Is the Fix In? DOJ Sues Apple for e-Book Price Fixing

by Holly Shoemaker

I discussed in March how the U.S. Department of Justice (DOJ) started to investigate Apple for e-book price fixing. On Wednesday, April 11, 2012, the DOJ filed a lawsuit against Apple and five publishing companies for price fixing. The publishers include: Simon & Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins. HarperCollins, Simon & Schuster and Hachette have since settled.

Overview of DOJ’s Case

The case centers on the pricing strategy used with Apple’s 2010 iPad release. The DOJ claims that Apple conspired with the five publishers to increase e-book prices, which prevented price competition.

• Agency model – Apple and the publishers entered into an "agency model" agreement. This allowed the publishers to set e-book prices. In turn, Apple received 30 percent of the profits. Part of this component included a “most favored nation” clause, which stipulated that retailers, like Amazon, had to partake in agency deals for four months.
• Executive involvement – The DOJ said that high-level executives held secret meetings and discussed how to get Amazon to cooperate in offering books at what they deemed acceptable price levels.

Apple’s Response

Apple does not make public statements too often. It did in this case. Apple maintains it allowed publishers to set e-book prices just like developers set prices for apps. Therefore, the company claims it did not engage in price fixing.

Concluding Thoughts

Ultimately, Apple used contractual agreements to force parties into an agency model. However, the issue is a murky one as Amazon has engaged in tactics that some would call price fixing to promote its Kindle line.

Because the DOJ claims to have recordings and documents, it has a stronger case against Apple. Furthermore, some of the publishers were against the agency model from the start. Clearly the decision to promote and “force” others into an agency model was Apple’s e-book strategy to compete with Amazon. Ironically, it will have the opposite effect as Amazon now gains the prime position for setting pricing. In the end, the action taken by the DOJ will result in lower prices for consumers. It may also impact Apple's e-book textbook plan.

DOJ Looks into e-Book Price Fixing

by Holly Shoemaker

The Wall Street Journal has reported that the U.S. Justice Department (DOJ) may sue Apple and five U.S. publishers, Simon & Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins for anti-trust violations related to price fixing of e-books.

Overview of Issues

At the center of the complaint is how Apple charged for e-books when it launched the iPad in 2010. Apple employed the "agency model," where publishers set the price for an e-book and Apple received 30 percent of the profits. This is the same as Apple’s education strategy. Apple also said publishers could not let rivals sell the same book at a lower price. This is the point that I see difficult to enforce and one that does conjure up concerns.

Prior to this launch, publishers sold books to retailers for half of the typical cover price. This allowed sellers to discount books for less than the cover price. Book publishers did not respond well when Amazon sold new best sellers for $9.99 to boost sales of its Kindle devices. Amazon also forbid publishers to offer discounts to other retailers. Those who accuse Apple of price fixing have some legitimate reasons to conclude Amazon did the same. The issue is whether it is legal or not, and that answer is, "It depends."

Publishers have also said that retailers such as Barnes & Noble would not have the ability to compete with discounting, like Amazon does. However, Amazon agreed to raise prices.

Concluding Thoughts

E-books operate differently than regular books. There has to be some leeway to ensure all parties get their fair shares, this includes consumers. Apple and other companies have the right to come to contractual agreements. The issue is sorting out if those agreements did violate anti-trust laws. On the surface it appears price fixing occurred, but the issue is also one of capitalism and honoring agreements - if they are legal of course.

Reports have circulated that some of these major publishers are in talks to settle this case. No matter the outcome, consumers keep benefiting. Consumers have already spent money on tablets, smartphones or e-book readers. They will expect to receive e-books at a cheaper cost. This could mean that e-books will become even cheaper for consumers.