Home » Apple, Big Publishing, Legal Stuff » U.S. Sues Apple and Big Publishers Over E-Book Pricing

U.S. Sues Apple and Big Publishers Over E-Book Pricing

11 April 2012

From the Wall Street Journal:

The U.S. filed an antitrust lawsuit Wednesday against Apple Inc. and five of the nation’s largest publishers, alleging they conspired to limit competition for the pricing of e-books.

The lawsuit, filed in Manhattan federal court by the U.S. Department of Justice’s Antitrust Division, alleges Apple and the publishers reached an agreement where retail price competition would cease, retail e-books prices would increase significantly and Apple would be guarantee a 30% “commission” on each e-book sold.

Three of the publishers have agreed to settle, according to court documents. Those are Hachette Book Group, Simon & Schuster and HarperCollins Publishers Inc.

. . . .

“Defendants’ ongoing conspiracy and agreement have caused e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid,” the lawsuit said.

. . . .

The publishers named in the lawsuit are: CBS Corp.’s Simon & Schuster Inc., News Corp.’s HarperCollins, Lagardere SCA’s Hachette, Pearson PLC’s Penguin Group (USA) and Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH.

. . . .

The suit says that “starting no later than September of 2008 and continuing for at least one year, the Publisher Defendants’ CEOs (at times joined by one non-defendant publisher’s CEO) met privately as a group approximately once per quarter. These meetings took place in private dining rooms of upscale Manhattan restaurants and were used to discuss confidential business andcompetitive matters, including Amazon’s e-book retailing practices. No legal counsel was present at any of these meetings.”

According to the suit, Apple executive Eddy Cue, telephoned each of the five publishers on or around Dec. 8, 2009, to schedule exploratory meetings in New York City on Dec. 15 and Dec. 16.

The suit said, “It appears that Hachette and HarperCollins communicated with each other about moving to an agency model during the brief window between Mr. Cue’s first telephone calls to the Publisher Defendants and his visit to meet with their CEOs.”

The suit also said, “the plan—what Apple proudly described as an “aikido move” —worked. Over three days in January 2010, each Publisher Defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010 and “chang[e] the industry permanently.”

In contending that there was a conspiracy behind the pricing effort, the Justice Department said in its suit that the publishers “regularly communicated with each other in private conversations, both in person and on the telephone, and in e-mails to each other to exchange sensitive information and assurances of solidarity to advance the ends of the conspiracy.” It also alleged that publishers “discussed, agreed to, and encouraged each other to collective action to force Amazon to raise its retail e-book prices.”

It also said in the suit that the publishers “took steps to conceal their communications with one another, including instructions to ‘double delete’ e-mail and taking other measures to avoid leaving a paper trail.”

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

And here is a copy of the Complaint filed by the Department of Justice today.

 



Apple, Big Publishing, Legal Stuff

30 Comments to “U.S. Sues Apple and Big Publishers Over E-Book Pricing”

  1. You know, I hadn’t actually dared to hope it would really happen. What happens next PG? What’s the process going to be?

    • Some publishers have reportedly already agreed on settlement terms with the DOJ.

      Apple and Macmillan are supposedly going to fight on. My speculation is that Macmillan will begin to run out of money, but the fight with Apple could continue for a very long time. See my later post about the adverse effects of Microsoft’s long antitrust battle.

      • PG,

        Three settled. The settlement agreement is under the documents tab of the linked WSJ article.

  2. “conspiracy”

    P.G.

    If it ain’t that, what could it possibly be?

    “It also said in the suit that the publishers “took steps to conceal their communications with one another, including instructions to ‘double delete’ e-mail and taking other measures to avoid leaving a paper trail.”

    Commercial confidentiality going to cover that, in your opinion, Senor?

    Has a rotten smell, always had and I hope the Govt pursues this all the way.

    What arrogance on the part of Jobs, and his gang. Pah!

    brendan

    • It wasn’t an accident that the DOJ included these details in the Complaint, Brendan.

      These are classic screw-ups that anti-trust violators have made for years. The fact that Big Publishing CEO’s did the same things shows how clueless and out-of-touch with business and legal reality they are.

  3. I don’t get all the skepticism.

    Is it truly too hard to imagine that five separate and distinct companies would all come up with the same pricing model at the same time?

    Oh, wait…

    I suspect the genesis of all this is simply arrogance.

    After enough years of consolidating and “coincidental” contractual and financial arrangements (okay, collusion, but we’ll let them call it coincidence), there was probably the typical attitude to keep doing what had always worked before.

    Add in Apple pushing for all this – and Apple can never be accused of being a modest company – and the inevitable result followed – one coincidence too many.

  4. “Three of the publishers have agreed to settle…”

    What does this entail – the admission of guilt? Or anything more?

