, Apple introduced a pricing model with major publishers that allows publishers to set prices. In this model, publishers set fixed prices across all e-bookstores and retailers get a fixed percentage of sales. (In contrast, Amazon takes pricing decisions out of publishers’ hands.)

The DOJ’s concern is that this fixed pricing model, adopted by five of the big six publishers, has reduced competition in the e-books industry and raised e-book prices for consumers.

Following the dead-tree book model, e-books were traditionally sold to retailers under a wholesale model. “[P]ublishers and retailers negotiated a fixed cost per unit, and retailers are then free to charge customers whatever they like,” explains Wired’s Epicenter blog. “But wholesale pricing causes two problems for publishers: it gives market leaders (read: Amazon) disproportionate negotiating power, and makes it possible to use heavily discounted e-books to boost sales figures, capture market share and sharply undercut sales of printed books.”

That’s when the late Steve Jobs, then-chief executive of Apple, introduced the agency model, under which publishers set book prices and Apple takes a 30 percent cut. According to the WSJ, “Apple also stipulated that publishers couldn’t let rival retailers sell the same book at a lower price.”

Hence the price fixing lawsuit.

What’s ahead? Publishers will likely want to reach a settlement soon – which may involve modifying or completely eliminating the agency model.

It’s too early to tell what a settlement might look like for consumers but it’s likely to translate to lower e-book prices.

Husna Haq is a Monitor correspondent.

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