DOJ: How Apple and book publishers conspired to combat Amazon, raise e-book prices

The U.S. Justice Department today filed its long-awaited lawsuit against Apple and major U.S. book publishers, alleging that they conspired illegally to raise e-book prices to counter Amazon’s deep discounting.

The DOJ lays out its case in a 36-page complaint.

Three of the publishers have agreed to settle the suit, freeing Amazon to revive its e-book discounting, the Wall Street Journal reports. The settling publishers are Simon & Schuster, HarperCollins and Hachette Book Group. Also named as defendants are The Penguin Group and Macmillan.

Referring to the settlement, Amazon says in a statement, “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books.”

At a news conference this morning, U.S. Attorney General Eric Holder said the settlement represents “progress in protecting American consumers from anticompetitive harm, ensuring fairness in the marketplace, and making certain that cutting-edge technologies are available at the lowest possible price.”

Apple isn’t commenting on the case. Here’s an excerpt from the complaint.

Apple had long believed it would be able to “trounce Amazon by opening up [its] own ebook store,” but the intense price competition that prevailed among e-book retailers in late 2009 had driven the retail price of popular e-books to $9.99 and had reduced retailer margins on e-books to levels that Apple found unattractive.

As a result of discussions with the Publisher Defendants, Apple learned that the Publisher Defendants shared a common objective with Apple to limit e-book retail price competition, and that the Publisher Defendants also desired to have popular e-book retail prices stabilize at levels significantly higher than $9.99.

Together, Apple and the Publisher Defendants reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the Publisher Defendants desired), and Apple would be guaranteed a 30 percent commission on each e-book it sold (which Apple desired). …

The plan — what Apple proudly describes as an aikido move — worked. Over three days in January 2010, each Publisher Defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010 and “change[e] the industry permanently.”

These “Apple Agency Agreements” conferred on the Publisher Defendants the power to set Apple’s retail prices for e-books, while granting Apple the assurance that the Publisher Defendants would raise retail e-book prices at all other e-book outlets, too.

Prices on bestsellers and newly released e-books rose as to as much as $16.99 as a result, according to the suit.

Seattle lawyer Steve Berman, the lead counsel in a separate class-action complaint over the issue, said in a statement, “We’ve long held that Apple and this group of book publishers formed a cabal with the sole intent of extinguishing any competitive influences in the e-book marketplace. … 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.”

  • Guest

    There’s a direct correlation between the DOJ’s “investigation” of Microsoft and Microsoft’s decline in innovation.

    Why must our government, the men and women we elect, be put in charge of regulating and constraining companies who just want to do that which they were chartered to do?

    • Guest

      The DOJ investigation hampered MS, but blaming their resulting decline in innovation and competitiveness on that alone is inaccurate. MS blew the mobile and tablet markets on their own, for example.

      This Apple case is significantly different than the MS one. The challenge in the latter was to a) segment the market in order to claim MS enjoyed a monopoly and b) identify and quantify resulting consumer harm from MS’s action. The Apple case is far more straightforward. Consumer harm is obvious and undeniable: Amazon was forced to raise prices against their will. Additionally, there was no allegation of price fixing in the MS case. Indeed, there was the allegation of making things free to destroy competitors. Again, the Apple case is different. The record clearly shows that Apple colluded with these book publishers specifically to harm Amazon and raise prices. The violation was so flagrant that the only question is why it took the DOJ so long to bring the case. I’m not surprised that several book publishers have already agreed to settle. This one was blatant and anti-competitive. But knowing Apple, I doubt they’re going to go down without a legal fight.

      • Guest

        Would you want to work for a company that the government wants to innovate more slowly? By telling Microsoft not to innovate, the Department of Justice sent a clear message to the technology community: don’t work for Microsoft.

        The men who could have built iPhone for Microsoft in 2001 were working for Apple instead. Why? No government pressure. Where will they go next?

        • Guest

          MS had more than adequate resources to build their own iOS in 2001, 2, 3 or any other subsequent year. In fact MS had numerous advantages over Apple, including a decade head start and significant OEM adoption and share for WM (not to mention cash, at least at that time but no more, and a ten times greater R&D budget). But they failed to innovate, focus on the customer, or address the obvious shortcomings of WM. As long as unit sales were coming in they didn’t care that the average customer experience sucked. Even after iPhone arrived and it was obvious to everyone else how much of a leap forward it was versus WM or anything else, MS spent at least another year in denial before finally pulling the plug on WM and basically starting over. That resulted in a three year total delay to respond and was a main factor in MS’s now nearly non-existent share in mobile.

