Apple e-book pricing dispute heads to court

The Department of Justice has decided to go ahead with a lawsuit against Apple and two book publishers over alleged e-book price-fixing. Divided commentators are predicting everything from a major price cut for book buyers to a humiliating government climbdown.

The case centers on two different ways of setting prices for e-books. When Amazon first launched the Kindle, it used the “traditional model” that is standard with printed books: the publishers sets a wholesale price and then the retailer decides how much to sell the book for. This allows the publishers to decide how much profit to take, or even sell the book at a loss, which it appears Amazon did in some cases to boost the Kindle.

However, five major publishers later came to Amazon and said they were now only prepared to offer books using an “agency model.” This system meant the publisher set the retail price and then allowed the retailer to take a fixed percentage.

If that sounds suspiciously similar to the way Apple already sold books and music, well, public officials shared your suspicion. It should be noted that this change in policy came right as the iPad’s launch was approaching, which made it the worst possible time for Amazon to call the publishers’ bluff and refuse to stock their titles.

The Department of Justice maintains this wasn’t just a coincidence, but rather an intentional agreement between the publisher and Apple to pressure Amazon into adopting the agency model. It believes that this was illegal price-fixing as the model means different retailers must all charge the same price, namely the one set by the publisher. It also claims that the publishers made an unfair agreement that they wouldn’t offer any other retailers a better deal than they had reached with Apple.

Three of the publishers have now agreed to a settlement with the DoJ. The other two publishers refused a settlement and will now contest the case in court alongside Apple.

The DoJ isn’t arguing that the agency model itself is illegal, rather that companies can’t collude to pressure a retailer into accepting it. However, because of the alleged collusion, it wants a two-year ban on the publishers using the agency model, a five-year ban on sharing price information with one another, and a total ban on the agreement not to undercut the Apple deal.

It’s also proposing that potential future collusion be combated with a rule that means e-book retailers can only carry out price negotiations with one publisher at a time, a suggestion that may be tricky in practice.

Although the DOJ’s proposals aim to boost competition (both between retailers in setting retail prices, and between publishers in setting wholesale prices), there is one potential constraint on aggressive retail pricing. Publishers will be allowed to insist on a clause that means retailers can’t take an overall loss over the course of a year across all books from a particular publisher. That means they could still sell new releases and best sellers at a loss, but would have to make up for this with higher pricing on other titles in a publisher’s catalogue.

Where Apple falls into any settlement remains unclear. CNET’s Declan McCullagh and Greg Sandoval believe it will be difficult for the DoJ to prove any wrongdoing on Apple’s part. Although the circumstantial evidence points to Apple’s involvement, it appears it will be easier to prove direct negotiations and agreements between the publishers than to prove the publishers struck a deal with Apple.

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