    • Karen – Probably admission of guilt, consent judgments that prohibit certain anti-competitive practices, fines, agreement to DOJ monitoring for a period of time.

      One of the elements will probably be an agreement to fully cooperate with the DOJ in its suit against Apple, Macmillan and anybody else that’s still in the litigation. This is where all those secret meetings and double-deleted emails will come out. The classic play here is for the DOJ to settle against one or more co-conspirators so they can really nail the rest.

      These are just guesses, however.

      • So basically they just played the prisoner’s dilemma and it’s probably going to hurt Apple and Macmillan, big time?

        • Might or might not. And I’m inclined to believe that Apple especially will not be hurt very much.

          Even with plenty of evidence, cases can be difficult and unpredictable to resolve.

          The DOJ will apply leverage against Apple and MacMillan based on whatever they have from the other firms that settled, and get them to settle as well.

          Just as there are all kinds of considerations into pursuing an act (like collusion) that runs a risk of being prosecuted, there are also all kinds of considerations involved in choosing when and under what conditions to settle.

          An immediate capitulation like the others firms did suggests they either lacked the resources and will for a long legal slog or the evidence against them was greater.

          Apple can afford to draw out a legal battle and contest evidence, and eventually settle “reluctantly, just to put this behind them so they can focus on other things.”

          MacMillan probably wants to get a look at the evidence against the firm (due to other firms settling) before it makes the decision of settling as well and under what terms.

          • Read the other post about the impact of antitrust litigation on big tech companies, Matthew. If the litigation is ongoing, the target company needs to be very careful about everything it does. Lawyers appear everywhere because the DOJ can always expand its claims to additional anti-competitive behavior it finds.

            Microsoft came out of its engagement with the DOJ a much different company than it was when litigation started and Microsoft won its court battle.

            • I agree that a lengthy investigation is detrimental.

              I don’t believe Apple will drag this one out too long – maybe a year or two.

              Tim Cook is a logistics guy who is devoted to timing and getting pieces to fit together in the way he wants. Apple probably has some strategic reasons to stall a settlement for the present. They’ll probably let MacMillan settle first and then quietly follow.

              Apple is capable of abject stubbornness for strategic reasons. They wield patent lawsuits as another weapon to fend off or at least delay competition.

              Unless they are extremely vested in their position on the agency model – which is unlikely since the model has fallen apart with the settlements of several of the other publishers – they’ll ride this one for just a little while and then write it off.

              I don’t see the outcome as too damaging for Apple. Although they would have preferred to carve a deeper niche in books – and certainly the deals with the publishers were one of the original push-points for the iPad when Steve Jobs announced it (along with his anger at Random House for backing out of the initial launch) – tablets and especially the iPad are in a very heady growth stage right now. Apple doesn’t need its book deal to sell them, although if they could have held onto it they would have.

              Given the wording of the DOJ complaint itself as well as what’s been released about the current settlements, the DOJ is not out for blood as much as it’s slapping a few big firms for doing something blatant.

              I’d guess MacMillan will settle within the year and Apple within 6 months after.

            • I’ll also add that on a separate note, I suspect Apple will begin to have more scrutiny on different parts of its operations.

              Now that they’ve grown to be such a large and influential (as well as extremely profitable) firm – rather than the underdog upstart they long played themselves to be even after that point had already passed – I’d guess that some of their less-than-subtle machinations may garner deeper looks.

              Offhand, their practice of locking suppliers into exclusive contracts for set periods of time or pre-buying all future inventory to delay competitors from entering a new market. That takes place mainly in China, so possibly the DOJ may have little or no say, but Apple plays very hardball and it’s inevitable for them to push things too far.

              I’m also curious what Apple’s response will be (or even if there will be one) to the DOJ lawsuit. There’s a wide world of difference between “we strenuously object to the false allegations” versus a more tepid “we believe the DOJ suit is without merit.” The latter would suggest plans to settle sooner rather than later.

              By the way, it’s pretty obvious that Random House is helping the DOJ case. I read the whole thing, and obviously the CEO of a non-defendant publisher present at some of the exclusive meetings where the discussions are known by the DOJ would have been the Random House CEO. Random House was similarly the holdout who ticked off Steve Jobs when Jobs unveiled the iPad. And that would make them the one that Penguin’s CEO tried to pressure – as well as trying to pressure Barnes & Noble (unnamed major book retailer) to also pressure Random House.

              I’d guess Random House decided they were the least culpable of all and provided a lot of the main ammunition for the case.

              I liked how Apple’s people (such as Cue) met separately with everyone – although he potentially screwed up when he assured each one that they were not alone in accepting Apple’s identical terms. Even if he didn’t tell each one which of their “competitors” were also signing deals with Apple, that’s a little too much “nudge-nudge, wink-wink, say no more.”

