The complaint against Apple and five major publishers made by the Department of Justice reads like a case study: A powerful, entrenched industry desperately tries to confront an economic disruption caused by the rise of a new innovation in technology, only to face charges of breaking federal law. When threatened by an upstart, potentially existential digital rival, five major publishing houses joined with Apple in a conspiracy to raise e-book prices, costing consumers millions of dollars - close to a hundred - the complaint charges.
It provides a rare glimpse, this lawsuit, into the secret negotiations and hardball tactics utilized by the publishers and Apple, who were allegedly intent on defeating Amazon’s crushing strategy of discount e-book bestsellers. The publishers were scared that lower e-book prices could empower Amazon, threatening their grip on the book industry and relinquishing all sales to Amazon and turning the e-book business into a monopoly. Apple was all too happy to participate, using its own, iPad-fueled market power to convince the publishers to join a scheme that would deal a major blow to Amazon, its e-commerce rival that has been at Apple’s ankles for the last few years. ;
This case, in its origin, dates back to 2007, when Amazon released the Kindle, which effectively launched the mass e-book market. When the giant online retailer started selling popular e-books for $9.99 — in a ploy to increase Kindle sales — the five publishers, Macmillan, Penguin, Hachette, HarperCollins and Simon & Schuster, seem to have panicked and started flocking, according to the lawsuit. After all, they were used to list prices on new hardcover bestsellers of generally $25-$35. So needless to say the new prices set by Amazon was terrifying to them and thus the publishers were concerned that lower prices would lead to a “deflation” of hardcover book prices, “with accompanying declining revenues for publishers worldwide.”
This made the publishers worked desperately to hatch a scheme in order to raise e-book prices before $9.99 became an “entrenched consumer expectation,” according to the lawsuit. Publishing executives are said to have plotted, in the most devious way imagineable, during meetings at classy Manhattan restaurants, and tried to conceal their communications “to avoid leaving a paper trail.” The primary meeting spot was the Chef’s Wine Cellar, a private room at Picholene, just off Central Park West. It’s clear from the complaint that the Department of Justice went so far as to obtain the mobile phone records of major publishing house CEOs, kinda creepy sounding, right?
During all of this, Apple was debating business models as it planned to storm onto the e-book market with its soon to be released iPad. At a certain point, according to the lawsuit, Apple “contemplated illegally dividing the digital content world with Amazon,” with audio/video going to Apple, e-books to Amazon. Instead, Apple - led by content crony Eddy Cue - reached out to the publishers to propose that the industry make a shift from a wholesale model, in which retailers would set the price, to an agency model, in which the publishers set the price and Apple, as the “agent,” overseeing these procedures, would receive a commission of30%.
CEO of Apple, Steve Jobs, described the talks in a now-infamous quote that appeared in Walter Isaacson’s Jobs biography: “We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway’.” Apple played a special role in the plot, according to the government, acting as the rails beneath a train of conspiracy, by playing the major publishers off each other to ensure they all took a part.
In addition to all of this, Apple struck a “most-favored-nation” deal with the publishers that effectively prevented them from selling their product for less, through other retail outlets like Amazon and Barnes & Noble. Newly strengthened by the launch of the “revolutionary” iPad, the publishers gave Amazon a stark choice: adopt the agency model, with higher prices, or lose the ability to sell new e-book bestsellers. Amazon initially balked, but quickly capitulated, publicly announcing that it the agency model was the only choice.
The plan was a success. Pretty much overnight, this conspiracy to fix prices caused e-book prices to increase by as much $5 per item, costing consumers tens of millions of dollars, according to the lawsuit: “Millions of e-books that would have sold at retail for $9.99 or for other low prices instead sold for the prices indicated by the price schedules included in the Apple Agency Agreements–generally, $12.99 or $14.99.” According to the suit, Apple boasted of the successful scheme as an “Akido move,” after Japanese martial art.
All of the publishers are yet to admit to having taken place in the price-fixing, but three of them, Hachette, HarperCollins and Simon & Schuster, have settled with the government and agreed to pay over $50 million in compensation to e-book consumers around the country. Sharis A. Pozen, the acting director of the DOJ’s antitrust division, said the settlement “will begin to undo the harm caused by the companies’ monopolistic conduct, and will restore price competition so that consumers can pay lower prices for their e-books.” The deal requires the publishers to end their “most-favored-nation” contracts with Apple, and allows retailers to offer e-books at lowered prices.
Macmillan, Penguin and Apple did not agree to the settlement — and have denied the charges. The DOJ has vowed to pursue the case against them aggressively. “There is little chance that the Department of Justice will fail,” according to Mark Cooper, director of research at the Consumer Federation of America. “This is a ‘slam-dunk’ case of collusive, anti-competitive acts.”
The DOJ is not seeking financial damages, but Apple and the remaining two publishers also face a class-action suit over the price-fixing conspiracy led by Seattle-based law firm Hagens-Berman. “While Attorney General Holder’s actions, if successful, will put an end to the anticompetitive actions, our class-action is designed to pry the ill-gotten profits from Apple and the publishers and return them to consumers,” attorney Steve Berman stated.
The settlement is a huge victory by any measure for Amazon, which wasted no time trumpeting the deal (and plugging its popular e-reader). “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” the company said, ruthlessly plugging the Kindle.
Even as the government aims to increase e-book competition, left intact are other anti-competitive features of the e-book market, as Wired.com pointed out, including efforts by both Apple and Amazon to limit consumers’ ability to buy and read e-books from rival companies, so Apple isn’t just the only evil, maybe just the greater of the two.