Apple eBook Lawsuit Filed

On Wednesday, April 11, 2012, the Department of Justice (“DOJ”) filed a civil antitrust action against Apple, Inc. and five major publishers (Hackette Book Group, Inc., Harpercollins Publishers L.L.C., MacMillan, The Penguin Group, and Simon & Schuster Inc.) for conspiring to raise e-book retail prices and otherwise limit competition in the sale of e-books.

This story has all the makings of a thrilling work of fiction: conspiracy theories, confidential telephone conversations, and secret meetings in the back rooms of New York’s fine restaurants. But this is not a story that is being published; this is a story about the publishers.

It all began in 2007 when Amazon released its Kindle device and began offering consumers the option to purchase bestselling e-books for only $9.99. Amazon was not out to make money on the e-books themselves, so they reduced the price of the e-books with the hope of increasing the sales on Kindle devices. Amazon’s price reduction worried publishers because they feared it could lead to a decrease in the wholesale price of e-books, or the decrease in the price of print books.

Apple wanted to get into the e-book market, but it also wanted to make a profit off the e-book sales. Therefore, Apple was able to capitalize on the publisher’s fear. Apple wanted to raise the price of retail e-books, and publishers wanted to restrain retail price competition on the sale of e-books. As a result, the DOJ claims that the five major book publishers and Apple entered into “Apple Agency Agreements” that would completely change the retail market for e-books from a “wholesale” model to an “agency” model.

Under a “wholesale” model, publishers would sell a book to a retailer, and then the retailers would own the book. Retailers could then turn around and sell that book to consumers at their own retail price. This type of model encourages competition between retailers to set prices that are more attractive to consumers than other retail competitors.

Under an “agency” model, publishers appoint retailers as “agents.” As “agents,” retailers have no power to set their own retail price. Retailers would sell a book to consumers at a price set by the publisher. This type of model does not encourage competition among retailers because, in theory, every retailer would have to sell a book at the publisher’s price.

On April 3, 2010, five major book publishers, the ones names in the DOJ’s action, and Apple, entered into “Apple Agency Agreements,” and changed the retail e-book market permanently. Under the agreements with Apple, the publisher would set Apple’s retail price for e-books, while giving Apple assurances that it was raising the retail prices at other e-book outlets as well. As a result, books that were previously available on Amazon for $9.99 were now going to be between $12.99 -$16.99 at all e-book outlets. Under this new pricing scheme, Apple is guaranteed their 30% profit margin.

For some, a few extra bucks might not sound too bad for your favorite John Grisham novel, but what Apple and these publishers did should not go unnoticed. Bert Foer, president of the American Antitrust Institute says, “The practical result of a failure to prosecute this case would be to acquiesce in this scheme to increase the price of e-books. Even though the agency model sought by Apple and the publishers may not in itself be illegal or unethical, to allow manufacturers to collude in the manner alleged would be to undermine the consumer’s best protection against the evils of monopolies and cartels.”

I don’t mind paying a little more for something of better value or if the money is going directly to my favorite author. But in this case, the money isn’t going down stream. It’s stopping at Apple or directly at the e-book retailer. Personally, as someone who just dropped over a thousand dollars in one year on textbooks I would like to save a few extra dollars when I read my favorite novel.

On a side note, since the lawsuit was filed three defendants have settled without admitting any wrong doing. At this time, Apple, Inc., The Penguin Group and MacMillian battle on!