U.S. Department of Justice Sues Apple Over E-Book Pricing

BY Rounak Jain

Published 11 Apr 2012

iBook Store

The U.S. government has filed an antitrust lawsuit in New York against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster over allegations of fixing e-book prices. 16 other states have also joined the U.S. Department of Justice in filing lawsuits against the Apple and the publishers mentioned over the same charges.

That lawsuit says that Apple and other publishers teamed up together to battle Amazon’s low e-book pricing. From WSJ’s story on the lawsuit:

The government’s lawsuit, filed in Manhattan federal court, described CEO-only meetings of publishers at which the alleged conspiracy was hashed out. The suit alleged that the publishers’ chief executives met starting in September 2008 or earlier “in private dining rooms of upscale Manhattan restaurants” and “no legal counsel was present at any of these meetings.”

The suit describes the shift from the traditional “wholesale” pricing model, under which retailers set the price of both electronic and physical books, to an “agency” model under which publishers set the price and retailers take a commission.

Under the agency model, Apple takes a 30 percent cut of whatever price the publisher sets. Additionally, it disallows publishers to sell an e-book on other stores at a price cheaper than that on the iBookstore. In contrast, Amazon, under the “wholesale” pricing model, had the freedom to set e-book prices and sold a number of newly released and best selling e-books at $9.99.

According to the DOJ, the agency pricing model led to an overall increase in the price of e-books which isn’t great news for the consumer. Through the backing of a strong player like Apple, publishers gained bargaining power against Amazon, which they say, helped reduce its dominance and increase competition in the e-book market.

The argument for the publishers who are defendants in this lawsuit is that, when the expected price of e-books goes down, corresponding prices for print books also goes down, which means that in the drive to create low cost books, the effort put into the content in these books reduces.

A similar problem exists on Google Play (Android Market), where the average consumer isn’t willing to pay a lot for apps, which means developers can’t justify putting in a lot of effort to create a great app, resulting in mediocre apps for Android.

Simon & Schuster, Hachette and HarperCollins have already settled with the DOJ, leaving out Apple, Macmillan and Penguin as the remaining defendants in the lawsuit. Apple hasn’t commented on the lawsuit. Macmillan’s CEO has published an open letter outlining the reasons behind their decision to fight this case in court rather than settling. The European Union is also investigating this issue.

Publishers, it seems, still have a long way to go before they figure out a strategy to effectively price and sell digital books.