Justice Department Possibly Suing Apple, Publishers Regarding Agency Pricing

I’ve grumbled for months about the agency pricing scheme that drove up the price of many e-books, wondering how on earth such a patently disingenuous scheme could not violate anti-trust laws.

Now it would appear that the Justice Department is wondering the same thing. The Wall Street Journal is reporting that the Justice Department has warned Apple and five major publishers of their intent to sue them for “allegedly colluding to raise the price of electronic books.”

The five publishers who’ve been warned are Simon & Schuster Inc.; Hachette Book Group;  Penguin Group (USA); Macmillan; and HarperCollins.

The possible litigation stems from Apple’s push to radically alter the way publishers price e-books as the tech company promoted the iPad as a tablet/e-reader in 2010. In the past, publishers had traditionally sold books to retailers for around half of the recommended cover price — i.e. wholesale. Retailers were then free to sell the books for less than cover price if they so desired. However, this wholesale model, originally designed for physical books, was upended by Amazon and the Kindle, when Amazon began routinely selling e-books for less than the suggested retail price as the company worked to promote the Kindle line of e-readers.

Amazon’s strategy did not sit well with publishers or with their biggest competitor in the tablet/e-reader market, Apple. According to the WSJ article, the late Steve Jobs, along with several major publishers, cooked up an “agency model” pricing strategy, under which the publishers would set the price of their e-books, allowing Apple to take a 30% cut of the profits. While that’s hardly egregious, Apple sweetened the deal for themselves with a stipulation demanding that publishers not allow rival retailers to sell the same book at a lower price. The new agency pricing model put rival e-book retailers over the figurative barrel; retailers were required to sign an agency pricing contract, or be denied access to the included publishers’ e-books.

According to WSJ, “the Justice Department believes that Apple and the publishers acted in concert to raise prices across the industry, and is prepared to sue them for violating federal antitrust laws.”

The Justice Department isn’t the only entity concerned about the lopsided agency pricing scheme. The European Union is also investigating the agency pricing scheme, and multiple class-action lawsuits have been filed and consolidated in a New York federal court, questioning the legality of such a scheme. Also not surprisingly, Apple moved to dismiss the class-action case, claiming that it did not collude with publishers to change the pricing structure for e-books. In their motion to dismiss, WSJ reports that Apple argues that their entry into the e-book market simply “created new competition in eBook distribution and a vastly larger pool of eBook consumers.”

WSJ sources say that several of the parties involved have held negotiations to settle the case. This could prevent a court battle that can only make the agency pricing scheme look worse than it already does.

All I can say is, it’s about time.

Agency pricing has artificially inflated the costs of e-books long enough. And as for me, I’m glad to see Apple getting as much of the blame as the agency publishers. While e-book purchasers, retailers, and libraries alike have decried the agency pricing scheme for a year now, most of the ire has been directed at the big bad publishers. I’m not sure if this is due to misinformation, or just the goodwill that Apple has created among the millions of people who love the company’s products.

I believe that Apple fully expected to be given a pass on all fronts for their alleged role in the agency pricing scheme. From other e-book retailers and e-reader manufacturers, to libraries and the law, it seems to me that the prevailing wisdom at Apple was that their rabidly loyal following wouldn’t care about their involvement in the agency pricing scheme. And now, the company would appear to be distancing itself from the whole drama, or at least that ‘s what I take from the company’s argument to dismiss the class action lawsuit in New York.  The company’s claims that it simply created so high a demand for e-books with the iPad and other products that the pricing model had to change is insulting, not only to consumers but to other manufacturers and retailers of e-readers and e-books. Apple’s part in the agency pricing scheme seems clear, at least if you believe the Justice Department’s allegations. And I do.

For me, the best part of the whole WSJ article was this statement in regards to the deal struck between Apple and the publishers:

Contracts such as Apple’s prevent publishers from selling books to other buyers at a cheaper rate. Such terms, known as “most favored nation” clauses, have drawn the scrutiny of the Justice Department in recent years in the health-care industry because they can sometimes be used to hamper competition.

While I’m sure the language is hidebound, comparing Apple to a “most favored nation” is nevertheless succinct. And who has more experience with the favoritism toward Apple than the Justice Department’s employees, whose Blackberrys are being retired in favor of iPhones?

Now, if we can just get something done about the publishers’ blatant discrimination toward libraries

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