DOJ Says Ebook Price Fixing Agreed at 'Highest Levels' of Apple, Publishers

By Wayne Rash  |  Posted 2012-04-11

DOJ Says Ebook Price Fixing Agreed at 'Highest Levels' of Apple, Publishers

U.S. Attorney General Eric Holder said the government will prove it in its lawsuit against Apple and major book publishers that €œexecutives at the highest levels€ of these companies €œworked together€ to reduce competition and raise the prices of ebooks purchased by millions of consumers.

The U.S. Department of Justice filed suit in the U.S. District Court for the Southern District of New York against Apple and five book publishers alleging that they conspired to prevent Amazon from discounting electronic books.

In a Washington press conference on April 11, Holder said Apple conspired with the book publishers to set the price they wanted for books, add 30 percent for Apple€™s share and then agree not to allow any other retailer to sell books for less than that price. Named in the suit besides Apple are book publishers Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster.

€œBeginning in the summer of 2009, we allege that executives at the highest levels of the companies included in today€™s lawsuit€”concerned that e-book sellers had reduced prices€”worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers,€ Holder said in his remarks at the DOJ press conference. €œAs a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles.€

The pricing scheme, called the €œAgency Model,€ effectively allows the book publishers to set the prices for their products rather than allowing retailers to set prices. The practice is similar to the manner in which Apple prices iPads and iPhones by demanding that retailers sell their products at a specific price or be penalized. In its complaint, the DOJ summarizes the alleged conspiracy:

€œTogether, Apple and the Publisher Defendants reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the Publisher Defendants desired), and Apple would be guaranteed a 30 percent €˜commission€™ on each e-book it sold (which Apple desired).€

What the publishers were trying to avoid was Amazon€™s selling price of $9.99 per ebook, which the publishers were afraid would erode the price of paper books and which Apple didn€™t like because it wouldn€™t make the huge profit margins to which it had become accustomed.

DOJ Complaint Cites Steve Jobs Role in Scheme


Acting Assistant Attorney General Sharis Pozen, who heads the Antitrust Division, elaborated on the Justice Department action: €œWe allege that CEOs of the publishers bemoaned the €˜wretched $9.99 price point.€™ One executive said that, €˜the goal is less to compete with Amazon as to force it to accept a price level higher than 9.99.€™

€œAnother executive said, €˜we€™ve always known that unless other publishers follow us, there€™s no chance of success in getting Amazon to change its pricing practices.€™ Our complaint also quotes Apple€™s then-CEO Steve Jobs as saying, €˜the customer pays a little more, but that€™s what you [he€™s referring to the publishers here] want anyway.€™€ Pozen explained. €œAs you can see, we allege that these executives knew full well what they were doing. That is, taking steps to make sure the prices consumers paid for e-books were higher.€

Pozen noted that the Justice Department action is the result of a combined investigation conducted by DOJ, the European Union and several states. She added that three of the book publishers€” Hachette, HarperCollins and Simon & Schuster€”have already agreed to settle with the DOJ and abandon the practice. However Apple, Macmillan and Penguin have vowed to fight the lawsuit.

At least one group, the Competitive Enterprise Institute, is taking Apple€™s side in the antitrust suit. The group brought out its own policy experts, who attempted to refute the Justice Department€™s position. A statement from the CEI€™s Ryan Young seems to be unaware of Apple€™s practices in the market place.

€œGiven Amazon€™s much larger share of the e-book market, Apple is hardly in a position to price its products uncompetitively [sic],€ Young said in a prepared statement released to the press. €œIf consumers feel overcharged, they can easily give their business to Amazon or Barnes & Noble instead€”possibly by using Apple€™s own products!€

What Young missed in the suit is that Amazon and Barnes & Noble can€™t sell their ebooks at a lower price than Apple because the contracts between Apple and the book publishers prohibit that.

In reality, the agreement between Apple and the book publishers, which involved quarterly meetings to make sure that prices were staying up, very closely resembles the activities of defense contractors in the 1960s and 1970s that ultimately ended up with a series of criminal convictions for price fixing. While the products were weapons and services in those cases, the practices were essentially the same.

In other words, what Apple has done is eliminate the competition in ebook pricing. With the agreements in place, the price is what the publisher and Apple want it to be, not what the retailers try to sell books for when they compete with each other.

While some could argue that selling books below cost, as Amazon is alleged to have done, is also anti-competitive, that€™s pretty hard to prove. Retailers selling items below their cost is very common and is the essence of the weekly sales that appear in the grocery ads in your Sunday paper. Indeed some items are sold below cost. The idea is to get you to shop at the store and while you€™re there, buy other items that generate profits. Price competition is part of a free market, but price fixing, regardless of whether it€™s books or bazookas, is not. 

Rocket Fuel