          The DOJ case had an adverse impact for the company. But to blame all of MS’s resulting problem on that simply isn’t supported by the facts.

          • Guest

            What makes you say that “MS had more than adequate resources to build their own iOS in 2001, 2, 3 or any other subsequent year”? My friend Henry worked at Microsoft for 10 years and was told, repeatedly, that Windows Mobile couldn’t integrate a web browser or media player because the DOJ said so. Only after protracted negotiations was Microsoft finally allowed to develop mobile IE, although other mobile browser vendors were also encouraged to participate (none did) and the over-regulation caused Microsoft to miss deadline after deadline. When’s the last time you had to involve Attorney General Richard Ashcroft in your build process?

            My parting question to you, good sir, is where will the Apple employees go? With Steve Jobs dead and the DOJ on line one, innovation is no longer on the luncheon menu at 1 Infinite Loop.

          • Guest

            Apple could coast on its existing momentum for a decade before facing serious issues. The problem for MS is that it already did.

          • Guest

            Thank you. As Microsoft was forced by the Department of “Justice” into a decade of coastage, so too is Apple about to be.

            President Romney, are you listening?

          • Guest

            I’ve been hearing that Apple has peaked about as many times as promises that MS was finally set for a competitive resurgence. I’ll believe either when I see it. Until then, I expect we’ll see more misses from MS and more blowouts from Apple. In fact we should be seeing another one shortly, with MS missing on both the top and bottom line.

          • Guest

            Thank you for continuing to bet on the status quo. It’s pretty easy to meet such poor expectations.

          • Guest

            And MS invariably does. Which is why it has become the status quo.

          • Guest

            Why do you even bother reading the news, then? Surely you must know all that will happen.

    • http://www.christopherbudd.com Christopher Budd

      There is definitely an impact on innovation when the lawyers get involved.

      I mentioned this in the context of the impact of litigation (http://www.geekwire.com/2012/tale-acquisitions-thoughts-1-billion-bets-microsoft-facebook/#comment-493464473) but it pertains to regulation as well.Put simply, the more you have to involve lawyers the more it gums things up and slows them down.

    • reneemjones

       You make no sense.  I suspect you are ignorant of the facts and are applying mindless ideology to the issue.

      Microsoft forced people to buy operating systems they did not want, simply as a condition of getting a computer with an Intel processor.  That is not innovation.

      Microsoft spent huge amounts of money to tie their web browser into the operating system and obfuscate which components were part of the browser, not for any benifit, lied about unexplained “user experience” simply to force people to use their browser whether they wanted to or not.

      Microsoft deliberately wrote code with no purpose other than to break competitive third-party products.

      None of this is “innovation.”  It is simply a monopolist throwing money down the drain, expecting that increased prices from their monopoly position will repay them.

  • http://www.christopherbudd.com Christopher Budd

    There’s an irony here. The Seattle Times did a series last week on Amazon that has been roundly criticized as a hatchet job.

    One of the things they were highlighting as an abuse was Amazon’s relationship with publishers and their push for ebook discounts. Essentially the Times was positioning it as big bad near-monopoly Amazon bossing around the publishers. There was an undertone to it of “when are the regulators going to make them stop”.

    So, with that in mind, it’s deeply ironic that this week the regulators take action….against Apple and the publishers.

    To be clear, I’m not speaking to the merits of any case here. I’m just saying that it would seem the Times misread the winds.

    • Guest

      I didn’t read that article, but dominant retailers are free to demand discounts from their suppliers and set their own prices to the end user for most goods. Hence the S in MSRP. Why would ebooks be any different?

  • Anonymous

    Both Apple and Amazon are bad actors here and the losers are the public.

    First Amazon, conspired to drive the publishers profits down, straining businesses that were already struggling. The idea that Amazon alone should set WHOLESALE prices of products that are not their own is ridiculous and counter to the way free markets work. It is an abuse of their monopoly power. Amazon is far more the 800-pound gorilla than Microsoft ever was, though in a narrower space. Amazon’s price fixing helps pave the way for Amazon to step in and replace the publishers, which we can see Amazon wants to do. Too bad Amazon doesn’t know anything about the non-technical side of publishing.

