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Everything you need to know about the e-book lawsuit in one post

Updated 4/18/12: After weeks of buildup, the Department of Justice sued Apple and five book publishers on Wednesday, April 11 and accused them of conspiring to set e-book prices. This is a big story and publishers, consumers and retailers may see the ramifications of today’s lawsuit for months or even years to come. Here’s what you need to know now.

What is agency pricing, anyway?

Agency pricing is at the heart of the lawsuits but the legality of the model itself does not appear to be in question. Agency pricing allows book publishers to set the prices of their e-books, while the retailer (the “agent”) takes a commission. Under the agency model, the publisher is the only party that can discount e-books, and an e-book’s price must be the same across all retailers (i.e., an e-book can’t go on sale at just one retailer). The agency model is different from the wholesale model, in which publishers set a book’s suggested retail price and retailers can discount the books to any price they want.

In early 2010, Apple negotiated with the big-six publishers — Penguin, Macmillan, Hachette, Simon & Schuster, HarperCollins and Random House — to make their e-books available on its then-forthcoming tablet, the iPad, through the then-forthcoming iBookstore. All of those publishers except Random House adopted the agency model at around the time of those negotiations.

Amazon turned off Macmillan’s “buy” button in protest over Macmillan’s switch to the agency model, but the retailer eventually capitulated and restored Macmillan’s books.

About a year later, Random House became the last big-six publisher to adopt the agency pricing model.

Background reading:Price-fixing makes comeback after Supreme Court ruling” by Joseph Pereira (WSJ, 8/18/08) | “Big six negotiate with Apple, ready new business model for e-books” by Michael Cader (1/19/10) | “Most dramatic publishing event of 2010? Introducing agency pricing!” by Mike Shatzkin (11/30/10)

Who is suing over publishers’ adoption of agency pricing?

Apple and the first five of the “big-six” publishers to adopt agency pricing — all of them except Random House, I’ll call them the “big five” here — are the defendants in a number of lawsuits.

The largest is the suit from the U.S. Department of Justice, filed today after weeks of investigations and buildup. In addition, 16 states sued Apple and the big-five today, claiming that agency pricing cost consumers $100 million. These lawsuits come on top of over a dozen class-action lawsuits, the first of which was filed last August, and a formal antitrust investigation by the European Commission.

Why are they suing?

The lawsuits accuse Apple and the big-five of colluding to raise e-book prices. The suits do not allege that agency pricing itself is illegal; rather, they allege that the big-five and Apple illegally conspired to adopt the model all at once in order to retaliate against Amazon’s discounting. Our legal reporter Jeff John Roberts explored the logic behind the suits herehere and here.

Publishers Marketplace took a deep dive into today’s DOJ filing and notes it revolves around two separate alleged conspiracies — one regarding a possible joint venture to sell e-books together (in conversations starting in 2008) and one to replace the wholesale model with the agency model. The DOJ charges that the publishers and Apple “shared their business information, plans, and strategies in order to formulate ways to raise retail e-book prices.”

Background reading: “Bigger than agency, bigger than e-books: The case against Apple and publishers” by Tim Carmody (Wired, 3/28/12)

Why do book publishers support agency pricing?

Book publishers’ general argument for agency pricing is that it ensures a more competitive marketplace because no one retailer — i.e., Amazon — is able to deeply discount e-books and thus gain a monopolistic position. Publishers argue that in the time since agency pricing was adopted, the e-book market has become more vibrant because smaller retailers are able to sell e-books at the same price as Amazon.

Background reading: I support agency pricing and debated the model with my colleague Mathew Ingram here — in that post you’ll see both pro- and anti-agency pricing arguments. | See also Mathew’s post today, “The e-book wars: Who is less evil, Amazon or book publishers?

How have the publishers and Apple responded?

Three of the big-five — HarperCollins, Simon & Schuster and Hachette — agreed to settle the case with the DOJ. In statements released today, Hachette and HarperCollins admitted to no wrongdoing and said they settled reluctantly, in order to avoid protracted legal battles and high court costs that, in the words of Hachette, would be “too disruptive to our business.” Simon & Schuster did not release a statement. (Here’s more on how the proposed settlement would work.)

