The DOJ’s Ebook Price Fixing Lawsuit Against Apple and the "Agency Five": An Overview

Posted by Victoria Strauss for Writer Beware

Unquestionably, the big publishing news of the week was the US Department of Justice’s lawsuit filing against Apple and five major book publishers–Penguin, Macmillan, Hachette, HarperCollins, and Simon and Schuster–for alleged ebook price fixing.

At the root of the dispute: the agency pricing model for ebooks, which the publishers adopted in 2010. Under the wholesale pricing model that until then had been the norm for both ebooks and print books, publishers sell to intermediaries–such as bookstores or distributors–at a fixed discount off the list price, and the intermediaries are then free to re-sell to consumers at whatever price they choose. Under the agency pricing model, publishers sell directly to consumers via retailer “agents”–such as Amazon or Apple–which get a commission on sales but cannot lower the publisher-set price. The wholesale model allows the retailer to control book prices; the agency model gives that control to the publisher.

The agency model, in other words, completely changes the selling relationship between publishers and retailers in regard to ebooks. This change is invisible to the consumer, but it is felt in the uniformity of ebook prices from retailer to retailer–since they can’t discount–and in the unintended consequences of competing pricing models, such as heavily discounted print books selling for less than their non-discounted electronic versions.

The DOJ doesn’t have a problem with the agency model as such. What concerned them was the possibility that the publishers–at first among themselves and later with Apple–had colluded on establishing it, as a way not just to gain control of ebook pricing, but of limiting Amazon’s perceived dominance of the ebook market, which Amazon had achieved in part by aggressive discounting.

According to the lawsuit, the collusion occurred through a series of meetings, email exchanges, and telephone calls in 2008 and 2009 (GalleyCat has the details of these allegations) and culminated in the introduction of the agency model in early 2010, just ahead of the April debut of the iPad. (You may remember the February 2010 standoff between Amazon and Macmillan, in which Amazon turned off Macmillan’s buy buttons in protest of the agency model, but later capitulated and turned them back on.) As a result, the lawsuit alleges, consumers have paid tens of millions of dollars more for ebooks than they otherwise would have.

The full complaint can be seen here.

Three of the five publishers named in the lawsuit–HarperCollins, Hachette, and Simon and Schuster–have agreed to settle. Among other things, the settlement prohibits them from setting consumer prices for the next two years, prevents them from entering into retailer agreements that include Most Favored Nation clauses (i.e., no one can undersell the retailer) for the next five years, and requires them to terminate their contracts with Apple within seven days of signing the settlement. They must also engage in a variety of compliance activities, including appointing an Anti-Trust Compliance Officer. (Helpful overviews of the settlement terms can be found at ShelfAwareness, Wired, and Publishers Weekly.)

The settlement can be seen here.

The settling publishers have issued statements; they deny liability, and cite their desire to avoid a costly and protracted legal battle as their reason for agreeing to the settlement. Macmillan and Penguin, by contrast, have vowed to fight on. Penguin’s John Makinson has issued a statement denying wrongdoing and affirming the agency model as “the one that offers consumers the prospect of an open and competitive market for e-books.” Macmillan’s John Sargent expressed similar views in an open letter to authors, illustrators, and agents:

When Macmillan changed to the agency model we did so knowing we would make less money on our e book business. We made the change to support an open and competitive market for the future, and it worked. We still believe in that future and we still believe the agency model is the only way to get there.

It is also hard to settle a lawsuit when you know you have done no wrong. The government’s charge is that Macmillan’s CEO colluded with other CEO’s in changing to the agency model. I am Macmillan’s CEO and I made the decision to move Macmillan to the agency model. After days of thought and worry, I made the decision on January 22nd, 2010 a little after 4:00 AM, on an exercise bike in my basement. It remains the loneliest decision I have ever made, and I see no reason to go back on it now.

Apple, which has also refused to settle, has also denied the charges. Some experts feel that the DOJ has a weaker case against Apple than against the publishers, and is unlikely to prevail.

Will the settlement actually benefit consumers, as the DOJ claims? It’s far too early to predict, but that isn’t stopping people from trying. Many of the expressions of dismay that greeted the settlement cite fears of less choice and competition, as the level playing field created by uniform pricing is dismantled, and Amazon continues to consolidate its already commanding dominance of the ebook market. Other commenters disagree, with familiar criticism of the publishing industry.

Amazon has already announced plans to lower ebook prices. It’s important to note, though, that the agency model itself has not been invalidated. While the three settling publishers have agreed to give it up, the two non-settling publishers–plus Random House, which adopted the agency model much later than the other five and wasn’t named in the lawsuit–will continue using it, at least for the moment. So in the short term, only some prices will drop. (Ebook aggregator Smashwords, which distributes 40,000 small presses and self-published authors, will also retain the agency model; Smashwords’ Mark Coker explains why in a long and interesting article that posits that ebook prices have actually fallen–not risen–under the agency model.)

In the long term…who knows? Mike Shatzkin has proposed some possibilities. One of his more interesting conclusions:

Over time, the biggest losers here will be the authors. The independent authors will feel the pain first. Agency pricing creates a zone of pricing they can occupy without much competition from branded merchandise. When the known authors are only available at $9.99 and up, the fledgling at $0.99-$2.99 looks very attractive and worth a try. Ending agency will have the “desired” effect of bringing all ebook prices down. As the big book prices are reduced, the ability of the unknowns to use price as a discovery tool will diminish as well. In the short run, it will be the independent authors who will pay the biggest price of all.

In the meantime, 15 states have filed suit against Apple and the five publishers, demanding restitution for overpriced ebooks, and a class action lawsuit is working its way through the courts. An anti-trust probe into agency pricing by the European Uniong is also ongoing, though it appears that Apple and four of the five publishers may be nearing a settlement.