Home » Apple, Big Publishing » U.S. Warns Apple, Publishers

U.S. Warns Apple, Publishers

7 March 2012

From The Wall Street Journal:

The Justice Department has warned Apple Inc. and five of the biggest U.S. publishers that it plans to sue them for allegedly colluding to raise the price of electronic books, according to people familiar with the matter.

Several of the parties have held talks to settle the antitrust case and head off a potentially damaging court battle, these people said. If successful, such a settlement could have wide-ranging repercussions for the industry, potentially leading to cheaper e-books for consumers. However, not every publisher is in settlement discussions.

The five publishers facing a potential suit are CBS Corp.’s Simon & Schuster Inc.;Lagardere SCA’s Hachette Book Group;Pearson PLC’s Penguin Group (USA); Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH; and HarperCollins Publishers Inc., a unit of News Corp. , which also owns The Wall Street Journal.

. . . .

The case centers on Apple’s move to change the way that publishers charged for e-books as it prepared to introduce its first iPad in early 2010. Traditionally, publishers sold books to retailers for roughly half of the recommended cover price. Under that “wholesale model,” booksellers were then free to offer those books to customers for less than the cover price if they wished. Most physical books are sold using this model.

To build its early lead in e-books, Amazon Inc. sold many new best sellers at $9.99 to encourage consumers to buy its Kindle electronic readers. But publishers deeply disliked the strategy, fearing consumers would grow accustomed to inexpensive e-books and limit publishers’ ability to sell pricier titles.

. . . .

As Apple prepared to introduce its first iPad, the late Steve Jobs, then its chief executive, suggested moving to an “agency model,” under which the publishers would set the price of the book and Apple would take a 30% cut. Apple also stipulated that publishers couldn’t let rival retailers sell the same book at a lower price.

“We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway,'” Mr. Jobs was quoted as saying by his biographer, Walter Isaacson.

The publishers were then able to impose the same model across the industry, Mr. Jobs told Mr. Isaacson. “They went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books,’ ” Mr. Jobs said.

The Justice Department believes that Apple and the publishers acted in concert to raise prices across the industry, and is prepared to sue them for violating federal antitrust laws, the people familiar with the matter said.

. . . .

Among the issues that the Justice Department has examined is the effort by three publishers involved in the probe to “window” e-books in late 2009, according to people familiar with the matter. That December, Simon & Schuster, HarperCollins and Hachette said they would delay the electronic publication of a certain number of titles for a limited time after the publication of the hardcover edition.

Link to the rest at The Wall Street Journal (link may expire)

Agency pricing was supposed to save Big Publishing. It would be ironic if price collusion hastened Big Publishing’s downfall.

Apple, Big Publishing

50 Comments to “U.S. Warns Apple, Publishers”

  1. If it does hasten Big Publishing’s downfall, I promise to weep great crocodile tears on their behalf.

  2. This is exactly why I’m leaning towards self-publishing. Constant dishonest practices.

  3. Wow! I didn’t see this coming at all, but then again, sometimes I’m not too bright when it comes to these things. PG probably saw this coming a mile away. A hundred miles away.

  4. Where’s the “like” button? Honestly what does it say about the industry that it didn’t occur to them where this would end?

    • It says desperation, Mary.

      • Yes, it says that…but I also think it also suggests a certain, um, insensitivity to the legal ramifications of collusion. They’ve certainly been following each other’s business moves in lock-step for quite some time without raising any hackles from regulators; whether this is the first thing that’s crossed the line from following into actual collusion, I don’t know.

        • And it says some pretty poignant things about Jobs and Apple too. I mean, you don’t go making an offer like that to a group of other companies without running it past legal and saying “Hey, does this raise any red flags?”

  5. I said at the time that if the publishers believed that Steve Jobs and Apple would save them, they were delusional. Apple is not in the business of saving anyone.

  6. High prices were going to be a problem for the big publishers anyway. Sure, they’ve got enough resource and momentum to get through this for a while with such high prices….

    But in the end, they were going to have to deal with the customer and the customer’s opinion.

