Three Publishers Settle in Apple Pricing Collusion Case
Nancy K. Herther
Posted On September 24, 2012
“In a move that could reshape the publishing industry,” The Wall Street Journal declares, “a federal judge has approved a settlement with three of the nation’s largest book publishers over alleged collusion in the pricing of e-books.” Although premature and a bit dramatic, the comments reflect that we are seeing a milestone for the growing ebook industry with settlements in some of the outstanding Apple and publisher legal actions in the U.S. and Europe.
Hatchette, Simon & Schuster, and HarperCollins agreed in April to the terms of settlement—that they terminate their existing arrangements with Apple and agree to refrain from any constraint on retailers’ ability to set their own ebook prices for a period of 2 years. The agreement was approved by Judge Denise Cote in a New York District Court on Sept. 14, 2012, and became effective immediately.
In her final ruling on the settlement, Cote summarized the complaint that “the defendants conspired to raise, fix, and stabilize the retail price for newly-released and bestselling trade e-books, to end retail price competition among trade e-books retailers, and to limit retail price competition among the Publisher Defendants in violation of Section 1 of the Sherman Antitrust Act.”
Cote sees the settlement as restoring “price competition” to the ebook arena “by effectively disallowing the Settling Defendants from using the agency model for at least two years, subject to limited exceptions, and from using Price MFNs (most favored nation status) for at least five years, the proposed Final Judgment appears reasonably calculated to restore retail price competition to the market for trade e-books, to return prices to their competitive level, and to benefit e-books consumers and the public generally, at least as to the competitive harms alleged in the Complaint.”
Comments Reflect Concern and Contention
In her opinion, Cote summarized the 868 public comments made to the proposed settlement agreement—90% of which were negative. The Authors Guild reported that the Department of Justice (DOJ) "is reshaping the literary marketplace without submitting a single economic study to the court to justify its actions.” Attorney Bob Kohn, an attorney specializing in intellectual property issues, originally submitted a paper far longer than the five-page limit imposed by the judge. Kohn went back and created a graphic "novel" version, which actually does a good job in explaining his perspectives on the key issues in the case. Could this be the wave of the future?
In defense of the settlement, Cote notes that, “the Complaint alleges not merely that the defendants signed contracts of agency and utilized Price MFNs, but that they used these tools together in furtherance of a horizontal price-fixing conspiracy.”
“What cannot be disputed is that the Agency Agreements ended retail price discounting and eliminated potential pricing innovations, such as ‘all-you-can-read’ subscription services, book club pricing specials, and rewards programs,” Cote concludes. “It is undisputed that Amazon’s market share in ebooks decreased from 90 to 60 percent in the two years following the introduction of agency pricing.”
LA Times' writer Michael Hiltzik notes that, “ironically, the surprise winner was Barnes & Noble, which now has at least 25% of the e-book market, served by its Nook e-reader. In May, Microsoft shored up the company’s efforts by pledging to invest $605 million in the Nook business over five years.” Hiltzik quotes Authors Guild executive director Paul Aiken as saying that, “if it hadn't been for the agency model, it’s questionable whether Barnes & Noble would still be around for Microsoft to invest in. How could they have gone toe to toe with Amazon if they had to lose money selling e-books to stay in the game?”
Monopoly, Collusion, or Competition?
University of Minnesota law professor Daniel Gifford, an expert on antitrust, believes that “the government has it right. The book publishers were apparently setting up a system under which they could prevent Amazon from discounting books. The move from a warehouse model to an agency model ensured that each publisher controlled retail prices. And the most-favored-nation clause in the distribution agreements between each publisher and Apple gave each publisher confidence that the other publishers were not selling elsewhere at lower prices than at Apple. Each publisher could then look at the Apple website for reassurance that the other publishers were maintaining prices everywhere at levels that were at or above their prices on the Apple site. This reduced uncertainty and instilled confidence of all parties in their new model of distribution. The case ensures that the book publishing industry will conform to the same competitive norm that governs all other American industries. If book publishing needs a subsidy, it should seek special legislation providing it. The case is a big win for consumers.”
