DOJ's recommended punishment for Apple in e-book case might also harm publishers

The DOJ made recommendations to rebalance the e-book market after Apple's antitrust trial. But the terms go too far, according to the five publishers involved in the case.

Five publishers raised objections to the Department of Justice’s recommended penalties against Apple in its on-going antitrust case, according to a filing made on Wednesday.

The group of publishers – HarperCollins, Hachette Book Group, Simon & Schuster, Holtzbrinck, and Penguin Random House – say that the DOJ’s proposal to rebalance the e-book market would not only hurt Apple, but would also be a financial blow for the publishing companies.

Apple was found guilty of colluding with these five publishing companies to raise e-book prices in violation of antitrust laws in early July. The publishing companies involved all settled out of court and agreed to issue approximately $175 million in consumer credits, though they admitted to no wrongdoing.

In its suggestions, the DOJ recommends that Apple should not be allowed to enter into so-called "agency pricing" agreements with publishers for five years.

This measure would adversely affect publishers, according to the group’s statement. 

The publishers’ settlements all allowed the agency model to stay in place, giving the publishing companies more control over book pricing.

The agency model allows publishers to fix the price they want retailers to charge for an e-book, and then retailers get a percentage of that sale price. In the traditional wholesale model, retailers pay publishers for the book and may then adjust the price as they see fit.

The case against Apple hinges on whether or not the company coordinated prices with publishers, not on a dispute of agency versus wholesale models.

However, “publishers make substantially less money under agency than they did under the wholesale model, but eventually they believe more competitors in the e-book market would make up for the lower margins,” says Andrew Albanese from Publisher’s Weekly in an e-mail to the Monitor. “What publishers are most upset about is how this complicates their future negotiations with Amazon,” though nothing prohibits the publishers from using the agency model with Amazon, if they “hold the line,” and insist on an agency model, writes Mr. Albanese.

When Apple entered the e-book market in 2009, rival retailer Amazon.com controlled more than 90 percent of the market. Amazon operated with the wholesale model, selling most books at a baseline price of $9.99. This frustrated some publishers who were concerned that uniformly low prices would devalue the price of the book . Apple offered to work with publishers using an agency model, giving them greater freedom to set prices.

The agency model “also gives the publishers more power to manage their print and digital businesses," writes Albanese. "By pricing e-books higher, consumers might be likely to buy a print edition,” addressing publishers’ fears of devaluing the hardcopy.

In their statement, the publishers claim that if the DOJ’s recommendations, which would prohibit the agency model, stay in place, limitations on Apple would effectively punish the publishers as well and conflict with their settlements.

Either way, the DOJ’s recommendations “should have little impact,” writes Albanese. If anything, it pushes all parties to negotiate new contracts without the aid of collective action, he says.

The court will hold a hearing to discuss the DOJ’s proposals on Friday.