The Road to Apple’s Ebook Price-Fixing Litigation Settlement

By Don Reisinger

Apple has been getting most of the headlines surrounding the ebook price-fixing lawsuit, due in large part to its prominence in the global business space, but it wasn’t alone in the alleged activities. A wide range of major book publishers, including Simon & Schuster, HarperCollins, Macmillan Publishers and the Penguin Group, were also cited in the lawsuit.

It’s possible that if Apple and the publishers had not settled their cases out of court, the damages could have easily risen to billions of dollars. In fact, Apple alone was expected to have to pay $840 million in damages before it settled its case out of court. The other companies settled their cases for millions of dollars. This was no small case, and it promised to be even bigger if the companies didn’t settle out of court.

So, what’s the background? At the time Apple started holding discussions with publishers in 2009, they wanted to find ways to profit more on ebooks. Apple offered that opportunity by allowing them to set their own prices—something called the Agency Model—and receive 70 percent of the revenue off those titles. The terms were better than they were with Amazon, and they were more than happy to take Apple’s deal.

Amazon was a huge issue for the publishers. In 2009, when the Kindle e-reader was just taking off, Amazon owned nearly 90 percent of the ebook market and was setting its own prices on books. The publishers, meanwhile, got a smaller share of the books Amazon was selling, which topped out at $10 to download the best titles. Amazon’s size and share of the revenue was a major concern for the publishers.

Ultimately, when it comes to why the publishers decided to take Apple’s deal, it all comes back to simple math. It’s not clear exactly how much publishers were making on the sale of each Amazon Kindle ebook, but it’s believed that the percentage was significantly lower than the 70 percent Apple was offering publishers. What’s more, Apple pushed its ebook pricing higher, topping out at $15. That resulted in far more cash in the publishers’ pockets and even more reason to take on Amazon.

Then Apple CEO Steve Jobs made it clear in comments made both publicly and in private that he wanted to take Amazon down in the ebook space. For Jobs, it was all about control. He indicated on several occasions that if he could incentivize publishers to take his deal by offering them more money, he could in turn make more cash off the sale of ebooks. More importantly, he could use that to keep customers locked into his company’s services and keep generating revenue off all of its offerings.

After Apple announced iBooks and raised prices, Amazon had an issue. The company was being forced into an agency model that Jobs set up for his own gain or face not having books to sell, since publishers wouldn’t offer their digital titles to the e-retail giant. After Amazon switched to the agency model, it reported hefty price increases, including a 14.2 percent raise for new titles, a 43 percent jump for New York Times bestsellers and an 18.6 percent increase on all titles on average. It was a mess.

Not surprisingly, Apple argued that what it did was perfectly legal. Indeed, the company said that it could not control what publishers would do, but could only establish its own pricing model for its own digital service. Apple also used the defense that its loss would mean other companies would shy away from competing in the ebook space. The arguments didn’t hold up, and U.S. District Court in New York found Apple in violation of antitrust regulations.

Now that the publishers have all settled and Apple is backing down, book prices have actually come down. Amazon is again able to offer its ebooks at lower prices, and while Apple is still offering a high percentage in revenue share to publishers, the company’s own iBookstore shows prices that match those on Amazon. Interestingly enough, ebook sales are now higher than ever and, despite getting a higher revenue share in the agency model, digital book publishers are generating more cash now than they were in 2010 when they were following Apple’s lead, according to recent research.

The battle between Amazon and publishers isn’t close to over. Hatchette, one of the book publishers involved in the ebook lawsuit, is fighting with Amazon over royalties. The issues have gotten so bad, in fact, that Amazon has stopped selling some popular Hatchette books and, as of this writing, won’t start selling J.K. Rowling’s next title unless they can come to an agreement.