Case against Apple, publishers concerns more than price fixing

The price-fixing complaint that America’s Department of Justice filed this week against Apple and five of the world’s Big Six book publishers has a triumphalist tone, describing secret meetings in “upscale Manhattan restaurants.”

But it seems to take a rather narrow view of what is going on in the e-book industry.

Until two years ago, Amazon, the dominant player in the market thanks to its Kindle e-reader, kept publishers on the “wholesale model” for e-books. This let them set the wholesale price but let Amazon sell the books at a loss, making it harder for newer e-reader makers such as Barnes & Noble to challenge its near-monopoly.

That made for cheap e-books, competing against the print versions. Publishers and authors also feared that if Amazon remained dominant, it would eventually impose lower wholesale prices on them too, forcing weaker publishers and other booksellers out of business.

They were therefore delighted when Apple, on launching the iPad in 2010, offered them an “agency model,” whereby they set the retail prices and give the retailer a fixed cut. Amazon later offered the same terms to big publishers, though not to smaller ones, and the prices of many e-books rose.

The Justice Department says this came about through deliberate collusion between Apple and five of the Big Six. (Random House, which joined the iBookstore later, isn’t included.)

The price to consumers is the Justice Department’s main beef. Three of the publishers, Hachette, HarperCollins and Simon & Schuster, have settled with the Justice Department by agreeing to refrain for two years from deals that constrain retailers’ ability to offer discounts. They can strike new agency agreements, but cannot “prohibit the retailer from reducing the price set by the publishers.”

But price is not the only consideration in anti-competitive behaviour, says Leiv Blad, co-chair of the antitrust group at Bingham McCutchen, a law firm; the variety of the market is too.

“For publishers to attempt to seek higher prices could be pro-competitive if it led to more output of books,” he says — so long as they didn’t collude in doing so. And even if they did, as the Justice Department thinks it can show, punishing the big publishers could hurt smaller ones. Independent publishers account for around half of e-book sales in America, estimates Curt Matthews, head of the Independent Publishers Group, or IPG, a book distributor.

But whereas e-books from the Big Six became, on average, more expensive under the agency model, data from Smashwords, another indie distributor, show that since Apple gave its publishers agency terms, the average price of their titles in the iBookstore has fallen by 25 per cent.

Source: Monitoring