Meanwhile, Macmillan CEO John Sargent announced that Macmillan will fight the lawsuit. The company “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,” Sargent wrote in an open letter to the publishing community.

Penguin CEO John Makinson announced Penguin, too, will fight the suit. “We understood that the shift to agency would be very costly to Penguin and its shareholders in the short term, but we reasoned that the prevention of a monopoly in the supply of e-books had to be in the best interests, not just of Penguin, but of consumers, authors and booksellers as well,” Makinson said in a statement. The DOJ’s filing “contains a number of material misstatements and omissions, which we look forward to having the opportunity to correct in court.”

Apple released a statement saying, “The DOJ’s accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry. Since then customers have benefited from eBooks that are more interactive and engaging. Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.”

How have retailers responded?

Amazon is happy. If agency pricing goes away, the company will be able to discount e-books the way it discounts print books and can likely return to its pre-agency pricing tactic of pricing New York Times bestsellers at $9.99. The company released the following statement on the three publishers’ settlement: “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books.” Amazon stock went up the afternoon of the DOJ filing.

Barnes & Noble (s BKS) had no comment, but the DOJ lawsuit and following publisher settlements are not good news for the nation’s largest bookstore chain. Agency pricing prevents Amazon from undercutting B&N on big-six publishers’ e-book prices and B&N has said that agency pricing “expands [its] gross margins.” Barnes & Noble stock went down the afternoon of the DOJ filing.

What happens with the investigations abroad?

The European Commission received proposals from Apple, Simon & Schuster, HarperCollins, Hachette and Holtzbrinck (Macmillan’s parent company) to bring the antitrust investigations to a close. (Penguin, the fifth company under investigation in the EU, did not send such a proposal.)

Will readers notice any changes right away?

Readers should not expect changes in e-book pricing until June at the earliest. Here’s more on what the lawsuit means for readers.

What happens next?

If the settlement is approved, the three publishers who settled — HarperCollins, Hachette and Simon & Schuster — are required to end their current publishing contracts with Apple but may enter into new ones. Here’s more on the terms of the settlement.

Macmillan and Penguin are headed to court to fight the DOJ’s allegations.

Sixteen states also filed suit on April 11 seek “consumer restitution.” Hachette and HarperCollins reached settlements with the states and agreed to pay $52 million in damages. Simon & Schuster is close to settling with the states. Damages are calculated based on “based on the number of states participating and the number of e-books sold in each state.” Eventually all fifty states may join the e-book settlement.

The class-action lawsuit led by Seattle-based firm Hagens-Berman continue and also seek financial restitution. “While Attorney General Holder’s actions, if successful, will put an end to the anticompetitive actions, our class-action is designed to pry the ill-gotten profits from Apple and the publishers and return them to consumers,” lead counsel Steve Berman said. He added, “We are eager to move forward with our civil action against Apple and the publishers, and to show the court and the public the depth and breadth of the conspiracy they concocted at the expense of consumers.” However, as our legal reporter Jeff John Roberts explains, a settlement with the states would effectively trump the private class-action lawsuit.

Agency pricing does not go away. Random House is not involved in any of the investigations and is free to continue selling e-books under the agency model, as are any other publishers who adopted the model later. Macmillan and Penguin will continue to sell their e-books under the agency model.

This post is a work in progress. Do you have other questions, thoughts or concerns? Let me know in the comments.

We’ll be talking about e-books at paidContent 2012, May 23 in New York City.

25 Responses to “Everything you need to know about the e-book lawsuit in one post”

  1. John F. Harnish

    I agree with David, the consumer decides which ebook to buy or not to buy at what price. In this sluggish economy, price is frequently the primary determining factor for the consumer.

    Of course there is the human factor, he/she is known as the author who created the content. The original content was initially edited and produced for the printed on paper editions. However, those paper editions aren’t selling through the projected numbers—the hype to thrust printed book into a shrinking marketplace isn’t working. One senior executive with a mainstream house foolishly tried to justify higher ebook prices as their way of recovering declining profits from dwindling printed book sales.

    Yes, there’s overhead along with frightfully high operating expensives required to maintain these corporate publishing giants. They’re trying to sustain an outdated business model with the zap of overpriced ebook dollars. Ebooks have created an entirely new dynamics in the publishing industry. It is regrettable greedy corporate publishers are attempting to impose an unrealistic pricing structure.

