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The Lawsuit Against Apple And Big Publishers: What’s In It

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This evening, Seattle-based law firm Hagens Berman filed a class action lawsuit against Apple (NSDQ: AAPL) and five of the “big 6” publishers claiming that they illegally fixed e-book prices (through the agency model, in which book publishers set their own e-book prices) in order to “boost profits and force e-book rival *Amazon* to abandon its pro-consumer discount pricing.” Here are the main points from the complaint, as well as a quick look at agency pricing.

The defendants named in the case are Apple, Hachette, Simon & Schuster (NYSE: CBS), Macmillan, HarperCollins and Penguin. The sixth “big six” publisher, Random House, which also uses the agency model but was the last to adopt it, is not included. Here’s a definition of the agency model. Under the agency model, book publishers set their own e-book prices and the retailer (agent) receives a commission. Under the traditional wholesale model, which is used for print books and was used for e-books as well until publishers adopted the agency model in 2010, publishers set a book’s suggested retail price and retailers can discount the books to any price that they want.

For a look back at the history of Apple negotiating with book publishers and a little more on how the agency model came about, I recommend this WSJ article from 2010 and Michael Cader at Publishers Marketplace’s look at how the introduction of the iPad gave publishers “the opportunity to change the basic selling terms of ebooks with at least one major trading partner in a way that lets [them] take back control of pricing and reassert their vision of the value of an electronic version of a book.”

Now, here are the main points of the complaint; bolding is ours.

The complaint begins by saying that Amazon’s Kindle had “the potential to massively reduce distribution costs historically associated with brick-and-mortar publishing. But publishers quickly realized that if market forces were allowed to prevail too quickly, these efficiency enhancing characteristics would rapidly lead to lower consumer prices, improved consumer welfare, and threaten the current business model and available surplus (profit margins). So, faced with disruptive eBook technology that threatened their inefficient and antiquated business model, several major book publishers, working with Apple Inc. (‘Apple’), decided free market competition should not be allowed to work–together they coordinated their activities to fight back in an effort to restrain trade and retard innovation. The largest book publishers and Apple were successful.”

The complaint says that “Amazon’s discount pricing threatened to disrupt the publishers’ long-established brick-and-mortar model faster than the publishers were willing to accept. Being hidebound and lacking innovation for decades, the publishers were particularly concerned that Amazon’s pro-consumer pricing of eBooks would negatively impact their moribund sales model, and in particular the sale of higher priced physical copies of books.”

The complaint says that the publishers “solved this problem through coordinating between themselves (and Apple) to force *Amazon* to abandon its pro-consumer pricing. The Publisher Defendants worked together to force the eBook sales model to be entirely restructured.”

The complaint says that “Apple facilitated changing the eBook pricing model and conspired with the Publisher Defendants to do so” because “the Kindle was (and is) a competitive threat to Apple’s business model.”

The complaint says that the publishers named as defendants “almost simultaneously announced that they were switching from a wholesale pricing model to an Agency model for eBook sales” in January 2010 and “the announcements to shift to the Agency model coincided with the release by Apple of the iPad tablet computer. In fact, when Apple announced the launch of the iPad on January 27, 2010, the Publisher Defendants agreed to allow Apple to use their trademarks in connection therewith. The same day Apple announced launching the iPad, it was also announced that Apple already struck deals with Hachette, HarperCollins, Macmillian, Penguin, and Simon & Schuster to switch to the Agency model for Apple’s iBookstore — the application on Apple’s iPad that functions as an eBook reader (thus competing directly with the Amazon (NSDQ: AMZN) Kindle).”

As a result of the publishers switching to the agency model, the complaint says: “As a direct result of this anticompetitive conduct as intended by the conspiracy, the price of eBooks has soared. The price of new bestselling eBooks increased to an average of $12 – $15 — an increase of 33 to 50 percent. The price of an eBook in many cases now approaches — or even exceeds — the price of the same book in paper even though there are almost no incremental costs to produce each additional eBook unit. The price of the Publisher Defendants’ eBooks sold on the iBookstore, facing no pricing competition from Amazon or other e-distributors for the exact same eBook titles, has remained at supra-competitive levels.”

The plaintiffs are Anthony Petru of Oakland, California and Marcus Mathis of Natchez, Mississippi. Anthony Petru appears to be a personal injury lawyer at Oakland firm Hildebrand McLeod & Nelson. Mathis appears to be the former owner of the now-closed Mighty Martini Bistro in Natchez. “Plaintiff Petru purchased at least one eBook at a price above $9.99 from a Publisher Defendant for use on his Amazon Kindle,” the complaint says. “Since May 2010, Plaintiff Mathis has purchased several eBooks from Publisher Defendants at a price above $9.99 for use on his Sony (NYSE: SNE) Reader.”