    Sure, I think there was collusion in keeping the prices high, but that wasn’t the fault of the agency model, or Apple. That was the fault of the publishers, not the model. The model (and Apple) just gave them the power to shoot themselves in the foot.

    We indies publish using the agency model too. It’s a power we want — to control our prices. We are, however, a lot more sensitive to the customer.

    • Well stated, Camille.

      • Uh, this. Does any self-publisher really want to negotiate wholesale prices with Amazon? Seriously?

    • Actually, indies using KDP are not under the agency model. Amazon has the right in their contract to change the price, if they so desire. So we’re on a wholesale model with a 30% retailer discount. The nice thing about the wholesale model? If Amazon discounts your book (unless it is being discounted because they found it cheaper elsewhere) you still get the same fee as if it was not discounted.

      • That’s true.

        It feels more like agency model because we get to change prices at the drop of a hat. That is, WE handle the “sales.” However, when we have a sale, Amazon treats the lower price as a new list price.

  7. In the meantime, in my wonderfull country (France), this behaviour is not only not punished, but sanctioned by the law, when the Publishers’s lobbying managed to have the “paper’s fixed price” law complemented by an other one applied to ebooks.

    Poor France.

    With the “Unavailable books” law, the “three strikes” one, we really have a problem.

    And even if the major opposing party wins at the next elections, it seems the wind won’t change with regards to culture and IP.

    Poor France indeed.

    • I’m not a lawyer etc…

      France is an interesting case, but they are far from alone – there is similar legislation in Germany and Italy.

      However, in all cases European law supersedes whatever national laws are in place. Price-fixing/collusion etc. are not permitted.

      Now, in practice, the EU have turned a blind eye to such goings on with print books. However, they seem to be a lot more sensitive to these shenanigans when it comes to e-books. I don’t know if that’s because it’s a digital product, something sold over the internet, something sold across national lines, or simply because the EU don’t classify e-books as a cultural artifact like print books, but as a “service”, but whatever the logic, they are going to come down hard on this in the EU too (they have opened their own anti-trust investigation).

  8. I seem to remember that *prior* to agency pricing, Amazon offered authors only 35% of cover for books. While I’ve never been a big fan of monopolies, if this lawsuit results in our returning to that 35%, I shall be less than pleased.

    Which means, of course, that I, like every author, should work to capture as much of our audience as I can, building mailing lists, attracting them to my website and social media feeds. If I do that and get more folks to buy direct, I can pull 95% of the cover price. A much better deal than 35%.

    • Yes, but also remember that Amazon tossed in a few restrictions for self-pubbers to get the 70% royalty. I doubt the Big 6 have such restrictions. In fact, I’d bet big money that they don’t.

      Self-pubbers get the 70% because toe the Amazon company line. Ebooks shouldn’t be more than 9.99. Ebooks should be 20% less than the cheapest print edition.

    • I don’t think a return to 35% is likely. It’s simply too big a profit margin; other folks would step in to offer better deals. Consider what happens to KLL if 100,000 indie books get pulled because writers are up in arms? ;) Or what happens if all those writers blog about how mean and horrible Amazon is for slashing their income in half? ;)

      The Paypal thing is a big deal on the net right now, and that impacts only a tiny fraction of writers directly. Hit ALL writers in the wallet at once, and you’d likely see a firestorm that would make the SOPA backlash look small.

      More, I think Amazon knows this. On some level, I think they are using our (writers) pro-Amazon activity on the net in countering the anti-Amazon press put out by the major media conglomerates.

      • I think you’re right, Kevin.

        In addition to the “established” nature of the 70% pricing level, I think Amazon has scaled KDP large enough so it’s making good money from indie books with its 30% of the pie.

    • To be fair, 35% of cover is still a lot better than 25% of net. Not that I want to see the royalty drop or anything, but it wouldn’t be enough to make me walk. (Of course, I like diverse income streams.) It would, however, make getting my publishing company’s website (with web store) a much bigger priority than it is right now.