George Pike, Barco Law Library director at the University of Pittsburgh and Information Today columnist, notes that, “Amazon essentially created a successful new way of doing business and there is nothing necessarily illegal about that. It did appear to have a negative impact on the publishers’ bottom line, again nothing inherently illegal about that as publishers could have chosen not to do business with Amazon on the terms that Amazon was presenting. What was (allegedly) illegal was Apple colluding with the publishers to act in collective opposition to Amazon. It’s that collective action that sparked the DOJ’s action and I think it was necessary.”
The settlement approval doesn’t end the legal action for Apple and Macmillan and Penguin, who all chose to go to court June 3, 2013, in New York to defend their actions. Macmillan and Apple both urged the court to defer the settlement terms “until after the June 2013 trial on the merits of the government’s case against the remaining defendants.” However, the settling publishers agreed with the court’s decision to immediately implement the terms of the settlement.
In the settlement agreement, the following terms were specified: Publishers must “terminate any agreement with Apple relating to the sale of ebooks that was executed prior to the filing of the complaint.” For ebook retailers, the publishers had 10 days to “release the ebook retailer” from existing pricing agreements and that they be “not renewed or extended.” Additionally, the “settling defendants shall not restrict, limit, or impede an ebook retailer’s ability to set, alter, or reduce the retail price of any ebook or to offer price discounts or any other form of promotions to encourage consumers to purchase one or more ebooks.”
Apple’s basic position asserts that the DOJ argument “sides with monopoly, rather than competition, in bringing this case. The Government starts from the false premise that an eBooks ‘market’ was characterized by ‘robust price competition’ prior to Apple’s entry. This ignores a simple and incontrovertible fact: before 2010, there was no real competition, there was only Amazon. At the time Apple entered the market, Amazon sold nearly nine out of every ten eBooks, and its power over price and product selection was nearly absolute. Apple’s entry spurred tremendous growth in eBook titles, range and variety of offerings, sales, and improved quality of the eBook reading experience. This is evidence of a dynamic, competitive market.” Apple and the two remaining publishers—Macmillan and Penguin—refused to submit to the terms of the agreement and intend to fight the case in court next year.
“There can be no denying the importance of books and authors in the quest for human knowledge and creative expression, and in supporting a free and prosperous society,” Cote continues. “And although the birth of a new industry is always unsettling, there is a limited ability for anyone to foresee how the market will evolve. What is clear, however, is the need for industry players to play by the antitrust rules when confronted with new market forces.”
However, Cote makes clear “even if Amazon was engaged in predatory pricing, this is no excuse for unlawful price-fixing.”
“Based on the allegations, I thought the DOJ position was quite strong particularly with the pressure placed on Random House to join the rest of them in fixed pricing,” notes Dear Author blogger and attorney Jane Litte, “and the communications between the CEOs seeking assurances that there would be others that would sign the same terms that Apple was offering.”
“The Department of Justice and the court hit the real perps squarely between the eyes—and the fact is that bookstores are now free from restraints the publishers forced on them and can nimbly participate in the free market,” law librarian and lawyer Carol Ebbinghouse believes. “Collusion among competitors to make consumers pay more than the market rate will not be tolerated—even if the market rate is set by a powerful price-gutter (to arguably below-market rates). No matter how much whining the perpetrator/publishers do in complaining (about not being able to nurture new authors without controlling the selling price of their e-books. ... )—conspiring together to gouge consumers is illegal.”
Working Out Settlements With the States and the EU
Even though there was a settlement with the DOJ case, Apple and the publishers still had to face the companion case brought the states and the ongoing investigation by the European Union (EU).
About a year ago, the EU began an investigation of Apple and the same publishers for potential violation of EU laws “that, by jointly switching the sale of e-books from a wholesale model to an agency model with the same key terms on a global basis, the Four Publishers and Apple engaged in a concerted practice with the object of raising retail prices of e-books in the EEA (European Economic Area) or preventing the emergence of lower prices in the EEA for e-books.” Recently, Reuters broke the story that the EU regulators had reached a preliminary settlement with Apple and four of the five publishers cited in the investigation. Penguin is notable for not participating in the settlement.
