E-Book Price Fixing Busted by DOJ

(Image Courtesy of Amazon)

As we move ever closer to a world where digital distribution becomes the standard for media and entertainment delivery, we’re bound to run into a few snafu’s along the way.  One such issue reared its unsightly head back in April when it was discovered that a number of major e-book publishers were holding meetings where they planned to fix market prices on their products.

Apple and five other major publishing groups had been in talks to set mainstream e-book prices at around $12.99 to $14.99. By using this pricing method, publishers would be able to pocket around 30% of each e-books cost while distributors like Amazon would receive a smaller commission for the sale of each e-book

The aforementioned process is referred to in the publishing business as agency pricing.  This model allows book publishers to set a price for their merchandise, while the agent, the group or organization that distributes the merchandise, receives a commission.  Under this business model, the publisher is the only party that can give discounts on e-books and the price of said e-book must remain the same across the market.

The idea was initially organized by late Apple CEO Steve Jobs.  The United States Department of Justice recently published an email from Jobs to one of the publishing houses which read, “Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.”

It’s not hard to see why this model was so appealing to publishers, considering that a price hike would earn them more money and the model also netted them the ability to limit supply to major distributors should they fail to comply to the publishers’ terms. While this practice certainly does very little to benefit distributers or consumers, it does raise an important question:

“Is it illegal?”

(Image Courtesy of US Department of Justice)

The Departments of Justice in both the United States and Europe certainly thought so, as both agencies filed lawsuits against Apple, HarperCollins, Simon and Schuster, Penguin, MacMillan, and The Hatchette Group.

“This took place at the highest levels of these companies.  This action drove up e-book prices virtually overnight.  Let me be clear: When companies enter agreements that prevent price competition, that is illegal,” said Sharis Pozen, head of the Department of Justice’s antitrust division.

The DOJ in both countries have strict antitrust laws that prevent top market competitors from making joint pricing decisions, a process referred to as colluding, in order to increase prices in goods and services. The European Commission and the U.S. Department of Justice both began antitrust investigations back in December of 2011 and on April 18of this year; Apple and the other publishers had suits filed against them.

The Department of Justice hopes that the law suits will result in a market reset, effectively terminating the fixed price model, and force Apple and the other publishers to cooperate with Amazon on lower, more consumer friendly e-book prices.

Three of the publishers, HarperCollins, Simon and Schuster, and The Hatchette Group have agreed to settle.  It would appear that Apple and the two remaining publishing houses, Penguin and MacMillan, show no signs of backing down.

During the initial hearing, Apple lawyer Daniel Floyd stated, “Our basic view is that we would like the case to be decided on the merits. We believe that this is not an appropriate case against us and we would like to validate that.” The next court hearing for USA v Apple Inc et al is set for June 22.