      • I’d walk if it went back to 35% on everything. Probably mostly because I’d get my dander up, but considering that Smashwords gives me 80%-after-PayPal-fees, and 60% from everyone they distribute to, and B&N could give me 65% if I cared to set up with PubIt (I’ve heard it’s a nuisance), and I could probably arrange 70% straight from Apple if I wanted to do more work than I currently do…

        Of course, all those other venues are what keeps Amazon from gettin’ greedy. Thank something.

    • Dear Mike,

      Thank you for the ulcer.

      Sincerely,
      Dave

  9. Correct me if I’m wrong, but wouldn’t the Justice Department have to prove that the publishers acted in concert, not with Apple, but with each other? After all, if it was just one publisher coordinating with Apple that wouldn’t be antitrust. If Apple individually suggested this approach to each publisher, and each of five of them individually (without inter-publisher communication) saw it in their best interests, I don’t see how that’s anti-trust. At least not in the broad, layman’s interpretation of how anti-trust is supposed to work.

    • The minimum number of parties necessary to collude on price-fixing is two.

      In some cases, companies use price-signaling to coordinate their pricing, but if you add any sort of communication or planning to that, you can get into price-fixing very easily.

      In this case, five big publishers all jointly adopted agency pricing together, clearly coordinating with each other and each forced retailers to set an identical price. Absent the concern that Amazon and others had about iBookstore (wrongly, in retrospect) entering the market, the collusion would have been much more difficult to pull off.

      • What is the relevant market, though? Are ebooks a distinct category from books generally? The DOJ and the civil suit would suggest that, but the publishers will fight back that a book is a book, e-format or otherwise–the prices are still less or the same as paper. And if the relevant market is ebooks only, the Big 6 and Apple have hardly raised prices on consumers because they have switched to indie books–what market power? The only people harmed are the Big 6 and their stable of authors thus far as readers switch to indie authors.

        Also, the intersection of copyright is interesting here because the publishers can refuse to stock Amazon or others at whim.

        I don’t see what the remedy is here (at least that helps consumers)? Is the DOJ going to prohibit Agency pricing or set prices itself? What if the publishers return to the wholesale model but set ebook prices at $15.99 with an MSRP of 18.99? Amazon may be free to set the price below the wholesale, but they can’t take losses forever.

        Seems to me the publishers and Apple will pay a sum-odd million dollar fine and agree not to collude anymore, but nothing will change at all.

  10. Well, I’d rather the Justice Dept sue the pants off big publishing than run more guns to drug dealers or harass in-state-legal medical marijuana dispensaries so…file this under the Win column?

    I just…laugh at the arrogance of the players involved, that they did not expect this to happen. Too big to fail? Noooope.

  11. [...] Before we get to the nitty gritty of the numbers, I have a selection of alternative reading for those averse to these reports. The big news this week is that the U.S. Department of Justice has warned Apple and five of the largest publishers that they plan to sue them for (alleged!) collusion to fix prices. I’ll talk more about this soon enough, but Passive Guy has all the details here. [...]

  12. It wouldn’t be ironic. The Five and Apple did it openly with the stated purpose of driving a competitor out of business. At least, Microsoft was a little sneakier about taking out their rivels.

    • The nature of a major antitrust investigation is that the investigation alone can cause substantial damage to the company absent a court judgment confirming antitrust violations. When a company is in the middle of something like that, everything has to be run past the lawyers and management feels completely shackled.

      IBM was massively set back by its antitrust investigation. I think it’s fair to say that Microsoft has never been the same company since it’s battle with antitrust authorities.

      Microsoft’s competitiveness once drove Apple to the brink of bankruptcy and the financing lifeline Gates gave Jobs was purely a play to show MS was not a big nasty monopoly. Today, of course, Apple is the king of the world and MS hasn’t demonstrated it can make serious money selling anything it wasn’t already selling ten years ago. Microsoft product releases don’t get covered by major media like Apple’s do.

      • What kind of bone do you think Apple will throw to get this to go away?

        I can’t see the publishers surviving regardless of how many bones they throw.