Details of the EU settlement would appear to parallel terms in the DOJ settlement. “For a period of two years, the four publishers will not restrict, limit or impede e-book retailers’ ability to set, alter or reduce retail prices for e-books and/or to offer discounts or promotions,” noted the EU statement.
On Sept. 14, 2012, a settlement was approved for a parallel lawsuit filed by 49 states (all but Minnesota) accusing conspiracy in ebook pricing by Hachette, HarperCollins and Simon & Schuster. The settlement provides a total of $69 million to be split up by the states. Florida Attorney General Pam Bondi noted that the settle “will repay consumer affected by the price-fixing scheme and will restore competition in the electronic book market.”
“I do see this as a near-term win for consumers as I suspect prices will go down,” says Pike. “Probably also a near-term loss for publishers as revenues and/or profits are also likely to go down. In the long-term I would agree that the ebook market is still in flux (think early days of Betamax and VHS) and needs to settle down and stabilize. Once that happens, I think publishers and the market can adjust. But the market will look very different than it does today, and publishers and ebook vendors that don’t adjust may go by the wayside.”
Apple’s Next Steps
Apple appears ready for a battle, as it filed motions and requests that appear to outline a defense strategy to focus on Amazon and the company’s practices. Apple argued in its filling that “Amazon is a central figure in both the government’s investigation and its theory of the case. Apple is entitled to test the truth of allegations pertaining to Amazon that lie at the heart of the DoJ’s case.” DOJ attorneys countered that their files and discovery were protected and suggested that Apple depose Amazon officials themselves. Cote agreed and denied Apple’s motion. Penguin petitioned the court (with the support of Apple) to make its “exhibit A” publicly available. This is a pricing chart that will “contradict the serious misconception” about the pricing under the agency model. “Penguin believes it is the public interest to make evidence like this public.”
Litigants in these suits were contacted for comments or statements for this article, but they did not respond.
Initial reactions to the resolution from publishers have generally had the flavor of business-as-usual. HarperCollins, one of the settling defendants, lost little time in establishing new contracts with major ebook retailers—and discounting titles. Laura Hazard Owen, blogging at GigaOM, published a list of key titles and pricing through major ebook channels. Within days of the settlement, Apple began slashing prices—and these were matched by Amazon. Owens, in another blog entry noted that “we can’t draw major conclusions about Apple’s new ebook pricing strategy based on what it’s done with one publisher’s books.” Owens adds, “but in the case of HarperCollins, we’re already seeing that even if Apple would prefer agency pricing, price bands and MRNs for books, it’s willing to compete on price in the absence of those thing. And it has a lot more money to do so than other ebook retailers like Barnes & Noble and Kobo.” Apple itself began to lower prices to match Amazon and other publishers and dealers seem to be matching prices.
Amazon released new Kindle HD tablets and Kindle Paperwhite e-reader products on Sept. 6, 2012, which have received very favorable reviews. Gizmodo celebrated by releasing a list of 375 “completely free ebooks for every device,” mainly out-of-copyright titles, but a nifty collection by any standard. Amazon also released information that for every 100 print books they sell, 114 ebooks are also sold, a continuing strong upward trend.
On the library front, last May ALA announced arrangements with Hachette and Penguin to "experiment" with making trade ebooks available to libraries as a pilot program. At the time, ALA saw this as a promising beginning. ALA president Mollie Rafael noting that “these pilot programs will help HBG learn more about library patrons’ interests, usage, and expectations, and help the publisher devise the best strategy to reach the widest audience of ebook readers in libraries.” Simon & Schuster and Macmillan still won’t sell ebooks to libraries, and HarperCollins and Random House use a pay-per-view scheme with libraries needing to pay for another copy once each ebooks is circulated/used 26 times.
This month, Hachette announced it would raise library ebook pricing by an average of 220% in October. The increase applies to 3,500 titles released before April 2010. This follows last winter’s announcement from Random House that it would raise library pricing for ebooks by as much as 300%. After strong expressions of concern by ALA and others, Hatchette released a statement in a form of damage control stressing their intent to continue “working with libraries, Overdrive, and several other partners to gather information and explore various options for making HBGs ebooks available to readers in a rapidly changing digital world.” However, this has done little to calm the dissent.
