Price Fixing & Publishing: The DOJ Takes on Apple and EBook Publishers

Apr 12, 2012

Last month I mentioned the rumors that the Department of Justice was preparing to file antitrust charges against Apple and five publishers regarding "agency pricing," wherein publishers set a specific price for an ebook and the retailer receives a certain percentage of that price. (Author royalties are paid on cover price in a similar manner.) Yesterday the hammer fell.

Within hours, three publishers-HarperCollins, Hachette and Simon & Schuster-had announced that they were settling with the government (pending approval by the New York Federal Court); Macmillan announced-and I'm paraphrasing here-no way, we're not settling, we didn't do anything wrong; and Penguin sent an email stating that there were omissions and mistakes in the charges that they "look forward to having the opportunity to correct in court." Apple has refrained from comment. But the whole situation is more than just a little confusing, so I'm here to help clarify some of the larger points.

But what exactly is it the DOJ alleges occurred?  According to their filing, the DOJ believes that in early 2010 publishing executives colluded together and with Apple to create and maintain a uniform ebook pricing structure for all retailers that would stifle competition through a most-favored nation status (wherein no one else could charge a lower price than Apple's iBooks). Publishers were concerned about Amazon's drastically lowered ebook prices becoming a consumer expectation. Apple wanted in on ebook sales but wanted to nail down the pricing before agreeing to anything. Steve Jobs can't be called as a witness, for the obvious reason, however he was quoted in Walter Isaacson's recent biography as saying, "We told the publishers, ‘We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway." Supposedly publishers then met clandestinely in Manhattan various eateries including Picholine (try the fish!) to hash out the details among themselves.

Why did three publishers settle? Hachette, HarperCollins and Simon & Schuster all announced settlements before the end of the day, and had apparently been in talks with the DOJ for some time. Both HarperCollins and Hachette stated that their decision to settle was a business decision. To paraphrase yet again: "We're not saying we did anything wrong, but it'll be cheaper in the long run to just settle now." Simon & Schuster has yet to release a public statement.

What are the settlement terms? Macmillan's CEO, John Sargent, called the terms "onerous" but judge the main points for yourself, straight from Attorney General Eric Holder: "(This settlement) would require them (the cited publishers) to grant retailers-such as Amazon and Barnes & Noble-the freedom to reduce the prices of their ebook titles. The settlement also requires the companies to terminate their anti-competitive most-favored-nation agreements with Apple and other e-books retailers. In addition, the companies will be prohibited for two years from placing constraints on retailers' ability to offer discounts to consumers. They will also be prohibited from conspiring or sharing competitively sensitive information with their competitors for five years. And each is required to implement a strong antitrust compliance program. These steps are appropriate-and essential in ensuring a competitive marketplace."

What could a ruling on this case mean for consumers? Will ebooks become cheaper? More expensive? Free? Well, certainly not that last one but some agree with the government that by setting pricing structures, the publishers kept ebook prices artificially high. Others maintain that Amazon was rapidly heading toward a retail ebook monopoly by artificially lowering prices, in some cases to a loss, which would have choked out all retail competition after which they'd be free to price ebooks as high as they wanted. No sooner had the charges been announced than the New York Times reported that Amazon was lowering ebook prices -- though it's unclear where that information came from.

And then there's the cash. HarperCollins and Hachette have agreed to pay back $51 million to consumers. S&S are still in negotiations.

Wait, am I getting money back for that ebook I bought in 2011? Whoo-hoo! Hold on there, Chumley. We don't know anything about those terms yet. Whether or not you receive any kid of refund is going to depend on a lot-the title, when and where you bought it, and probably a lot of other factors that we just don't know yet.

Only one thing is for sure: publishers' assistants are going to have to be in collusion these next five years to make sure no publisher has lunch reservations at the same restaurant.

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Consumers may have been furious (and vocal) about an April settlement that allowed three publishers - HarperCollins, Simon & Schuster, and Hachette - to settle out of court in regards to an antitrust lawsuit brought against several publishers and Apple for allegedly "price-fixing" ebooks, but that doesn't seem to bother the DOJ. Many people who filed comments with the U.S. District Court in New York have criticized the DOJ for essentially giving Amazon a leg up in the ebook market by taking on its competitors.