by James Temple
The Justice Department has threatened to sue Apple and major publishers in a high-profile case that could reshape the digital-books market, driving down prices but also potentially shifting market power from publishers to e-commerce giant Amazon.
The government warned Apple and five major book companies that it intends to file a lawsuit accusing them of colluding to boost the prices of e-books, the Wall Street Journal reported, citing unnamed sources. Several of the publishers are already in talks to settle the matter, although those discussions appear to be at an early and uncertain stage, the Journal reported.
The publishers in question include Simon & Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins Publishers.
The case turns on the decision, driven in part by the late Apple co-founder Steve Jobs, to move to an “agency model” in pricing e-books just before the introduction of the first iPad in early 2010. That gave publishers the ability to set their own retail price in Apple’s digital bookstore, as long as they handed the Cupertino technology giant a 30 percent cut.
It also appears to have inflated prices across the industry, which is what caught the attention of regulators.
Previously, sales of digital books had occurred through the same “wholesale model” that has long applied to physical books. Under this approach, publishers sold their books to retailers for about half the cover price and booksellers like Barnes & Noble or Amazon were free to charge whatever they liked.
That meant they could sell the books for substantially less than the cover price. In fact, Amazon frequently sold e-books for less than what it paid for them, in an effort to build an early market lead and bolster sales of its Kindle readers.
Publishers were upset about this discounting, fearing it would condition readers to think of Amazon’s common $9.99 price as the cost for all books, undercutting already slackening sales of pricier hardcovers. So it seems they were receptive when Apple brought up the agency model in discussions about creating an e-book store for its forthcoming tablet.
Walter Isaacson’s biography of Jobs quoted the former chief executive saying he pushed for that approach. The strategy presumably gave Apple a way to enter the market without having to price books as aggressively as Amazon had.
The ultimate deals also included a “most favored nations” clause that prevented the publishers from selling their goods to other retailers for less. Jobs said publishers leveraged their agreements with Apple to compel Amazon to accept similar terms, under threat of withholding their products.
The Justice Department and others allege that collusion took place in the process.
“A radical, structural industry change took place in one fell swoop when the light turned on for the iPad,” said Jeff Friedman, a partner in the Berkeley office of Hagens Berman, a law firm serving as co-lead counsel in a separate class action complaint now moving forward in New York federal court. “All prices went up 30 to 40 percent for the five agency publishers. That is not something that happens coincidentally.”
Some e-books on Amazon’s Kindle page today cost $14.99 – $5 more than what the company used to charge. Multiply that by the number of people buying digital books and the number of digital books they buy, and it starts to add up to some pretty big numbers.
Justice officials have been investigating this issue since 2010. The European Union has said that it’s conducting an inquiry as well.
One traditional legal requirement for collusion cases is a “conscious commitment to a common scheme.” In other words, companies simply doing the same thing in parallel aren’t violating the law. They have to know they’re working together.
In a court filing seeking to dismiss the New York suit, Apple denies that was the case – especially for itself.
“While the publishers’ actions advanced their individual business interests and do not imply a conspiracy at all, Apple’s manifest interests (successfully introducing the iPad and the iBookstore) differ so completely from those attributed to the publishers (defending brick-and-mortar bookstore sales) that the alleged conspiracy as a whole is simply implausible,” the court document reads.
The government may not have to prove any of this in court, because these companies appear eager to avoid the financial and public relations toll of a high-profile trial.
Which raises the question: What might a settlement look like?
The Journal noted that the government looks askance at the sort of “most favored nations” clauses Apple used in these deals. So at least one idea presented by publishers in early settlement talks was to maintain the agency model but allow discounts, the Journal said, citing its unnamed sources.
If the Justice Department ultimately wins the case or forces a settlement – which appears to be the more likely outcome – it could drive down retail prices for e-books. That could deal a blow to publishers already struggling amid declining reading habits and shrinking margins.
But that would be an obvious win for consumers.
In an odd twist, the other big winner would be Amazon, giving the mega-online retailer back some of the pricing power it lost. The legal action could represent a blow to Apple’s effort to compete against the Seattle e-commerce company.
According to the Journal, the publishers argued to the Justice Department that the addition of Apple as a retailer made the digital-books market more competitive, not less. The regulators didn’t find those arguments persuasive, however, because – as noted – prices have gone up.
Over the years, judges in antitrust cases have tended to consider a wide range of arguments, but typically antitrust law concerns itself with “consumer welfare” not “producer welfare,” said Gary Reback, an antitrust lawyer with Menlo Park law firm Carr & Ferrell who is not involved with this case.
If companies were allowed to collude for the purposes of weakening a dominant player, it would lead to all kinds of worrisome behavior, he said.
“That kind of notion is just fundamentally rejected by the courts,” he said.
What could this mean for Apple?
If the case goes against the company, it could lose the price parity that has helped it gain a foothold in a market dominated by Amazon. But it’s hard to say how much that will really matter. The company ended last quarter with $97.6 billion in cash on hand and, at this point, sees e-books as little more than a sideline business.
Apple has a huge sales channel by virtue of its mobile devices, as well as plenty of marketing muscle and know-how to compete with Amazon or anyone else in pretty much whatever field it wants.
“It’s laughable and a bit ironic for Apple to say, ‘We can’t compete against Amazon without an agency model,’ ” Friedman said.