The Colorado Douglas County Libraries are now preparing and publishing price comparisons for library versus consumer pricing for both print and ebooks. Today, we appear to need a scorecard to keep up with all of the pricing options and conditions. DCL’s director Jamie LaRue noted that, “one county commissioner asked me, ‘So if the [Department of Justice] felt that consumers were being squeezed by the difference between $9.99 and $15.99, what will they say about the difference between $9.99 and $45.97? Or the refusal to sell at all?’ One wonders.”
As the dust settles, competition will eventually refine and redefine many of these initial pricing schemes, especially given the growing role of ebooks in the publishing sector.
Ebooks Remain the Trade Format of Choice
AAP’s 2012 BookStats edition, released in July 2012, found that “in the overall Trade sector (encompassing Fiction and Non-Fiction for Children, Young Adults and Adults), eBooks’ net sales revenue more than doubled in 2011 vs. 2010. This significant growth was particularly fueled by eBooks’ performance in the Adult Fiction segment where, for the first time, it ranked #1 for the year in net revenue among all individual print and electronic formats.”
The Aptara/Publisher’s Weekly "Revealing the Business of eBooks: The Fourth Annual eBook Survey of Publishers," released recently, finds that 68% of ebook publishers currently sell trade titles through Amazon while Apple’s iBookstore, at 58%, is the second-most popular distribution channel. The Apple lawsuit is clearly not stopping publishers from the trend: “4 out of 5 publishers now produce eBooks, a remarkable 30% increase in three years; 31% of eBooks publishers produce enhanced eBooks, a 24% increase in just one year. ... The majority of publishers now produce more than 50% of their titles as eBooks; almost half produce more than 75% of their titles as eBooks.”
Berkman Center for Internet & Society published a ‘briefing document’ on "E-Books in Libraries" in July, in an effort to “explore current issues associated with digital publishing business models and access to digitally-published materials in libraries.” The study finds that the availability of trade ebooks from major publishers is still a major issue; although most report relying on ebook distributors (OverDrive, NetLibrary/EBSCO, ebrary, MyiLibrary, etc.) for acquisitions.
If we can assume that pricing issues are back on course, more issues face the industry. The first revolves around the proprietary nature of e-reading devices. We seem to still be living in walled silos. Android and Apple apps don’t work well together, meaning that when you buy the device, you automatically limit your options for what you can and cannot do with your mobile smartphone or tablet device.
"When you buy a device these days, you’re not just buying a gadget," CNET.com’s Molly Wood told Marketplace Tech Report. “You’re buying into a whole universe of the content and the apps and the systems that run on that hardware. So you might buy an iPhone, but that means you are also buying into iTunes as a place to buy your music, rent your movies and even get your books.”
Even if/when publishers decide on platform-independent standards for ebooks, we still have many other issues to deal with.
“I think that format exclusivity is one of the biggest prohibitors of competition,” says Litte. “A new bookstore can’t offer ebook sales to Kindle owners unless the books are DRM free. That’s a huge barrier to being competitive. As for Amazon's alleged predatory pricing, there are huge companies selling ebooks who could easily go toe to toe with Amazon. Apple is the world’s most valuable company with cash on hand of $100 billion. Microsoft just invested heavily in Barnes & Noble. Kobo was bought by Ratuken, one of the world’s largest retailers, and Google has extensive resources. The players in the ebook retailer market have plenty of resources to compete with Amazon.”
DRM continues to haunt the industry such as the Ghost of Christmas Future. “If DRM were eliminated,” Litte continues, “I think competition could be increased from an indie ebook retailing market. If DRM persists, then I do believe the ebook market will likely be dominated by Amazon, Apple, Google, and some version of B&N. Global expansion is increasingly more important.”
Market uncertainty has become a major issue. Target and Walmart have now ended agreements with Amazon to sell Kindle devices in their stores—perhaps in fear that once users own the devices, they would more naturally go directly to Amazon for ebook content—cutting them out of the market.