        • I honestly don’t know if it can. Most of these comments seem to be assuming that just the publishers are going under, but it sounds very much like the DOJ is going after Apple too.

          “we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway”

          That statement alone is incredibly damning if it bears any resemblance to reality at all. Based on the effective price fixing that the five did, I think the DOJ could make their case, but if they’ve got Apple dead to rights as an active middleman that just makes it stronger.

          Apple’s such a large company right now that I suspect a lot of people at the DOJ are salivating to take them down, if only for the personal prestige and career advancing opportunities.

        • I expect Apple will write a big check and eliminate its own agency pricing behavior.

  13. Honestly, I think this news is (odd as this sounds!) really GOOD for publishers and really HORRIBLE for indies. ;)

    Right now, publishers are allowed to set their own price. So are indies. Publishers are mostly pricing $8-15, indies mostly $1-5. Right now indies have over 50% of the top 100 bestsellers in each fiction genre I’ve surveyed.

    No small part of that is due to the price disparity. When a consumer sees a comparable value good for half or 1/3 the price, they will almost always show preference for the cheaper good. And yes, entertainment books are interchangeable, in the readers’ eyes. Locke’s famous quip about a $10 ebook having to prove it is ten times better than his $1 book is very valid.

    But what happens if publishers are forced out of the agency model? What happens if Amazon starts discounting their books down, so that the gap between indie and other publisher prices is not so great?

    I suspect the result will be a loss of some of that hard-won market share indies have.

    Every month, every day, that goes by with indies in the top seats, those writers are gaining more word-of-mouth, more fans, more people who will continue buying their work in the future. Honestly, the longer agency pricing is allowed to continue, the BETTER the outlook for indie writers.

    So I say: “Hey! DOJ! Leave those publishers alone!” ;)
    (somehow, “The Wall” seems vaguely appropriate here…!)

    • It will at least make it harder for new indies, who haven’t established a fan base, to compete on “hey, try me; first one’s cheap.”

      Yeah, I’m over here loving agency pricing, too, for exactly those reasons. *sigh*

    • Part of the problem for publishers is the lower prices online will help kill physical bookstore sales and take away that publishers-only pipeline.

  14. Oh, I’m reading the full article, and it’s making me laugh out loud. Apparently the publishers told the DOJ that agency pricing would increase competition. Annnd…”Government lawyers have questioned how competition could have increased when prices went up.”

    HAHAHAHAHAHA!!! I bet THAT was a fun meeting!

    • Lawyer-snark (and judge-snark) is always delicious. On the other hand, as Mr. McLaughlin (and I) note, it has increased competition! From the little mammals — er, indies — who swarm around the dinosaur feet squeaking, “Try mine! First one’s cheap!”

      Not that the publishers probably meant that. At best they’re making lemonade.

      • Not that the publishers probably meant that.

        No, of course they didn’t mean competition for themselves. What kind of crazy talk is that? Traditional publishers are too special to compete! They specifically meant competition for Amazon.

        Yeah, I don’t worry that publishers will suddenly become nimble once agency pricing goes down in flames. The Kindle’s more established now, so Amazon is less motivated to take a loss on tradpub e-books. Plus, a price drop from $14.99 to $9.99 still means the tradpub e-books are way more expensive than most indies (which are profitable for Amazon even when they’re priced at 99 cents).

  15. The publishers could find themselves in a real pickle. I don’t know what the status is of the class action suit that was filed last year (http://arstechnica.com/tech-policy/news/2011/08/class-action-suit-targets-apple-and-five-publishers-for-price-fixing.ars) but if they settle with the DOJ, wouldn’t that make them more vulnerable in the class action, possibly putting themselves on the hook for millions in refunds?

  16. [...] Leave a commentThe US Justice Department has told Apple and five of the six largest publishers that they face lawsuits for colluding to raise prices on ebooks.One of the reasons for this united action was to protect physical bookstores as an alternative [...]

  17. [...] Thursday it was reported that the U.S. Justice Department was preparing to sue five of the largest publishers, and Apple, for (allegedly) colluding to fix e-book prices. Despite the shock expressed in some [...]

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