A few things to note here:

–The description of the plaintiffs appears to assume that $9.99–the price at which Amazon used to price the Kindle editions of most New York Times (NYSE: NYT) bestselling titles–or less is the “correct” price for an e-book. The complaint also suggests that e-books are too expensive.

–Random House, which was the last “big 6” publisher to adopt the agency model for e-book pricing (in February 2011) is not listed as a defendant.

–The agency model requires publishers to price their e-books the same at all e-bookstores. Publishers can also put their e-books on sale and extend sale prices across all e-bookstores.

–Amazon is believed to have about 60 percent of market share for e-books, with Apple at about 10 percent.

More to come after I have interviewed the parties involved and done some more research on this.

The full complaint (PDF) is here.

12 Responses to “The Lawsuit Against Apple And Big Publishers: What’s In It”

  1. Actually Apple has a great deal of experience in this sort of pricing structure and has been sued many times over this type of pricing issue and has always prevailed, always.
    Apple dealers are forbidden by Apple (the manufacturer) from discounting the computers, phones, iPods, tablets by more than 5.00 unless agreed upon by Apple. They can provide add-on value (discounts) in the form of rebates, free memory, printers etc at their own discretion.
    That’s why MacMall and ClubMac always had the same pricing as MacWarehouse.
    Apple in the past used to audit the books of it’s dealers to ascertain that they were adhering to their contractual dealer agreement and not discounting the goods.
    Now, publishers are setting the price and leveling the playing field between retailers in the same way that Apple does between dealers.
    Retailers can make the price higher but not lower.

  2. BillTheSlink

    Basically the problem and possible anti-trust violation if it can indeed be proven this is collusion, is that it PREVENTS competition by book sellers, which have been forced to accept the agency model or not sell the books, and therefore keeps the price of ebooks artificially high for consumers.  See Apple struck a back room deal with the publishers to sell there books like this in exchange for the publishers agreeing not to allow there books to sell anywhere than less than they do at Apple.  That’s why it is price fixing because you are not allowing market forces to act.

    • Okay, this is making a little more sense, then. Thanks. Unfortunately, it only makes the complaint inherently faulty as far as I can tell. Paragraph 10 of the introduction says in part, “As part of the unlawful agreements, and seeking to leverage its installed user base and dominant position via the Apple iOS platform, Apple and the Publisher Defendants agreed that prices for Publisher Defendants’ eBooks that were offered through the iBookstore would be calculated by a formula tied to physical books.  This eBook formula would cause current prices for eBooks to increase and, at the same time, would guarantee Apple that the Publisher Defendants would not sell eBooks at lower prices elsewhere, such as through other eBook distributors, including Amazon.” The key phrase here, however, is “eBooks that were offered through the iBookstore”. Where I work, the price We charge one Retailer does not effect what We charge a different Retailer due to different contractual terms.

      Besides, convincing a court “a change in business model is price fixing” is going to be a stretch at best; otherwise going from paying Workers on a per unit of production to a set hourly rate of salary model would be price fixing, going from selling software to software-as-a-service would be price fixing, and going from selling cell phone plans which charge by the minute to selling plans which charge a flat fee with a block of minutes would be price fixing. The legal arguments I would hope are very ‘acrobatic’ in nature.

  3. From the article, “Under the agency model, book publishers set their own e-book prices and the retailer (agent) receives a commission. Under the traditional wholesale model, which is used for print books and was used for e-books as well until publishers adopted the agency model in 2010, publishers set a book’s retail price and retailers can discount the books to any price that they want.”

    So, I’m not seeing how Apple’s behavior is distinguishably different under these two models. Under the agency model, Publisher A sets price B and Retailer C receives some fraction of B. Under the wholesale model, however, Retailer C is free to set the retail price as high as that same said B set by the Publisher. The approaches, though theoretically different, in practice appear to provide a distinction without a difference.

    I am sure I have missed something but I do not know what that something is.

    • Hey Frank, under the wholesale model, a retailer (like Apple or Amazon) can sell e-books at whatever price it wants, and put them on sale. I’d written that under the wholesale model, “publishers set a book’s retail price and retailers can discount the books to any price that they want”; to make that more clear I should have said that publishers set the book’s SUGGESTED retail price and retailers can discount the book to any price they want.

      So, under the wholesale model, a retailer can discount e-book prices whenever it wants. Under the agency model, it can’t.

      Does that help?

      • Not really because it strikes Me as identical to the case where the Retailer establishes a policy to not discount e-books at all under the wholesale model. Would this lawsuit be happening if Apple had secured agreements with the Publishers to use the wholesale model and Apple then announced books would be sold solely at the suggested retail price? While My instincts say, “No,” I am open to the possibility some other key piece of information has been excluded from this discussion.