After weeks of buildup, the Department of Justice sued Apple and five book publishers today and accused them of conspiring to set e-book prices. This is a big story and publishers, consumers and retailers may see the ramifications of today’s lawsuit for months or even years to come. Here’s what you need to know now.
What is agency pricing, anyway?
Agency pricing is at the heart of the lawsuits but the legality of the model itself does not appear to be in question. Agency pricing allows book publishers to set the prices of their e-books, while the retailer (the “agent”) takes a commission. Under the agency model, the publisher is the only party that can discount e-books, and an e-book’s price must be the same across all retailers (i.e., an e-book can’t go on sale at just one retailer). The agency model is different from the wholesale model, in which publishers set a book’s suggested retail price and retailers can discount the books to any price they want.
In early 2010, Apple negotiated with the big-six publishers — Penguin, Macmillan, Hachette, Simon & Schuster, HarperCollins and Random House — to make their e-books available on its then-forthcoming tablet, the iPad, through the then-forthcoming iBookstore. All of those publishers except Random House adopted the agency model at around the time of those negotiations.
A battle with Amazon ensued. A couple of days after the iPad was released, Amazon turned off Macmillan’s “buy” button in protest over Macmillan’s switch to the agency model. Amazon eventually capitulated and restored Macmillan’s books.
About a year later, Random House became the last big-six publisher to adopt the agency pricing model.
Some more background reading: “Big six negotiate with Apple, ready new business model for e-books” by Michael Cader (1/19/10) | “Most dramatic publishing event of 2010? Introducing agency pricing!” by Mike Shatzkin (11/30/10)
Who is suing over publishers’ adoption of agency pricing?
Apple and the first five publishers to adopt agency pricing — I’ll call them the “big five” here — are the defendants in a number of lawsuits. The largest is the suit from the U.S. Department of Justice, filed today after weeks of investigations and buildup. In addition, 16 states sued Apple and the big-five today, claiming that agency pricing cost consumers $ 100 million. These lawsuits come on top of over a dozen class-action lawsuits, the first of which was filed last August, and a formal antitrust investigation by the European Commission.
Why are they suing?
The lawsuits accuse Apple and the big-five of colluding to raise e-book prices. The suits do not allege that agency pricing itself is illegal; rather, they allege that the big-five and Apple illegally conspired to adopt the model all at once. Our legal reporter Jeff John Roberts explored the logic behind the suits here, here and here.
Publishers Marketplace took a deep dive into today’s DOJ filing and notes it revolves around two separate alleged conspiracies — one regarding a possible joint venture to sell e-books together (in conversations starting in 2008) and one to replace the wholesale model with the agency model. The DOJ charges that the publishers and Apple shared their business information, plans, and strategies in order to formulate ways to raise retail e-book prices.”
Some more background reading: “Bigger than agency, bigger than e-books: The case against Apple and publishers” by Tim Carmody (Wired, 3/28/12)
Why do book publishers support agency pricing?
Book publishers’ general argument for agency pricing is that it ensures a more competitive marketplace because no one retailer — i.e., Amazon — is able to deeply discount e-books and thus gain a monopolistic position. Publishers argue that in the time since agency pricing was adopted, the e-book market has become more vibrant because smaller retailers are able to sell e-books at the same price as Amazon. I support agency pricing and debated the model with my colleague Mathew Ingram here – in that post you’ll see both pro- and anti-agency pricing arguments.
How have the publishers and Apple responded?
Three of the big-five — HarperCollins, Simon & Schuster and Hachette — agreed to settle the case with the DOJ. In statements released today, Hachette and HarperCollins admitted to no wrongdoing and said they settled reluctantly, in order to avoid protracted legal battles and high court costs that, in the words of Hachette, would be “too disruptive to our business.” Simon & Schuster has not yet released a statement.
Meanwhile, Macmillan CEO John Sargent announced that Macmillan will fight the lawsuit. The company “felt the settlement the DOJ wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents,” Sargent wrote in an open letter to the publishing community. Penguin is believed to also be fighting the lawsuit but has not yet released a statement. Apple also has not yet released a statement.
How have retailers responded?
Amazon is happy. If agency pricing goes away, the company will be able to discount e-books the way it discounts print books and can likely return to its pre-agency pricing tactic of pricing New York Times bestsellers at $ 9.99. The company released the following statement on the three publishers’ settlement: “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books.” Amazon stock is up this afternoon.
Barnes & Noble had no comment but is presumably unhappy. Agency pricing means Amazon can’t undercut B&N on e-book prices and B&N has said that agency pricing “expands [its] gross margins.” Barnes & Noble stock is down this afternoon.
What happens with the investigations abroad?
The European Commission announced this afternoon that it received proposals from Apple, Simon & Schuster, HarperCollins, Hachette and Holtzbrinck (Macmillan’s parent company) to bring the antitrust investigations to a close. (Penguin, the fifth company under investigation in the EU, did not send such a proposal.)
What happens next?
The three publishers who settled have to end their current publishing contracts with Apple but can enter into new ones. Publishers Lunch notes that these publishers may be able to continue a “modified” version of agency pricing: “Justice appears to have set up a system that will allow limited discounting of ebooks, so as to inhibit predatory loss-leader pricing of ebooks from the settling publishers. They acknowledge that settling publishers retain the ability ‘to prevent a retailer selling its entire catalogue at a sustained loss.’”
The 16 states that filed suit today seek “consumer restitution.” Hachette and HarperCollins reached settlements with the states today and agreed to pay $ 52 million in damages. These damages are calculated based on “based on the number of states participating and the number of eBooks sold in each state.”
The class-action lawsuits led by Seattle-based firm Hagens-Berman continue and also seek financial restitution. “While Attorney General Holder’s actions, if successful, will put an end to the anticompetitive actions, our class-action is designed to pry the ill-gotten profits from Apple and the publishers and return them to consumers,” lead counsel Steve Berman said today, adding, “We are eager to move forward with our civil action against Apple and the publishers, and to show the court and the public the depth and breadth of the conspiracy they concocted at the expense of consumers.”
Macmillan is headed to court to fight the DOJ’s allegations. Apple and Penguin have not released statements but will likely fight the lawsuit as well.
Agency pricing does not go away. Random House is not involved in any of the investigations and is free to continue selling e-books under the agency model, as are any other publishers who adopted the model later. Macmillan will continue to sell its e-books under the agency model as the lawsuit continues and Penguin will presumably do so as well.
This post is a work in progress. Do you have other questions, thoughts or concerns? Let me know in the comments.
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