  5. Good! I’m glad this is finally happening. Speaking as a reader more than a writer, I’m tired of the high ebook prices, and I’ve had to skip buying books I want to read just because of the price.

  6. PG, do you expect the remaining publishers to cave in the face of the nearly-instant settlements of the first three? And what does this mean for Apple? Three (or possibly more) of the defendants put up their hands and surrender. Does Apple fight on just because they can afford an ongoing suit?

    • My take (maybe not PG’s) is that Apple will throw the publishers under the bus and settle within a year or two, if not sooner.

      I suspect Apple was more clever at insulating itself a bit better than the publishers.

      I would guess that the DOJ lawsuit against Apple and Steve Jobs over backdating stock options serves as one possible template:

      http://money.cnn.com/2006/12/29/technology/apple_jobs/index.htm

      • The large majority of antitrust cases brought by the DOJ are settled at some point. Microsoft was an outlier in that it went to trial.

  7. “The classic play here is for the DOJ to settle against one or more co-conspirators so they can really nail the rest.”

    P.G.

    LOL, you know, this made my mouth water. I recall lots of long, tiring and thrilling meetings with the Crown Prosecution Service in the UK and the defendants lawyers. They were sometimes more theatre and poker than a full daggers out crown court trial.

    Heh, made my day that has. Good on the DOJ, I’m definitely roaring at their end! :)

    brendan

  8. Daniel O'Halloran

    While I agree that traditional publishers have brought this on themselves, and I also believe Amazon has been an absolute boon for the indie author (and Scott Turow doesn’t get it at all) – is there any concern that once the dust settles and if agency pricing is done away with, that Amazon might not feel the need to maintain the current 70% royalty rate for ebooks priced $2.99 or higher? I know many have argued that why worry about what Amazon might do when the traditional publishers screw authors worse already but I am just curious how people think the resolution might affect this particular aspect.

    • I think the two sets of suppliers are too different for one to affect the other. Self-published books are always profitable to Amazon even at very low prices, and if Amazon want to to continue to have a supply of those, then it needs to keep the indie writers happy. The 70% royalty does that. There are a lot of little companies cropping up that want to retail self-published e-books, and self-published writers can sell e-books themselves, so there’s competition for those suppliers that is completely unrelated to what’s going on with traditional publishers.

      • I sure as hell hope that’s the case.

        I am also ready for the digital selling venues to stop saying “royalties” and start saying “price less our transaction fee.” Treat ebooks literally the same as a physical good being sold–skim the percentage off the sale and don’t confuse terminology. “Royalty” has connotations that imo don’t apply to what indies are doing in the marketplace.

        • Yeah, completely true, and the terminology confuses people. Often to the advantage of publishers who say, “Oh, we give you 50%,” and people think, “That’s not so bad, Amazon gives 70% and doesn’t provide the services this publisher does,” but of course that 50% comes only AFTER Amazon gets their 30%….

    • That is also my concern, Daniel. My pet suspicion is that Amazon will eventually drop to 50% for everything except Amazon Select, which will continue with 70%. My cynical crystal ball also suggests that this will be disguised by them going to a flat 50% (or 45%?) for indie works (including things that were .99c), and hail this as Great News For Indie Authors (who price their stuff at .99c all the time, dontcha know).

      I base this cynicism off of Amazon’s initial offering to indie authors, back in 2007: 35%. And “most favored nation” status on the SRP, among other amusing contract stuff, such as being unable to get out of the contract unless it was changed. (http://archangelbeth.dreamwidth.org/745191.html has my naive discussions on the matter.)

      My alternate cynical prediction is that B&N will change its contract, and start discounting indie authors to try to desperately draw people to shop there. Amazon, meanwhile, will meet the price automatically, and there will be a race to 99c for the “midlist” indies. (The high-profile ones are too high-profile for Amazon to want to tick off, while the “mulch” layer aren’t enough of a draw to bother to discount them — and they’re probably at 99c anyway.)

      I hope to be proven wrong, but if I am proven right, I am gonna gloat like a gloating creature whilst I grit my teeth and try to decide whether it’s best to pull my stuff from Amazon or knuckle under. After all, gloating would be the only joy I’d get from that situation. :(

  9. So the defendants are going to have to pay out hundreds of millions of dollars to all those adversely affected, right? Like in a class action law suit, sort of?

    Let’s see, Apple’s flush with cash even if the others aren’t. What do you say, maybe $500 million split up between the XX millions of people who have purchased inflated ebooks in the last several years? I’ll take my twenty bucks and start buying those ebooks I wanted but couldn’t afford last year…

    Hey, I can dream!

  10. In response to Matthew, above: having the “Big 6″ (5, 4,…) at one another’s throats over who turned DOJ evidence, who pied out of the deal, who caved and settled, etc. might prove fairly amusing over the next year or two.

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