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Five book publishers were accused of partaking in an agency sales model with Apple

A judge from the Manhattan federal court has finally set a date for the bench trial involving Apple and two publishers who were accused of anticompetitive practices involving e-books.

Back in April of this year, the U.S. Department of Justice (DOJ) sued Apple and five book publishers over anticompetitive practices concerning e-book sales. The book publishers were Hachette Livre (Lagardère Publishing France), Harper Collins (News Corp., U.S.A.), Simon & Schuster (CBS Corp., U.S.A.), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of inter alia Macmillan, Germany).

The book publishers were accused of partaking in an agency sales model with Apple, which meant that publishers were allowed to set the price of a book and Apple would take a 30 percent cut. In addition, the publishers could not let rivals sell the same book at a lower price.

Traditionally, publishers sell physical books to retailers for about half of the cover price, which is considered a wholesale model. Retailers then had the ability to sell those books to customers for a lower price if they wanted to.

But when e-books came along, this model was challenged. Amazon started selling best sellers for as low as $9.99 to encourage its Kindle e-reader sales. Publishers were not happy.
Apple then came along with iBooks, and publishers began to worry that it would take over the book industry the way Apple's iTunes took over the music industry, where customers would choose to purchase cheap, digital books instead of physical books.

However, Apple made everything better when it struck a deal with publishers to implement the agency model in 2010. This helped Apple at the time of its iPad and iBooks launch. But its deal with publishers made it seem like an attempt to thwart Amazon's dominance.

Recently, Harper Collins, Simon & Schuster and Hachette Livre decided to settle the case with the U.S. DOJ. However, Apple, Penguin and Macmillan have decided to fight the antitrust case.

The bench trial in the Apple e-book case will start June 3, 2012.

Source: Reuters

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Apple could have had a case..
By lightfoot on 6/27/2012 6:23:44 PM , Rating: 1
Apple could have had a case if they had started with the wholesale model and sued Amazon for using it's dominant position to drive out competition by way of dumping cheap books on the market.

However Apple didn't. Instead they choose to abuse their dominant position in consumer electronics to FORCE an agency model on an entire industry. This resulted in both the collusion and price fixing charges.

Apple could have countered the perceived monopolistic abuses by Amazon in court, instead they decided to abuse their own monopoly in order to destroy Amazon. Apple will lose, because they decided to play dirty. Amazon may well have done it first, but that is no excuse.

RE: Apple could have had a case..
By Shadowself on 6/27/2012 6:44:57 PM , Rating: 2
The error in this logic is that Apple did not have a dominant (or really even any position at all) in the e-books market.

Apple wanted to set up an e-books market. It needed the publishers buy in.

Also Apple didn't have a dominant position in any kind of e-book reader. When the negotiations and collusion were supposedly going on, Apple wasn't really shipping anything in volume that anyone in their right mind would consider a real book reader.

Apple was the one who needed to please the publishers. Not the other way around. If all the publishers were happy with Amazon and other distributors they could have easily told Apple to take a hike.

Apple had to give up more control to the e-book publishers than they ever did to the music industry. Apple couldn't dictate prices (Apple did initially dictate a 99 cent price per song to the music industry). Apple could only offer 70% to the publishers (with Apple getting 30%) versus the 50% those publishers were getting from Amazon. Apple offered a larger piece of the pie to the publishers and they jumped in.

Potential higher profits for the publishers is what brought them on board with Apple. Not Apple forcing them to do anything.

RE: Apple could have had a case..
By lightfoot on 6/27/2012 7:15:01 PM , Rating: 1
Wow... Total revisionist history!

Apple DID have an established monopoly in the tablet market and in iOS devices (and it was totally legal.) This was AFTER the iPad was released and BEFORE Apple started their own book store.

To date, Apple still maintains that monopoly (on iOS devices and Tablets specifically.) Again this appears to be totally legal.

What is NOT legal is to use that existing monopoly to gain leverage into a different market. This is EXACTLY what Apple did.

Apple forced book publishers to re-write their contracts with everyone (including Amazon) to force them into an agency model in order to satisfy Apple's lofty profit requirements of 30%. This is classic collusion and price fixing. And the fact that Apple leveraged an existing legal monopoly on iOS means that they abused their monopoly position in order to do so.

Apple didn't need the publishers to sell their books on the iPad. The publishers NEEDED Apple's permission to sell their books on the iPad. Amazon had previously sold books to iPad users, but Apple revoked that ability because Apple did not profit from it. Apple literally pulled the Kindle App from the App store until Amazon removed the ability to purchase books through the App.

And the end result of this was that eBook prices went UP for all consumers. Even people who did not own Apple devices.

Apple could only offer 70% to the publishers (with Apple getting 30%) versus the 50% those publishers were getting from Amazon. Apple offered a larger piece of the pie to the publishers and they jumped in.

That simply isn't true. Amazon previously paid the publishers a fixed price (wholesale) price for books. Say 9.99 on a book with a cover price of $19.99 Amazon then choose to sell it at cost for $9.99 in order to sell more eBook readers (Kindle devices.) Apple came in and said, we will use an agency model where we get a fixed 30% cut of all sales. Publishers then would get 70%. Apple also dictated a most-favored-nation clause that dictated that their SALES price would be no higher than competitors. Thus if Amazon sold a book for $9.99 Apple would sell it for the same price. the problem is that Amazon would still PAY publishers $9.99 for the book, but Apple's contract said that publishers had to sell the same book to Apple for only $6.99 (70% of the sale price.)

This clause caused the publishers to force Amazon into the Agency model and also resulted in a net price increase. Publishers still get their $9.99, but the resellers are forced to take 30% of the sale price as profit.

You are right to point out that the agency model is not the illegal part. The M.F.N. clause is what in combination with the agency model results in the price fixing. Apple's actions resulted in an overnight 42% price increase for all eBooks.

Apple could not have done it without the help of the publishers, but Apple single-handedly masterminded and implemented the entire event.

"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer

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