What is Really Going On? The Apple – Major Publishers Price Fixing Lawsuit Explained

hcsp.jpgA price-fixing lawsuit against the computer giant and publishers will have a far-reaching effect on the future of e-books, but is a ‘predatory’ online retailer the big winner? Jimmy So reports.

They called it “the Jesus tablet.” When Apple introduced the iPad on Jan. 27, 2010, some in the publishing industry thought a messiah had arrived to take on the enemy: Amazon.

Under a “wholesale model,” Amazon had been ordering e-books for about $13 and selling them for $9.99, taking a loss in order to get customers to buy other stuff, like the Kindle. When Walmart took on Amazon in 2009 and the two repeatedly marked down the prices of bestsellers–hard, physical book copies–they were able to get away with it also because Walmart’s real motive was to lure people online to sell them more expensive products.
Neither of the players lost in this price war; even the customers won. But there were losers: booksellers, both large chains and independent stores, were going under. Profit margins were shrinking for publishers. David Young, the chairman and CEO of Hachette, told The New Yorker’s Ken Auletta, “The big concern–and it’s a massive concern–is the $9.99 pricing point. If it’s allowed to take hold in the consumer’s mind that a book is worth 10 bucks, to my mind it’s game over for this business.”
Apple didn’t want to get into a price war with Amazon. For one thing, it didn’t need cheap books to entice readers into buying iPads–the product was doing just fine. Instead, Apple reportedly convinced five of the six big publishing conglomerates (Penguin, Simon and Schuster, HarperCollins, Macmillan, Hachette) to set up an “agency model” for e-book sales. It offered to allow the publishers to set whatever price they want, as long as Apple got a 30 percent commission. And because publishers had to offer the same contract to all “like” retailers (Apple and Amazon), the big five asked Amazon to take it or leave it; Amazon balked at first, but ultimately took it. That is why most e-books cost $12.99, and publishers and bookstores rejoiced.
The problem was that if Apple and the publishers did agree to set a price, this was illegal. The U.S. Department of Justice today filed an antitrust lawsuit against Apple and the five publishers, alleging price fixing.
“If that’s true, that’s a ringleader organizing a price-fixing conspiracy among a bunch of horizontal price fixers,” said F.M. Scherer, professor emeritus at Harvard’s Kennedy School, and an expert in antitrust law. “Let’s just say a friend of mine who did something like that spent two years in jail.”
No surprise, then, that shortly after the suit was filed, Simon and Schuster, Hachette, and HarperCollins reportedly agreed to a settlement. To antitrust lawyers, this was an open-and-shut case. (Readers of the American Antitrust Institute’s e-bulletin posted comments like, “Where the hell were Apple’s lawyers?”)
Under the settlement terms, current contracts with Apple will be terminated, and new ones will be negotiated, likely cutting the $12.99 price tag of e-books. E-bookstores, including Amazon, will be–must be, under the terms–permitted to discount their prices.
The most likely outcome will be cheaper e-books. How much cheaper will depend on whether Apple would want to fight Amazon to maintain competitiveness. Drew Herdener, a spokesperson for Amazon, said, “We look forward to being allowed to lower prices on more Kindle books.”
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SOURCE: Daily Beast – Jimmy So