eBook Settlement Big Win For Amazon & Consumers

Consumers should soon be getting a more of a price break on electronic books following approval of a settlement between the US Department of Justice and three publishers who, along with Apple, stand accused of price-fixing eBooks to compete with Amazon.com.

The publishers had agreed to the settlement in April. When the court publicized the terms for a required period of public commentary, they drew a large negative response from many industry players. Critics argued that the settlement would give Amazon too much market power by removing agency pricing from the publishers' arsenals.

Agency pricing allows a publisher set the prices of an e-book, with the retailer getting a cut of the price as a commission. This differs from the wholesale model, where a book’s price is suggested and retailers can discount it to their heart’s content. Amazon used the wholesale model until Apple came along with a plan of its own.

According to the DoJ’s suit, the publishers entered into agency agreements with Apple, contrary to Amazon’s way of doing things. In response, Amazon blocked Macmillan’s books from being sold on its site. Amazon eventually backed down, and the agency model became the norm across all ecommerce retailers. Another major publisher in the US, Random House, switched to agency pricing on its own in 2011.

Agency pricing isn't necessarily a problem - it's a perfectly legitimate way of doing things. The DoJ's issue is that Apple allegedly colluded with the five publishers to get them to all jump to agency pricing at the same time. If true, this would be a highly anti-competitive act.

Under the terms of the settlement approved by U.S. District Judge Denise Cote yesterday, the three settling publishers, Hachette Book Group, HarperCollins, and Simon & Schuster, will be required to end their agency agreements with Apple seven days after the settlement’s final approval. The publishers can then sign new contracts but are forbidden for two years from using clauses that limit retailers' rights to discount.

Apple and two other publishers accused in the suit, Macmillan and Penguin, have not agreed to the settlement and are continuing to fight the suit in court, which is due to go to trial in June of 2013.

The American Booksellers Association was one of the vast majority of commenting parties that were opposed to the settlement.

"We believe that elimination of the Agency Model will radically change the current e-book distribution system, will significantly discourage new entry, and will lead to the departure from the market of a sizable number of the independent bookstores that are currently selling e-books," the ABA wrote to the court in June.

The Authors Guild fired off an amicus (friend of the court) brief saying that "of all possible remedies to the alleged collusion, requiring three large publishers to allow Amazon to sell ebooks at a loss is among the most destructive of competition that one could imagine."

Judge Cote acknowledged the opposition to the settlement, but at the end of the day, could not let the issue of collusion go unpunished.

"Even if Amazon was engaged in predatory pricing, this is no excuse for price-fixing," Cote wrote in her order.

The rest of the case will now have to go through the trial itself, but almost immediately the benefits of this settlement should be felt outside the insular world of publishing.

At yesterday's Kindle launch event hosted by Amazon, executives lauded the settlement approval and predicted lower prices for works from those publishers soon, according to Reuters.

Ultimately, this what consumers ultimately care about: lower prices. Amazon's pricing model is clearly a threat to publishers and booksellers, as the demise of Borders chain illustrates quite well. But how is Amazon's model a different threat than, say, that of the big-box bookseller chains like Barnes & Noble, Books-a-Million, or Borders to the smaller independent booksellers they cheerfully pushed out of the market?

If Apple did indeed participate in price-fixing activity, the consequences go beyond just sticking it to Amazon. Consumers were the ones who who got stuck - with higher costs at checkout time. Paraphrasing the DoJ in its response to the Author's Guild this week, Amazon's model scares the beejeezus out of the publishing world, but that's no reason to break the law.

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