The lawsuit from the Justice Department and 16 states alleges that Apple and major book publishers entered into an agreement to change the market model for e-books in a way that would set prices at a certain level and eliminate retail competition. The agreement caused “e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid.”
Three of the publishers involved – Hachette, Simon & Schuster, and HarperCollins – have already settled, to the tune of an estimated $150 million. Other publishers, including Penguin and Macmillan, have not. Neither has Apple.
The price-fixing scheme cost customers an extra $2 to $3 per e-book, estimated Connecticut Attorney General George Jepsen at a Justice Department press conference Wednesday. He suggested that affected e-book buyers would be compensated, either in the form of book purchase credit or a check.
“The details are still being decided,” he said.
Here’s how the arrangement worked, according to the suit: Book publishing has always operated as a “wholesale model” – publishers sold titles to stores and online vendors at a flat wholesale price, then the merchants would set the retail price of the book for customers. Allegedly, Apple and the colluding publishers shifted the market to an “agency model” in which the publishers had the power to set retail prices themselves, eliminating competition among retailers, who were reduced to a role as intermediaries in the transaction, paid via commission.
Under this new model, Apple agreed to a set pricing system for all e-book sales, which the publishers then imposed on retailers under a “most favored nation clause,” which stipulated that no other retailer could sell e-books for a lower price.
The lawsuit quotes Apple's late chief executive, Steve Jobs, saying "We'll go to [an] agency model, where you set the price, and we get our 30 percent [commission] and yes, the customer pays a little more, but that's what you want anyway."
“Apple clearly understood that its participation in this scheme would result in higher prices,” the lawsuit says.
On its own, there’s nothing unethical about an agency model, says Herbert Hovenkamp, a law professor at the University of Iowa in Iowa City, who specializes in antitrust law. “It’s a normal, legal way of making sales – real estate, for example. But what you cannot have is two or more sellers agreeing with each other about an agency relationship."
"If Apple had agreed with each publisher on the agency system, it would be legal,” he explains. “But it’s illegal for the publishers to agree with each other and Apple to do that. As soon as you have two or more competitors agreeing, it’s a problem. That’s the DOJ’s theory on what happened, and what they would have to prove if this went to trial.”
According to the Justice Department's complaint, the agreement was reached as part of an effort to raise online retail giant Amazon’s e-book prices, which many publishers and authors thought were far too low. (Before the agreement, Amazon found wild success selling new and best-selling e-books for $9.99, a far lower price point than most vendors could offer.)
“Publishers saw the rise in e-books, and particularly Amazon's price discounting, as a substantial challenge to their traditional business model,” the lawsuit reads. “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.”
"Amazon is a victim in this story,” Hovenkamp says. “They had an aggressive pricing strategy going, and publishers and authors didn’t like it very much. Apple took advantage of that.”
The casting of Amazon in a victim’s light is worrying to some in the publishing industry industry, who fear that the company could gain a monopoly on e-book sales. With the “$9.99” plan, Amazon was already selling some e-books for less than it paid publishers, a practice that smaller vendors could never afford.
“We have no way of knowing whether publishers colluded in adopting the agency model for e-book pricing,” Authors Guild President Scott Turow wrote in an open letter last month in response to news of the Justice Department’s investigation. “We do know that collusion wasn't necessary: given the chance, any rational publisher would have leapt at Apple's offer and clung to it like a life raft. Amazon was using e-book discounting to destroy bookselling, making it uneconomic for physical bookstores to keep their doors open.”
“The irony bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition,” he continued. “This would be tragic for all of us who value books, and the culture they support."
Indeed, according to the New York Times’ Media Decoder blog, Amazon seemed ready to drop e-book prices on their website in response to the lawsuit, and a spokesman for the company stated that the lawsuit and settlements were “a big win for Kindle owners, and we look forward to lowering prices on more Kindle books.”
At the Wednesday press conference, too, the question was raised whether driving down prices would result in fewer e-book titles for readers, as smaller publishing houses and vendors might not be able to compete with big online merchants.
“Our aim was to restore competition in the marketplace,” replied acting Assistant Attorney General Sharis Pozen.
But does the antitrust suit mean that e-book prices will be lower for consumers from now on? “Hard to say,” says Hovenkamp. “The government will not order the firms to charge any particular price, it will just order them to stop. Whether or not the prices will come down or not is anybody’s guess.”