There’s no question that six major e-book publishers decided it was necessary to impose on retailers an “agency pricing” scheme – a set price that a reseller must agree to. Nobody kept this a secret – in fact, it may be the lack of secrecy here that federal and state attorneys-general believe may have contributed to the alleged collusion between Hachette, Harper Collins, Macmillan, Penguin Group and Simon & Schuster, along with Apple. The U.S. Justice Department’s Antitrust Division announced a civil suit against these six parties this afternoon, alleging price-fixing for e-books sold through Apple’s iTunes store and elsewhere. Hachette, HC and S&S agreed to settlement terms.
The question at issue with respect to e-book retailing is literally this: If an unquestionably dominant retailer – in this case, nondefendant Amazon – specifies a fixed sales price for general e-book titles (borrowing a model created, ironically, by Apple), do publishers have a right to use a competitive retailer’s leverage to set higher market prices for what they produce? Put another way, is a counter-price the same as a price fix?
“We allege that CEOs of the publishers bemoaned the ‘wretched $9.99 price point,'” stated acting Antitrust Chief Sharis Pozen this afternoon, referring to Amazon’s single set price. Citing from other emails in the Government’s civil complaint, Pozen continued: “One executive said that ‘the goal is less to compete with Amazon as to force it to accept a price level higher than $9.99.’ And yet another: ‘We’ve always known that unless other publishers follow us, there’s no chance of success in getting Amazon to change its pricing practices.’ Our complaint also quotes Apple’s then-CEO Steve Jobs as saying, ‘The customer pays a little more, but that’s what you want anyway.'”
During today’s price conference, Pozen was asked if she was concerned that adjusting the market conditions back to the way they were would, in effect, reestablish a pre-existing dominant player – in this case, Amazon. “This lawsuit and the settlements that we reached are about opening up the competitive marketplace and the competitive landscape,” she responded, “and not dictating a business model, but allowing competition to flourish. We have talked to many participants in this market; we have obtained lots of information about the marketplace. And here we’re taking action to stop what was an illegal conspiracy among five publishers and Apple.”
Today’s action by the Justice Department follows a March 2011 raid by European Union investigators into the offices of various publishing companies, presumably including the five named today. That action led to a series of private, class-action lawsuits in several states last August, as well as a civil action in U.S. District Court in Southern New York.
“As you can see,” Pozen stated, “we allege that these executives knew full well what they were doing: that is, taking steps to make sure the prices consumers paid for e-books were higher.”
Indeed, the five publishers named in the lawsuit did institute a so-called agency pricing model. With the typical wholesale model, a reseller purchases a product from its producer at a price point that’s a certain percentage (usually 50%) of its suggested retail (list) price. The reseller then sells it with the markup percentage of its choice.
Contrary to the wholesale model, the agency model has the reseller into an agreement to sell at a fixed price, with the implicit understanding that no other reseller would be allowed to sell at a different price. Pozen told reporters today that the five named publishers initiated this model during a three-day period in January 2009.
According to the original civil suit upon which today’s Justice Department actions were based, each of the named publishers followed up their agency pricing model with coercion policies aimed at punishing Amazon for its fixed price point. First, the original suit alleges, publishers actively “windowed” the release of their e-book titles to Amazon until a fixed number of days following the general release of the corresponding print editions. Then on a certain date following Apple’s launch of the iPad and its iTunes Book store in January 2010, the suit continues, publishers allegedly withheld up to 85% of their fiction titles from Amazon.
The narrow window of implementation – the near-simultaneity of their actions – may be enough to imply the existence of collusion between the publishers and involving Apple, according to the Justice Department. Indeed, a 1939 Supreme Court decision involving the apparent collusion of theatrical film distributors, establishes precedent for the notion that the obvious appearance of near-simultaneity for companies’ actions is enough to establish evidence of collusion.
Is the Evidence Self-Evident?
If the Government’s case boils down to the validity of a single argument, it will be the notion that the publishers acted together to establish a pricing scheme against Amazon, and worked together to buttress it with policies that benefitted a competitor. It’s this near-simultaneity which Pozen referred to during a press conference in Washington this afternoon, emphasizing the impossibility of coincidence.
But the case against Apple, specifically, may be harder to prove. If time is the only indicator of collusion here, then Apple and the other remaining defendants could make the case that the iPad release was a milestone date known to the publishers – as well as the world at large. That their actions centered around launch dates could also aid in the publishers’ defense, giving them a clear reason for their actions (which may not be illegal taken unto themselves) to have taken place within such a short period of time.
What may also aid the publishers’ defense, if it can be clearly demonstrated, is the possibility that they didn’t directly benefit from a price hike. In fact, technically there may not have been a hike at all: As e-book publisher Mike Shatzkin explained on his personal blog in November 2010 – long before any legal actions commenced – adopting the agency pricing model made publishers responsible for sales taxes. So perhaps the entire $2- to $3-per-copy price hike alleged by Pozen this afternoon, and perhaps more, may have been usurped in taxes. And more still may have been claimed by authors’ agents, as Shatzkin went on to explain.
This could eliminate financial gain as a motivating factor. In an open letter published today, Macmillan CEO John Sargent made exactly this case: “When Macmillan changed to the agency model we did so knowing we would make less money on our e-book business. We made the change to support an open and competitive market for the future, and it worked. We still believe in that future and we still believe the agency model is the only way to get there.”
With respect to the timing of his move to the agency model, Sargent said the idea came to him “on January 22nd, 2010 a little after 4:00 AM, on an exercise bike in my basement. It remains the loneliest decision I have ever made, and I see no reason to go back on it now.”
If a judge finds against the defendants in this case, is the Government afraid of publishers possibly retaliating by reducing the number of available e-book titles across the board? That was a question raised by NBC News Justice Correspondent Pete Williams; and Pozen’s answer teetered dangerously close to the edge of making the publishers’ case for them – stating that companies will do what it is within their means to do to remain competitive: “This enforcement action is about opening the playing field so that it’s open and fair, and that competition can flourish at the retail level. We want that competition to take whatever form it’s going to take.”
Stock photo by Shutterstock.com.