With the states suing over ebook price fixing, Apple needs to surrender

Attorneys General in 16 states filed suit against Apple and three publishing companies Wednesday, following a similar suit filed this morning by the US Justice Department. Unlike the federal suit, the states action also looks for monetary compensation in addition to the end of the collusive agreements between Apple and the publishers.

Connecticut and Texas lead the action, and are joined by Attorneys General in Alaska, Arizona, Colorado, Illinois, Iowa, Maryland, Missouri, Ohio, Pennsylvania, South Dakota, Tennessee, Vermont and West Virginia and the Commonwealth of Puerto Rico.

The states' suit names Apple as well as publishers Macmillan, Penguin Group USA, and Simon & Schuster. Hachette and HarperCollins are settling out of court, says Connecticut Attorney General George Jepsen, and will pay a combined $52 million in restitution.

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"Publishers deserve to make money, but consumers deserve the price benefits of competition in an open and unrestricted marketplace", Jepsen says. "Those interests clearly collided in this case and we are going to work to ensure the eBook market is open once again to fair competition".

In the federal case, Hachette and HarperCollins settled almost immediately after the suit was announced, as did Simon & Schuster. Why Simon & Schuster did not settle with the states is unknown, but it very well could have to do with the monetary demand in addition to the move away from the so-called "agency pricing" model put in place by Apple's deals.

Apple is in trouble, that is now clear. Like the antitrust case built against Microsoft in the 1990s, the Cupertino, Calif. company faces a several-pronged assault from users, the federal government, and the states. Microsoft decided to fight the allegations against it, and lost.

With ebooks such a small portion of Apple's business when it comes to the iOS platform, is it really worth spending what could be millions to defend a contract with shaky legal basis? Experts agree that publishers are within their rights to have some control over the pricing of content. Apple does not have the right to dictate what that price may be though, or prevent competitors from undercutting its pricing.

That's where Apple went wrong, according to noted antitrust lawyer William Markham. The company saw Amazon in the rearview mirror, panicked, and made a legally questionable move as a result.

"Amazon poses a threat to Apple’s entire business model, its iPad line of products in particular, and its interest in making profits from selling ebooks", Markham told me last month. "Indeed, Apple explicitly wants to make profits by inducing prospective customers to purchase iPads and commit themselves by contract to its closed world of available ebooks, and Amazon stands between Apple and this profitable ambition".

Consumers were overcharged $100 million as a result of the price fixing, the suit claims. These attorneys general are not satisfied with the Justice Department's effort to control the ebook marketplace for five years to prevent collusion. They feel this profit was illicitly gained, and should be forfeited.

Apple gains nothing by standing its ground. Raising the white flag now and paying up will be far less expensive than fighting. Remember back to my piece last month where I showed that Apple has already admitted to the key allegations in the case. Apple said this in a legal filing:

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.

Is the ebook industry important enough for Apple to lose its head? I think not. The company makes far more money from other iTunes content. Ebooks, while a source of significant revenue when it comes to digital content, is nowhere near the revenues from music and video. I fail to see how the iBookstore will really mean that much in the end to Apple's bottom line.

Apple stands to lose far more by playing a game of Russian roulette with federal regulators. This isn't a battle worth fighting, and it is time to walk away before the damage is worse.

Photo Credit: Carsten Reisinger/Shutterstock

14 Responses to With the states suing over ebook price fixing, Apple needs to surrender

  1. woe says:

    "Amazon poses a threat to Apple’s entire business model"

    ?  Apple makes 90% of its revenue off of selling its own hardware.  Amazon makes 99.9% of their revenue off of selling other peoples stuff.

    Amazon's market cap is 85billion.  Apple could buy them with cash.  This will do nothing to Apple.  They will still sell ebooks to the millions upon millions of iPad owners.

    • Alan says:

       Apple makes a good chunk of money off of other people's work.

      If Amazon isn't forced to raise their prices as they have been due to Apple's terms with publishers, Apple could lose some people to Amazon, and would lose money on ebook sales.

  2. blindwanderer says:

    Puerto Rico wishes it were a state.

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  5. woe says:

    Apple will settle.  Ebooks may go up in price on iTunes, and Apple may lose some ebook sales.  I would imagine that today ebooks for Apple make up less than 1% of their revenue.
    I buy ebooks from both Apple and Amazon for my iPad, going with Amazon only if I cant get the book from Apple or there is a huge difference.  In my experience pricing is all over the place between the two.  Most of the time the price is the same. For instance I just bought this book...

    http://itunes.apple.com/us/book/a-dance-with-dragons/id424007351?mt=11 

    but its the same exact price on Amazon....for the Kindle.

    http://www.amazon.com/Dance-Dragons-Song-Fire-Book/dp/0553801473/ref=sr_1_1?ie=UTF8&qid=1334240117&sr=8-1 

    Sometimes Amazon is cheaper, sometimes Apple is cheaper.  The area where I see the biggest difference for me is Technical books.  Example

    http://www.amazon.com/Microsoft-Data-Protection-Manager-2010/dp/184968202X/ref=sr_1_1?s=books&ie=UTF8&qid=1334240379&sr=1-1 

    http://itunes.apple.com/us/book/microsoft-data-protection/id474134645?mt=11 

    All that said I am not how or what Apple is doing wrong????  Both of my examples show there is choice and that in many cases (for me) they are the same price and when Apple is more expensive I can just get it at Amazon.

    • thommcg says:

      Think it's a case of, "you can set the price, we'll take 30%, but you can't sell it cheaper elsewhere".

      Out of interest, if the price is the same on Apple and Amazon, why buy from Apple (iBooks) when that'd limit you solely to Apple devices?

      • rauckr says:

        I occasionally read books on my MacBook Pro with a Kindle Reader since there is no Apple iBook reader for the Mac. If I were using a tablet, it would be an iPad anyway so I wouldn't feel limited buying from Apple since they do dominate the tablet market. I have never been able to justify any tablet to date hence I need something for the Mac. Hopefully, Apple will release a reader in the near future since I am not real happy with the Kindle reader..

  6. John LeMoine says:

    Who buys ebooks from Apple? They've always been an expensive rip-off . I always buy both ebooks and audible books from outside sources and import them or use an app to read. (Like the Kindle App).  Apple builds pretty good hardware at high prices and you'd think that would be enough for them but like all big companies their  business model is built on the same premise, GREED

    • TechnologyRules says:

      You're such a moron and so wrong by the way...

      Apple, like many other business, want to expand their existing business.

      Apple is going to win because the state is overreaching on this one... Apple has not engaged in any anti competitive actions or behavior. Several legal analysts made a very good case on how this is almost baseless on CNN and msnbc.

      • 1DaveN says:

        How can you say Apple didn't engage in anti-competitive behavior when their direct actions forced Amazon to raise prices on Kindle e-books?  Amazon's sales policies had nothing whatsoever to do with Apple, other than that Apple didn't want to compete on price because their margin would have been too low.  So they entered into a conspiracy with multiple publishers, because one publisher would not have been powerful enough to change Amazon's pricing.

        You're going to be in for a surprise on this one.  Read the DOJ complaint if you think they're kidding around, or that they don't have a massive amount of detailed evidence of what really happened.

  7. rauckr says:

    There is at least one key difference between Microsoft in the 90's and Apple today when it comes to the the litigation issue. Apple does not dominate the eBook market. They are a small player at this point. Also, they do not set the book prices; the publishers do.  Where's the beef in this argument?

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