DoJ sues Apple, publishers in e-book price fixing antitrust suit

DoJ sues Apple, publishers in e-book price fixing antitrust suit

Summary: The DoJ is suing Apple and five major e-book publishers as it begins an antitrust investigation into the alleged collusion of e-book price fixing.

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The U.S. Department of Justice is suing Apple and five major international publishers for allegedly conspiring to fix --- and subsequently increasing --- the price of e-books in a bid to push Amazon and other e-book sellers.

Bloomberg said an antitrust suit has been filed in a New York district court. Attorney General Eric Holder confirmed the news a short while ago in a speech in Washington D.C., and outlined how the publishers would settle, but not without a catch.

Holder outlined how the publishers would be limited from practicing certain business conditions as per their individual settlements:

"The settlement also requires the companies to terminate their anticompetitive 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."

Macmillan, Penguin, Lagardere’s Hachette Livre, News Corp.-owned HarperCollins, and CBS-owned Simon & Schuster (ZDNet is also owned by CBS) are also being sued for their involvement with Apple’s e-book “cartel”.

Simon & Schuster, Hachette, and HarperCollins settled their suits with the Justice Dept. today, two sources confirmed. But Apple and Macmillan reportedly refused to engage with the U.S. authorities and deny the allegations made. Penguin is also willing to take the matter to court.

Macmillan's chief executive John Sargent defended the move to not settle, confirming that the company had been in talks with the Justice Dept. "for months":

"It is always better if possible to settle these matters before a case is brought. The costs of continuing—in time, distraction, and expense— are truly daunting."

"But the terms the DOJ demanded were too onerous. After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model. We also 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."

He added:

"The government’s charge is that Macmillan’s CEO colluded with other CEO’s in changing to the agency model. I am Macmillan’s CEO and I made the decision to move Macmillan to the agency model."

A spokesperson for Apple did not comment, and the other publishers were not available at the time of writing.

The case revolves around the 'agency' model, which Apple uses in its iBookstore offerings, which e-book authors and sellers must hand over in this case a 30 percent  cut of each sale. It allows publishers to set the prices, rather than the vendors.

Amazon's ‘wholesale’ pricing model which gives e-book authors and sellers greater flexibility to price what they like for their work --- even at a loss.

The Justice Dept. is investigating how Apple changed the way publishers charged for e-books on the iBookstore.

The 'agency' model started in 2010 after publishers wanted Amazon to increase the prices of e-books on its online store. Amazon said that anything above $9.99 was "too high", but gave in after many books were pulled from its retail site.

From the filing:

"As a result of discussions with the Publisher Defendants, Apple learned that the Publisher Defendants shared a common objective with Apple to limit e-book retail price competition, and that the PublisherDefendants also desired to have popular e-book retail prices stabilize at levels significantly higher than $9.99.

Together, Apple and the Publisher Defendants reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the Publisher Defendants desired), and Apple would be guaranteed a 30 percent "commission" on each e-book it sold (which Apple desired)."

The U.S. investigation began after UK competition authorities raided the publishers in April. The UK’s Office for Fair Trading closed its investigation and handed it to the European Commission.

Companies which break European antitrust and competition law can face fines of up to 10 percent of their global annual turnover.

The Commission was willing to settle with companies which wanted to, but the EU Competition Commissioner Joaquin Almunia warned earlier this month that the companies involved “know very well” under which conditions the European authorities were willing to settle.

“If our conditions cannot be met in a satisfactory way, we will continue our investigation,” he said, speaking to reporters.

Image credit: David Carnoy/CNET.

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Topics: Security, Apple, Hardware, Mobility

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105 comments
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  • About Time

    This has been the problem all along with the iPhone and iPad, Apple's over-reaching control of not just the platform but the way products are sold on the device. Apple has every right to set the prices in their iTunes Store, however, they will not allow any other store to operate on the platform. I cannot buy books within my Kindle app on my iPad because Apple will not allow Amazon's app to perform that function without taking a 30% cut. It is criminal, and hopefully this is just the beginning.

    It's funny, Apple is considered a "consumer" company but most of their business practices are anti-consumer and pro-industry. Whether that industry be software, music, books or video.
    clcrockett
    • A tricky issue

      In some ways, I think that apple is justified in their stance:
      As the "publisher" for apps, in some ways they have a right to a fixed percentage of apps sold through them. It wouldnt be fair to them, to have a content provider sell a $50 app, but do weasly things like put up a $1 app bootstrap, then charge $49 "in app".

      Kindle, and potentially other apps, are different, though. They're not selling "an improved app". The app is designed to access other things (ie: e-books), that are not intrinsically part of "the app". As such, apple is not entitled to a cut of book sales, because the app is "a reader" only.
      If apple were to be 100% consistent with the current model, that would mean they would have to also block the "Opera browser" app, from using ssl to connect to sites to do online transactions.
      Phil Brown
      • Not tricky at all

        You sound like one of the debaters for Microsoft when they were trying to explain that Microsoft justly installed Internet Explorer on any machine loaded with Windows. The lockouts on the tablets and their equivalent "app markets" are just like the lockouts on the cell phones instead of being open to consumerism.
        tlaney@...
      • Very tricky; Amazon had monopoly and with their system basically nearly no books

        ... could be really sold cheaper than $9.99.