    As for the human factor, I believe authors of ebooks with mainstream houses will suffer because they won’t be paid anywhere near the 70% in royalties they would receive from Amazon and 65% from B&N. On ebooks priced above the consumer-friendly threshold of $9.99 the royalties are only 35% and 40%–and that’s higher than royalties typically paid by traditional publishers. I don’t know what kind of corporate bean-counter did the math, but this is surely a case where less is more.

    Another human factor is the consumer. There’s an ongoing boycott by ebook buyers not to purchase ebooks priced above the threshold. The exception to this imposed consumer requirement would be nonfiction titles with proprietary information the reader is specifically interest in.

    I’ve been writing professionally and involve in some aspect of the publishing industry for more than half a century. In recent years I’ve authored and published nineteen ebooks, including the popular series, “Ebooks about Ebooks.” Late in 2011 I retired from a mid-size digital publishing company as Vice President for Author Services.

    Ebooks are the dynamic future of publishing—a fresh start, a new look, an unpolluted platform for creative expressions. This evolving publishing branch needs to be free of the self-serving ways, controlling influences, ill-fated dealings of corporate style publishing. It was the combined efforts of mainstream publishers, distributors/wholesalers, bookstore chains, and major reviewers who suppressed the early growth of POD publishers. This cannot be allowed to happen with ebook publishing.

    Enjoy often… John

  2. Bodhisatva Bandopadhay

    As someone who recently paid $39 for an e-book on the Apple store (a very popular one at that), I’m glad that someone is taking Apple to task. I fail to understand why its $39 for an iBook when the print version is $30 from Amazon. The Kindle edition is $28.

    I had to get the book as a reference else I would’ve used Amazon or Bookdepository.

    PS: The book in question is the latest edition of the Web Application Hacker’s Handbook (which is a very popular series among web app pen testers).

  3. Jenna-Lee

    I for one find it absolutely ridiculous to pay nearly the same for an e-book as a print copy. I think that the e-books should be dramatically reduced since there essentially is no overhead cost and no printing costs. It’s pure profit (minus fees taken per sale) after the initial establishment. It’s not something you can physically hold. It’s electronic data, transmitted to a reading device. Anything over $8 is absurd.

    • Nancy Youngbauer

      I respectfully disagree: there is plenty of overhead in ebook production, including editing, art, writing (creative content) and formatting. All of these require human labor. Why is this never acknowledged as legitimate overhead?

      • david roberts

        I don’t think that it is not acknowledged – we all know that there is a human element, in anything. However, the human element is drastically reduced once the final product is produced. An ebook should, by all rights, be cheaper; however, buying it or not is an economic decision for each of us to make, and that will determine pricing futures.

  4. Jeff Whipple

    I am a huge Apple fan and stockholder, but I don’t believe their denials. While they likely didn’t gather like mobsters in a warehouse somewhere to price fix, they did make deals and set a standard that changed the market. It is a fact that e-Book prices jumped from $9.99 to $12.99 or higher the day the Apple Newstand hit iPads. And other book sellers and publishers followed suit, including Amazon who owned the market. I’m sure they changed their pricing based on pressure from convinced publishers, eyes widened by staggering profits on books without the printing and shipping expense. For once, the DOJ is onto something and should be protecting the consumer.

    • Prices jumped at Amazon because they were selling books at a loss to try to artificially force down the “value” of ebooks. If they did this to drive out competition and devaluate ebooks, they could have a lawsuit heading their way too and the death of Borders and closing of many B&N stores would be damning evidence.

      Proving that Apple did anything wrong in offering book publishers the same sales deal they have with Application, music, TV, and Movie distributers sounds near impossible. But I guess we will see.

    • Neil NZ

      Interesting that this url

      provides the facts on ebook prices for perhaps the first time. A true decrees under the Agency model!

      You can add all the rhetoric you like (from either side) but at the end of the day the stats actually speak for them selves. The DOJ had that info even though the public did not.

      This demonstrates that the DOJ is on the wrong side in the battle!

