DOJ accuses Apple, five publishers of colluding to fix ebook prices

In December 2010 I asked: "Is someone fixing ebook prices?" Google's digital bookstore opened for business, and I started comparing prices only to find them fairly consistent across all retailers. I expected to see huge variances, not pricing consistency, which shouldn't be in a competitive market but is systematic of one where businesses conspire to "fix" prices.

I wasn't alone wondering about this abnormal consistency. After weeks of rumors, today, the US Justice Department filed a lawsuit against Apple and five publishers. The antitrust enforcement agency accuses them of colluding to fix ebook prices, thus impeding competition and, more importantly, consumer choice.

The lawsuit names five publishers: Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster. However, Bloomberg reports that three of the publishers already have settled with the Justice Department. As previously reported by BetaNews, MacMillan and Penguin, along with Apple, refused.

Causing Consumers Harm

There are few areas of US antitrust law that is more clear or so aggressively enforced as price fixing. Unlike Europe, where trustbusters focus a bit more on protecting competitors, US priority is the consumer. The 1890 Sherman Act and the court precedents following it allow for aggressive competition -- some really rough play. But what's fair among competitors is a problem when they collude in ways that diminish competition at the expense of consumers.

US Antitrust law looks harshly on price fixing, because it causes harm to consumers. They don't receive the benefits, lower pricing among them, of companies vying for the same customers.

I wrote 16 months ago about ebooks:

Nearly uniform pricing is highly suspicious. Brick-and-mortar retailer book pricing does vary more, depending on initial discount, volume of inventory to sell (or unload if too many) and time on shelf, among many other factors. Remember: Ebooks don't grow old on the shelf. Retailers can't over-order or be compelled to offer overstock deals.

In looking at these four ebookstores, pricing is too similar. It stinks of publishers demanding prices be such and such to grant distribution. It wasn't that many months ago, that in a disagreement with publishers Amazon was forced to raise ebook prices and adopt an agency sales model. I have to wonder: Are major publishers fixing prices?

Conspiracy Theory

The Justice Department answers yes and says that Apple helped them. Before Apple opened iBookstore, Amazon sold many ebooks at a loss, to gain market share. Had Amazon been allowed to continue, consumer demand surely would have compelled publishers to lower prices. Amazon typically sold new ebooks for $9.99.

During negotiations for iBookstore, Apple pushed for an "Agency" revenue-sharing model. The Cupertino, Calif.-based company would take a 30-percent cut and sell books at prices dictated by publishers. Amazon got into a scuffle with several publishers, leading to threats of withholding books. The retailer ended up adopting the Agency model, thus raising prices to match Apple's. That's reverse of how competition works -- one company lowering prices to match another's.

Before today's criminal filing, a civil case was underway. There, in a legal filing, Apple strangely admitted to collusion: "Apple knew that if Amazon were allowed to continue to solidify its position in the ebook market, these network effects would make it nearly impossible for Apple to dislodge Amazon in the near term".

More: "It would make perfect sense as a rational and competitive business strategy for Apple not to enter as a retailer incurring losses, but instead as an agent on commission with a competitive offering – which is exactly what the agency agreements negotiated by Apple accomplished".

Based on the civil case, San Diego-based antitrust attorney William Markham tells my colleague Ed Oswald that the behavior of Apple and publishers "easily meets the standard for stating actionable antitrust claims". He adds:

By this conspiracy they have apparently raised and fixed the prices of ebooks so as to preserve Apple’s sales of iPads, improve its share of sales of ebooks, allow the old publishers a few more years to exact profits that their own honest services can no longer produce, and harm the fortunes and progress of the new Walmart of our era, Amazon.

Bad, But Worse

Collusion is much bigger than single-title pricing. Publishers also demand onerous digital rights mechanisms that defy fair use-laws permitting people to share print books. Ebook sharing is limited at best and rights often are confined to a single user account. That's a secondary form of price fixing, since it compels even members of the same household to buy more than one title when using separate accounts on different devices. I can read Kindle books on any device running Amazon's software, but rights restrictions limit or prevent sharing the titles with my wife and daughter on their separate accounts.

In a competitive market, particularly a growth one, competition should loosen rights. That's what happened with digital music, where DRM ruled early on but today is all but gone. Consumers benefit from the ability to share music within a household. Ebook publishers generally grant no such rights.

I've warned several times that Apple policies regarding publishers would likely lead to antitrust problems:

• "iPad is a devil's deal for publishers", February 2011
• "Apple App Store subscription plan gouges publishers, eats their young", February 2011
• "Apple intimidation drives developer innovation", August 2011

But there is another policy that suddenly makes sense in context of today's lawsuit: Apple's iBooks Author EULA. The company unveiled the software in January with surprisingly restrictive terms. Simply stated: If you publish ebooks using iBooks Author, no other publisher but Apple can profit. Distribution anywhere else must be for free. Authors can only charge money at iBookstore.

The onerous terms didn't make much sense, since they might detract some people from using the software to create ebooks. Now they do, or so I conjecture. Apple must have known what was going on before anything leaked about the Justice Department ebook pricing investigation. Apple knew if the Justice Department filed a case, and anyone settled, it would lose control of favorable pricing terms, allowing Amazon to undercut prices. So in making a compelling publishing tool, Apple also placed restrictions favoring distribution through its ebookstore. The EULA was a pre-emptive strike.

I proposed this idea to Ed Oswald last week, since he leads our ebook price-fixing reporting. He answers that Apple is "threatening to shut the whole damn thing down if that happens".

My response in group chat: "But Apple won't because of education market. For many obvious reasons. Core market. Nab the youth young. Sell more Macs, since tools require OS X. Besides, people pay more for Macs. They'll pay more for ebooks, too. Customer loyalty to the brand, for starters and what publishers can add to the books beyond text".

Ebooks are serious business to Apple, because they can help sell more iPads and, via the authoring tool, more Macs. There's your reason for Apple colluding with publishers and fighting the Justice Department's case.

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