    Next, Apple steps in, not to save the publishers, but to increase their own profits. Sadly, higher prices alone are not enough to save the publishers in a world with very few ways to sell their products. A slightly higher price doesn’t help when both Apple and Amazon control all of the promotions and advertising in their respective stores. In different and similar ways, they are both killing publishers.

    Whether you like or dislike what Apple did, they effectively struck deals with publishers that allowed them to set their own prices. They all could have chosen the $9.99 price that Amazon had previously FORCED them to take.

    If the DOJ wins this case, I think it will only be in one area — the part where the publishers asserted that Amazon was not allowed to discount. Amazon wants it to be the case that discounting comes out of the pockets of the publishers. If this case is settled correctly, the publishers will have the absolute right to set their wholesale prices and Amazon will be free to discount at their cost. That is how free markets are supposed to work.

    • Guest

      “The idea that Amazon alone should set WHOLESALE prices of products that are not their own is ridiculous and counter to the way free markets work. It is an abuse of their monopoly power.”

      A) Amazon didn’t set the WHOLESALE price, publishers did. Amazon simply set a retail price they were prepared to offer those goods for and left it up to publishers to either agree or do elsewhere. Walmart does the same a few hundred times each day.
      B) Amazon has not been deemed to have a monopoly by the authorities responsible for determining that, which would be a pre-requisite for abuse of said monopoly.

      • Another guest

        “Amazon simply set a retail price they were prepared to offer those goods for and left it up to publishers to either agree or [go] elsewhere.”

        The truth is that both Amazon and Apple have erected a firewall around their platforms to prevent others from selling onto them. There are a few holes in Amazon’s wall but none that truly open the platform up. If you don’t want to sell at Walmart you can sell through other retailers to the same consumers. If you don’t want to sell through Amazon/Apple, you’re out of luck. Walmart may dominate the market but it’s not the same.

        The irony here is that both Apple and Amazon want to stifle competition to maximize their profits. They’re just going about it in different ways.

        • Guest

          If you don’t want to sell through Amazon or Apple you’re not out of luck, you just won’t get the same volume. Look, lots of others tried similar models or more open ones. Only they failed or never amounted to much while Amazon and Apple emerged as giants. That’s capitalism. Survival of the fittest.

          How many companies don’t want to stifle competition in order to maximize profits? Why do you think we have to have anti-trust laws and enforcement?

          • And another guest

            From the New York Times:

            But publishers and booksellers argue that any victory for consumers will be short-lived, and that the ultimate effect of the antitrust suit will be to exchange a perceived monopoly for a real one. Amazon, already the dominant force in the industry, will hold all the cards.

            “Amazon must be unbelievably happy today,” said Michael Norris, a book publishing analyst with Simba Information. “Had they been puppeteering this whole play, it could not have worked out better for them.”

            The government said the five publishers colluded with Apple in secret to develop a new policy that let them set their own retail prices, and then sought to hide their discussions.

          • Yet another guest

            OK. I’ve go an iPad app that Apple won’t let me sell or I don’t want to sell through iTunes. How exactly DO I sell it? How do I sell my xbox game without permission from Microsoft or my wii game without permission from Nintendo. I don’t.

            Fact: Apple controls the market for iOS apps, period, just as Microsoft/Nintendo control the xbox/wii markets. It’s not survival of the fittest. It’s not a free market. If you don’t see that, you’re just delusional.

  • Why is paper cheaper?

    I just bought a book, the old fashioned kind with paper pages. The kindle edition is $8. I paid $5.50 for paper, discounted from $8, because the place I bought it was willing to make less money to get the sale so I didn’t buy it down the street. When I’m done with the paper copy, I have the right to sell it or give it away. When I’m done with the kindle copy, the drm prevents me from doing that. If the market was really free here, the kindle copy would be priced to be competitive.

    There’s no question it’s not a competitive market. The open question is whether it will get any better with this result.

  • Kindle publisher

    amazon is no better. they say <> on every kindle book and kindle app. it’s a lie for small publishers and developers. if the publisher doesn’t set the price that amazon wnats they just want accept it. at least apple doesn’t do that. why doesn’t geekwire or anyone else report on this that every kindle publisher knows???