The U.S. Department of Justice filed a federal antitrust complaint against Apple and Hachette, HarperCollins, MacMillan, Simon & Shuster, Pearson, and Penguin, alleging e-book price fixing in violation of the Sherman Act. According to the complaint, after unsuccessfully trying to pressure Amazon into raising its e-book prices, the publishing companies found common cause with Apple. The company that was about to bring out the iPad felt that the profit margin on e-books, at the prices popularized by Amazon, was too slim. Of course, the problem was that because of Amazon’s pricing, consumers expected not to have to pay more than $9.99 for popular e-books. While Apple worried about insufficient profit margins, the publishers’ concerns also included the possibility of print books becoming devalued if $9.99 became the “standard.” So, Apple and the publishers conspired to raise e-book retail prices, with Apple getting a 30 percent cut of each e-book sold.
Under the old “wholesale” model, the publisher would sell books wholesale to the retailer, and then the retailer would be free to set whatever price it wanted. The new model, agreed on by Apple and the publishers, would entail the publisher appointing the retailer as its agent and setting the retail price itself. Publishers signed such agency contracts with Apple, with the assurance that they would impose similar agency contracts on all other e-book retailers as well.
The complaint goes on to describe in great detail the steps taken by the conspirators and stresses the extent to which it is clear that all the participants knew full well just how illegal the venture was. For example, the complaint refers to instructions to double-delete certain e-mails.
Final, virtually identical, contracts between Apple and each of the publishers guaranteed that it would lower the retail price of its e-books in Apple’s iBookstore to match prices offered by any other e-book retailer – even if the publisher didn’t control the other retailer’s pricing. In addition to its 30 percent cut, Apple would also be protected from having to compete. And the publishers were now bound to enforce the agency contract on all other e-books retailers, just to avoid taking huge losses.
Though Amazon first tried to resist the new agency model, when it became clear that five major U.S. publishers were united in pushing this model, Amazon was forced to cave. The publishers and Apple also unsuccessfully tried to pressure an unnamed major publisher and an unnamed major retailer to adopt the new model (Apple told the publisher that iBookstore wouldn’t carry its e-books).
Talks of settlement had been broached weeks earlier, while the DOJ probe was ongoing. Apple, MacMillan, and Penguin were reported as being resistant to reaching an agreement. Reportedly, one version of the settlement agreement would invalidate the agency contracts, leaving Amazon and other e-book retailers free to set their own e-book prices.
Yesterday, Hachette, Simon & Schuster, and HarperCollins reached a settlement with the DOJ; the terms are unknown as of yet.
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