  5. Rita Arens

    As an author, I know books are sold more through a consignment model than a true retail model. If a bookstore buys 100 of your books and only sells 20, they can send the other 80 back as long as the book is in print, which totally sucks for the author and results in a very confusing royalty statement. I’m wondering if agency/wholesale addresses that problem, because publishing is the only industry I know of that operates in that bizarre way.

  6. Pete Simon

    ” If agency pricing goes away, the company will be able to discount e-books the way it discounts print books…”
    Not quite. Amazon doesn’t price print books below the price they paid the publisher for them (with a very few exceptions). That’s because there’s no upside for them to do so. With ebooks, the point of their predatory pricing is to ensure that they keep selling more Kindles. Full stop. Cheap ebooks are a marketing device for Amazon to sell more Kindles. If their marketing analytics determine at some future date that they have sold all the Kindles they can possibly sell, or that they’ve achieved the highest level of buy-in of Amazon Prime that they’re ever going to achieve, you can bet that their ebook pricing strategy will change overnight.

      • How do you figure?

        Why do you think a company who wants to make money would intentionally loose money? Why do you think Borders is dead? and B&N is closing stores all over the place?

        Do you think the bits were taking up too much warehouse space and they needed to fire sale them to make room? Why do you think Amazon would take a loss on each book?

    • rcentros

      “With ebooks, the point of their predatory pricing is to ensure that they keep selling more Kindles. Full stop.”

      Lose money selling e-books so they can sell more Kindles at a loss? Yeah, that makes sense. The truth is, like many retailers, Amazon sold *some* e-books at a loss so you would get used to buying at their store.

    • Jeff Whipple

      No one lost money in a $9.99 ebook pricing model, especially Amazon or the publisher. Amazon actually gave Kindles away to top customers to continue to feed their book buying habit – that was the true lost leader. This is simply about publishers getting wide-eyed about potential Apple level margins and they held all retailers to that standard.

      • Jeff — not so. Amazon regularly lost money on $9.99 pricing of books and ebooks under non-agency pricing terms if the retail price was above $20. Yes, the Kindle was a promotional vehicle to keep customers, but Amazon needs customers committed to their model. It’s a winner-take-all model: hook the customer with pricing; hook them to your closed-system, proprietary device, and you have them for life. With this monopoly or near-monopoly they can dictate terms to publishers or dictate what gets published: Amazon is great at selling certain kinds of books but not others (trade paperbacks, lit fiction that needs “discovery”; mid list from writers who lack a social media or publicity “platform”), and the more Amazon dominates the market, the less viable it becomes to publish books in those categories. Those readers / consumers — and the writers of those books — are the losers.

      • Don’t post if you don’t know the facts. Under the previous pricing model Amazon paid half the “list price” of the hard back book. So a book with a list price of $25 for a hard back cost Amazon $12.50 and they sold it for $9.99, loosing $2.51 per book. This is a fact that nobody disputes.

  7. Perhaps there is more to this than I understand, but if one retailer (amazon) has become too large, and is hurting the market, then surely this needs attention from an appropriate regulator, not a retaliative price-fixing model from vendors.

    Granted, the legality of the agency model is not being questioned. But why not? Scruples aside, Amazon is a leaner company and sells its books more cheaply than others. Let it.

    • Amazon is not selling books more cheaply because they are leaner. They are losing money on non-agency books priced cheaply in a bid go grab market share away from retailers who cannot afford to sell below cost. They can afford to do so because of their size and because of policies that advantage them, and because stock-holders and financial analysts have bought in to their strategy. It’s a tactic to establish themselves as the leader, and to eliminate (or cripple) the competition. Ultimately that’s not a good thing for consumers.

    • Jeff Whipple

      They are priced differently because there is no expensive printing and distribution costs. Margins soar (for publishers). Furthermore, they virtually eliminate the wholesale or secondary market (like MP3s did for music). The consumer should share in the benefit of innovation and everyone can win.

      • dancingnancy

        I don’t think she was asking why the prices were different. I think she was asking why ebooks should be sold under the agency model when paper books are sold in the customary way. The answer, of course, is: They shouldn’t.

  8. Mark Kohut

    John Sargent of Macmillan paid a visit to Amazon to present them with the new terms….then his company’s ‘buy” buttons were turned off.