updated 06:56 pm EDT, Thu September 6, 2012
Ruling could be disastrous for bookstores, competition
US District Judge Denise Cote, who is already on the record as believing that publishers conspired to fix e-book prices, has approved a settlement between three of the five major publishers and the US Department of Justice that could see e-book discounter Amazon restored to a monopoly position in the market, reports The Wall Street Journal. In the settlement, Hachette, Simon & Schuster and HarperCollins agreed to tear up their contracts with Apple and allow steep discounting of e-books for at least two years.
While a short-term win for e-book consumers, the move is expected to allow Amazon to regain a monopoly position in e-books, as it is one of the few companies willing to lose money on each title sold in order to build more loyalty and lock-in buyers to its Kindle hardware and software marketplace. Under the settlement, the three publishers will
The settlement, which allows Amazon to resume discounting e-books below their wholesale price, could prove ruinous for smaller publishers, e-reader competitors and competing e-bookstores as consumers increasingly move to the digital format. When Amazon previously had a monopoly position in the market, the company was known to abuse its position and punish publishers that didn't agree to its terms. Amazon still retains a 60 percent hold on the e-book market, even after the implementation of the agency model of pricing.
When Apple entered the e-book market, it introduced a return to the traditional "agency" model of pricing -- where the publishers set prices and the retailers received a percentage of the selling price (generally around 30 percent). All five major publishers eventually agreed to the model, which broke Amazon's monopoly high of 90 percent of the market and forced it to stop selling e-books at a significant loss -- a trend publishers felt was devaluing e-books across the board, as well as eliminating smaller competitors who couldn't afford to sustain such losses in order to match Amazon's predatory pricing.
The Department of Justice and the judge viewed the actions of Apple and the publishers as anti-competitive and borne of a desire to keep the prices of e-books "artificially high" -- though on average prices rose about $2-3 per title under the agency model, and have remained stable over the past few years in spite of inflation. The agency model also allowed both Apple and others, such as Kobo and Barnes & Noble among others, to enter the market competitively, since Amazon was no longer allowed to sell e-books at a loss. While Amazon is still the dominant seller, other companies are able to compete with it and still profit.
Apple and the two publishers that refused to settle -- Penguin and Macmillan -- say that the settlement is both illegal (since it has a material effect on the trial between them and the DOJ) and entirely mis-judged, since the DOJ failed to prove that any economic harm had come from the use of the "agency" model, that any conspiracy between Apple and the publishers to fix prices existed, and that the settlement will in fact cause harm to the industry as a whole and limit consumer choice by eliminating competitors and smaller publishers. Apple and the two holdout publishers are also being sued by most states attorneys general as well as by consumer groups.
Amazon had used (and will likely revert to) the "wholesale" model of pricing, where it retains full control over what price it will sell e-book titles. It had previously favored a $10 price point to encourage the nascent e-book market, as well as to help tie consumers to its Kindle e-reader hardware and software. Whether it will reinstate the discounting policy remains to be seen, but the company has just launched a refreshed line of Kindle e-readers and tablets.
Attorney Bob Kohn, an antitrust lawyer who filed a "friend of the court" brief defending Apple and the two publishers' position, said that Judge Cote "deferred to the Justice Department in its analysis" and that the ruling will "cause great harm to consumers of e-books because the judgement reverses the pro-competitive effects of the agency model."
A spokesperson for the Authors Guild, which also filed a pro-Apple amicus brief, called the settlement acceptance "devastating to bookstores" and charged that "the court acknowledges that this restores the status-quo conditions before 2010, when Amazon [had] 90 percent of the e-book market." It added that "the Justice Department is reshaping the literary marketplace without submitting a single economic study to the court to justify its actions."
Apple and Amazon have thus far declined to comment on the acceptance of the settlement, though Apple has previous filed motions attempting to stop the deal from going through, saying it disrupts existing arrangements and causes uncertainty in the marketplace. It previously blasted the settlement as "fundamentally unfair, unlawful and unprecedented," citing the DOJ's inability to cite a single case in which such relief was granted without a trial. It refers to the settlement as "nullifying a non-settling defendant's negotiated contract rights by another's settlement."
The Justice Department said that it was pleased that the court found "the proposed settlement to be in the public interest" and said that consumer would start to benefit from "restored competition in this important industry," though it could not cite any examples of how the settlement would work to any player other than Amazon's benefit. Apple has charged that Amazon was the "driving force" behind the investigation, and even hosted a two-day conference with DOJ employees at its Seattle headquarters, meeting with over 14 DOJ officials but "not once under oath," according to Apple attorneys.
Despite the strong positions taken by each side, Apple and four of the five publishers have reached a settlement in the EU that echoes the deal just approved in the US. In that settlement, the case against the publishers was dropped in exchange for allowing wholesale discounting for two years, which provides some hope that the DOJ, Apple and Macmillan could reach a refined version of the current settlement. Penguin has not participated in either the US or EU settlement.