Apple / Agency 5 Antitrust Suit: Settlement News From the Trenches

It was announced today that the U.S. Justice Department is filing its long-anticipated antitrust lawsuit against Apple, Inc. and the "Agency 5" publishers who are charged with colluding with Apple to fix prices on ebooks. Three of the five publishers immediately moved to settle out of court, though Penguin, Macmillan and Apple itself are digging in their heels and maintaining they are innocent of the charges.

Bloomberg News is reporting that when the U.S. Justice Department officially moved to file suit against Apple and the “Agency 5″, all but Apple and one of the publishers named in the suit negotiated a settlement. From Bloomberg:

The U.S. sued Apple Inc. (AAPL), Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster in New York district court, claiming the publishers colluded to fix eBook prices.

CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins settled their suits today, two people familiar with the cases said…

Apple and Macmillan, which have refused to engage in settlement talks with the Justice Department, deny they colluded to raise prices for digital books, according to people familiar with the matter. They will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, which was dominated by Inc. (AMZN)

You can read the full Bloomberg report here. A report on Fox Business offers some settlement details:

If the settlement reached with the other three publishers is approved, retailers such as Amazon and Barnes & Noble could once again set the price of books sold via their outlets. The settlement also requires the publishers to terminate their anticompetitive most-favored-nation agreements with Apple and other e-books retailers, Holder said.

“In addition, the companies will be prohibited for two years from placing constraints on retailers’ ability to offer discounts to consumers.  They will also be prohibited from conspiring or sharing competitively sensitive information with their competitors for five years,” the statement reads.

Over on Slate, no less than three news and opinion pieces have been posted in the wake of today’s news. In If Apple and Publishers Plotted, They Didn’t Need to, Reynolds Holding argues:

If Apple and a clutch of publishers plotted together, they didn’t need to. U.S. trustbusters say the iPad maker and five electronic book producers conspired to raise download prices. But the model they came up with makes sense even without collusion, giving the publishers perhaps their best chance of survival. 

The book business has changed radically in recent years. The old model of selling wholesale and letting retailers set prices worked fine in the world of printed books and bricks-and-mortar stores. But the arrival of digital tomes allowed Amazon, for one, to slice prices to $9.99 per e-book, providing relatively cheap content that helped make its Kindle e-reader gadgets popular. Prices like that ate into publishers’ profit margins.

But Holding is mistaken. Amazon’s pre-Agency deal with publishers had Amazon paying publishers’ their usual wholesale cut, which was based on publishers’ suggested retail prices. When Amazon slashed prices on mainstream bestselling Kindle books to $9.99 or less, it meant no less profit for publishers, but that Amazon had to take a loss on almost every one of those sales. Amazon is no stranger to the loss-leader strategy of obtaining market dominance however, so it was prepared to take the hit—for years, if need be.
This is partly why consumers and consumer watchdogs have been crying, "Foul!" over the claims of publishers and their supporters that Amazon’s pre-Agency ability to set its own pricing was in some way harming the publishers.
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