E-books price fixing by Apple and several large book publishers forced consumers to pay an extra $2 to $3 extra per e-book, law-enforcement officials say. But the long-term impact on e-book prices is not clear.
The lawsuit from the Justice Department and 16 states alleges that Apple and major book publishers entered into an agreement to change the market model for e-books in a way that would set prices at a certain level and eliminate retail competition. The agreement caused “e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid.”
Three of the publishers involved – Hachette, Simon & Schuster, and HarperCollins – have already settled, to the tune of an estimated $150 million. Other publishers, including Penguin and Macmillan, have not. Neither has Apple.
The price-fixing scheme cost customers an extra $2 to $3 per e-book, estimated Connecticut Attorney General George Jepsen at a Justice Department press conference Wednesday. He suggested that affected e-book buyers would be compensated, either in the form of book purchase credit or a check.
“The details are still being decided,” he said.
Here’s how the arrangement worked, according to the suit: Book publishing has always operated as a “wholesale model” – publishers sold titles to stores and online vendors at a flat wholesale price, then the merchants would set the retail price of the book for customers. Allegedly, Apple and the colluding publishers shifted the market to an “agency model” in which the publishers had the power to set retail prices themselves, eliminating competition among retailers, who were reduced to a role as intermediaries in the transaction, paid via commission.
Under this new model, Apple agreed to a set pricing system for all e-book sales, which the publishers then imposed on retailers under a “most favored nation clause,” which stipulated that no other retailer could sell e-books for a lower price.
The lawsuit quotes Apple's late chief executive, Steve Jobs, saying "We'll go to [an] agency model, where you set the price, and we get our 30 percent [commission] and yes, the customer pays a little more, but that's what you want anyway."
“Apple clearly understood that its participation in this scheme would result in higher prices,” the lawsuit says.
On its own, there’s nothing unethical about an agency model, says Herbert Hovenkamp, a law professor at the University of Iowa in Iowa City, who specializes in antitrust law. “It’s a normal, legal way of making sales – real estate, for example. But what you cannot have is two or more sellers agreeing with each other about an agency relationship."
"If Apple had agreed with each publisher on the agency system, it would be legal,” he explains. “But it’s illegal for the publishers to agree with each other and Apple to do that. As soon as you have two or more competitors agreeing, it’s a problem. That’s the DOJ’s theory on what happened, and what they would have to prove if this went to trial.”