        To break this monopoly, Apple had no other way that offer the same system as they use in music, videos and applications -- an agency model.

        While this model would initially have overall negative influence on the price, back in 2010 Steven Jobs said that this effect will go away eventually, and would allow publisher sell their books even at prices cheaper than $9.99, what is not possible under Amazon monopoly.

        So [b]this DoJ case is highly questionable, if you consider long-time benefits of the people[/b], and is grasping at straws in the attempt to bring Apple (which has no say on prices and only cares to have their agency fee) into this.
        DDERSSS
      • How many times do you have to pay for an app?

        Just to be clear, we are talking about books here, not apps. The question is whether Apple should be able interfere with purchases from other businesses.

        If you bought an app you should be able to use as you wish. If you bought an iPad, you should be able to install any app you want, even if it is offered for free by Amazon or Barnes and Noble. Face it Apple is an authoritarian entity, that wants to control all aspects of the use of the device you paid for. Apple is of the opinion that everything you buy to use on an Apple product should give Apple a cut of the transaction.
        pfrench@...
      • It seems in every discussion about iTunes

        folks miss a salient point. Namely, that Apple profited by having apps available in the iTunes store, regardless of the price the developer charged. The presence of apps is what enabled the iPhone and subsequently the iPad to sell. Absent an iTunes like market place, the iPhone would have gained little traction.

        I don't mean to minimize the benefit to the developers who took part in the early app marketplace, regarless of the price they set for their app.

        If you look at the Apple method, it is pretty clear they understood the goals early on. First, develope an apps market charging developers minimally in order to help create a demand for their iDevices. Once the devices and marketplace were sufficiently established, change the pricing model to a cut of the proceeds AND eliminate the in app purchases in order to control the market.
        whatagenda
      • They do have rights as publisher

        However, when you consider they ban all other publishers from their platform, that's where things get dicey.

        Interestingly enough, the success of the iPad can hurt them in this case. With the iPhone they could claim that since the iPhone did not have a smart phone monopoly that they could leverage the iPhone to enter the app market (among other markets as well). But now that the iPad has dominated the tablet market, they might not be able to make that claim anymore.
        Michael Kelly
    • so because of that you think we should give Amazon a monopoly..

      and let them artificially set the price of eBooks for the entire eBook market? that's what we had before Apple entered the scene... are you people insane? so price went up initially.. eventually market forces will take over and prices will be whatever the market determines they should be...

      the market should set the price of ebooks not Amazon.. common people don't let you hate of Apple cloud your better judgement.
      theFunkDoctorSpoc
      • If Amazon achieved the monopoly, then they would need to be targeted..

        This isn't as double-standard as you like to think. Nobody wants any monopoly, and I personally haven't been a fan of the single-source App/Book store model that Apple has been pushing, either.

        If the effect was indeed to give Amazon such a monopoly, then Amazon would have to face a similar lawsuit, or at least regulation, if they also refused to voluntarily play fair.
        daftkey
      • Say what?!?

        Spoc - wow..... :O

        Before the change the average cost of an electronic "hardcover" was $7.99 to $11.99. Most were $9.99. The average cost of an electronic "softcover" was $3.99 to $7.99.
        After the change, the average cost of an electronic "hardcover" is $11.99 to $17.99. Most are $12.99. The average cost of an electronic "softcover" is $4.99 to $9.99. Most are $7.99.

        Price went up, stayed up and continues to climb. In most cases I can buy a physical copy from the local B&N for less. Not sure what you are talking about.
        rhonin
      • market?

        and who's the market??? apple?
        letsmotor
      • Uh huh.

        Because that worked so well for CD prices.
        Beat a Dead Horse
    • Oh the Impunity...

      You can buy your Kindle books elsewhere and view them in the free Kindle app on "your" iPad.

      Doesn't Amazon decline to use epub format, and isn't their AZW file format, used for protected files, proprietary, meaning Kindle-only?

      I presume from your irritation with what Apple does that Amazon allows iBook purchases through their Kindles?

      And from the reports (and Mr. Whitaker, the DOJ investigation started weeks ago, we don't have filings and settlements without the prosecutors making preliminary investigations), the DOJ is not asking Apple to change the app store or iBooks app. Apple is involved as the nexus for a conspiracy to price-fix, being the kind of price-fix where the publishers are free to charge the price they wish, i.e., not fixed.

      But yes, the mechanism seems to foreclose Amazon's prior arrangements where it could take a loss on e-book licenses in order to build market share, so for the time frame when Amazon wishes to do that, consumers can get some of their e-books at lower cost. In this sense, the government's allegation is arguably on point.

