Justice Department Allegations That Apple, Publishers Colluded Over E-book Pricing Persist

For many readers the e-book has replaced printed copies. Considering that an entire generation of post-Millennials is being reared on digital titles, the e-book looks to have a bright future. While its great news for readers who don’t want to lug Haruki Murakami’s latest 900 page tome 1Q84 to the beach (or even Steven King’s 11/22/63), book publishers are unsure how to proceed in this brave, new, paperless world.

How much publishers can charge for an e-book is critical to the industry’s financial future, and now publishers, and Apple will have to answer to the U.S. Justice Department over e-book pricing.

The U.S. Justice department is examining whether publishers committed anti-trust violations in their attempts to remain profitable. The government is still pursuing its investigation that Apple and five major book publishing groups colluded over e-book pricing according to the Wall Street Journal. The allegations against Apple and print publishers Simon & Schuster, Hachette, Penguin, MacMillan and HarperCollins first surfaced last summer, when a DC-based law firm threatened to sue Apple and the publishing groups. The EU has also pursued a similar investigation against Apple.

None of the companies would comment publicly on the matter, but several of the companies have held talks to stave off a costly court fight and settle the antitrust case.

Apple is alleged to have created a pricing structure, called the agency model, prior to releasing the original iPad in 2010. The agency model offered publishers 30 percent of iBook sales, rather than relying on the traditional wholesale model. Prior to the advent of the e-book publishers sold books to retailers at a steep discount, which then allowed retailers the freedom to charge less than the book’s sticker price. This is the pricing structure behind that familiar 40 percent discount sticker Barnes and Noble slaps on its hardcovers.

The wholesale model took a hit when Amazon introduced the Kindle, since Amazon frequently sold brand new titles for $9.99, which was significantly less than the comparable hard cover edition. Amazon made this choice with the hope that cheaper content would drive Kindle sales (a pricing model that is the inverse of the Kindle Fire, where the company takes a loss on the hardware in hopes of profiting on digital content).

The Wall Street Journal also reports that according to Steve Jobs’ biographer, Walter Isaacson, Jobs stated that after publishers established the agency model with Apple, those same publishers refused to sell books to Amazon unless it too followed the agency model.

The Justice Department wants to know whether this action constitutes collusion by book publishers and Apple to keep prices high. The publishers stance is that the move to agency pricing was not an anti-trust violation, but rather that it actually fostered competition by making sure Amazon was able to create a monopoly on sales by undercutting competitors.

It looks like Apple, book publishers, and even Barnes & Noble, are lined up against Amazon. In a Justice Department deposition, Barnes & Noble executive William Lynch testified that abandoning agency pricing would give one company an even bigger share of the market that it currently enjoys. We have presume he was referring to Amazon, though a Barnes & Noble spokeswoman declined to comment.

Are e-books the future of publishing or the harbinger of its demise? While e-books are undoubtedly critical to the financial health of the publishing industry book publishers cannot afford to see their industry take the same financial nose dive that befell the music industry in the post-Napster era. We have yet to see a workable pricing structure that satisfies all. The issue of e-book pricing is reminiscent of the deals that Apple, Google, and Amazon had to cut to launch their respective cloud music locker services in 2011.

E-book pricing is a contentious and unsettled issue. Libraries are reeling from Random Houses’ recent 300 percent price hike. Unlike their paper counterparts, e-books do not wear out, and publishers want to make sure that libraries pay for the huge numbers of patrons who read their materials. HarperCollins has combated this by instating a 26 check out per title limit on books, much to the dismay of libraries and their patrons.

If the publishers in question settle with the Justice Department, it could mean lower prices for consumers. Don’t expect to find an iBooks bargain bin any time soon, however, because as a rule Apple doesn’t sell on the cheap. (Is it any wonder won of the first things Ron Johnson did at JC Penney was end sales?)

Whether these matters end up in a court of law remains to be seen, but an intervention from the Justice Department that threatens to penalize Apple and other book publishers demonstrates there is a need to figure out how best to serve all the parties that have a financial stakes in e-books.

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About Emily: Emily is a freelance writer who loves discovering new apps whenever she can pry the iPad away from her children or husband. You can contact her via Twitter: @whatwentwrite