      As for addressing your grievances, if this goes to trial, the defendants lose, and a consent agreement is written up, the things that irritate you will still be in place. What I suspect will happen is that publishers cannot say agency-only and will have to continue to offer e-book licenses at a wholesale, negotiable price as well. Amazon may then, if it wishes, use its profits from other markets to discount heavily and drive competitors out of the market (the Rockefeller/Standard Oil strategy).

      Or Apple will be told that a most favored nations clause in its contracts has to have limitations, for example, other sellers are free to set the level of commission or other sellers may agree with the publisher that for a specified number of times and for a limited period, a title may be available at a lower retail price with the actual split of revenues other than the standard 70/30.

      How will it turn out? One has to figure that the government is asking for more than it wants, in order to have a negotiation. Amazon may not even care that much about the e-book market. Amazon's results over the past year have been lackadaisical, so there may not be the capital to buy market share. Undercutting pricing on music did not noticeably impact Apple's iTunes volume. Amazon may figure that there's no real upside for being the e-book monopsony. Amazon may be proud of its infrastructure's efficiencies and figure that 30% means real profit to them while it means, a bit past break-even for Apple. Amazon's purchase devices may come to dominate among users who buy books regardless of Amazon's pricing. No matter how open the Kindle is, you have to figure it's always going to be easiest to use it to buy from Amazon.

      I took a lot of time here, but you seem to have some irritation about Apple, iPads, and iBooks, and I wanted to steel you for the disappointment when you realize that what's going on has very little to do with making your pain go away.
      DannyO_0x98
      • Danny, Danny

        Your commentary is entirely too cogent, rational, and informed for this anti-Apple venom soaked venue. The emotive driven conversation herein is seldom influenced by such. Kudos.
        dheady@...
      • Not Quite

        You can get the Nook app on the Kindle Fire. If Apple offered an android version of iBooks I could get that on the Kindle Fire as well. So yes, Amazon does allow others access to the hardware products they sell. The root of the problem is the anti-competitive, anti-consumer practices Apple attaches to its products.

        You can continue to drink the Apple kool-aid, but the fact of the matter is Apple's business practices need and should be investigated.
        clcrockett
    • You hit the nail on the head there...

      Apple charges the little guy a 30% commission while PAYING big corporations for content. As we speak the deluge of add-ons is ramping up. I'll bet that a year from now iPad owners will find themselves spending thousands trying to expand the capabilities of the device. A good friend of mine owns a recording studio and laughs about this all the time. He said 'Apple is planning to sell a ton of hardware, external this and that, to compete with desktops. They did it with the MacBook and they're going to do it with the tablets. In the end the consumers always realize that it doesn't compare to having the real deal on a desktop.... ever. And after they've wasted all of their money they still come to me and spend even more.' I agree with this totally. As far as technology goes -phones follow tablets, tablets follow laptops and consoles, consoles follow desktops. Apple is the tech equivalent of a gangster.
      kennyrosenyc
    • I find the timing interesting

      As publishers have had a lockdown on pricing for years not only with ebooks but with print textbooks as well. Now here comes Apple with their deep pockets and suddenly there's an outcry over a possible price fixing suit. What really bugs me is that even before Apple got into the game one could not find an ebook that was priced less than it's tree-based counterpart - if a paperback sold for $9.99 the ebook sold for anywhere from $7.99 to $9.99. As for the 30% Apple charges my question is how much of a percentage is Amazon getting from the publishers per book?

      Now it could be that Apple is playing dirty - IF they are then it will come out in the wash and they should have to pay the price for it... no free pass here if they did get involved in price fixing. But the fact is there has been price fixing and other games for years done by the publishers. Which is why I find the timing to be interesting.
      NonFanboy
      • I don't know where you went looking fore- books before

        But there have been many sites selling e-books at prices well below that of printed books for many years, hell I've been selling books on the Internet as electronic versions through various publishers for over a decade and the electronic version has always been a lot cheaper than the print version. My cut has been the same, but the retail price has varied due to the cost of printing. Just check the price differences between the print and e-books at Lulu - - if there isn't a price difference, then it's the author selling it setting the higher value on the electronic version.

        Mind you, it takes me an extra week's hard work to create an e-book version to go with Kindle or iBook than it does to get the print book copy ready. This is due to the crappy limited formats of the garbage readers being made. I create a print ready PDF from the book in seconds and a few minutes later I have a html version, but have to make huge format changes to get a copy that works on an e-book reader. Why they don't just make them to use basic html code is beyond me. That would be easier to program, easier to create, and easier for the user as they can then read on any device. But, hey, Amazon and Apple couldn't rip you off the big money for the reader if they did that, could they as you'd just use your other existing mobile devices to read the files.
        Deadly Ernest
      • Before Apple came along with iBook

        standard Amazon practice was to take SEVENTY percent of the book's selling price. They STILL take 70% if the book is priced over 9.99. So don't even try to cry about how Amazon is the aggrieved party here.
        baggins_z
      • You need to get out more

        Before the Apple initiated agreement, it was common practice for me to scan a book in a bookstore to see if the online price was cheaper than my bookstore cost. It frequently was.
        Now, no need to do this as my member price at B&N is almost always cheaper. It is very seldom more.
        rhonin