U.S. Reaches Settlement With Publishers over Alleged e-Book Scheme

“Publishers saw the rise in e-books, and particularly Amazon's price discounting, as a substantial challenge to their traditional business model,” reads the complaint. “The Publisher Defendants feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid.”

The settlement reached with DOJ requires the publishers to terminate their agreements with Apple and other e-book retailers. The publishers will be restrained from entering into new agreements that “constrain retailers' ability to offer discounts or other promotions to consumers,” DOJ said.

Pozen, joined by Attorney General Eric Holder Jr. to announce the settlement and the antitrust suit against Apple, said at a press conference April 11: “By requiring the companies to allow retailers the freedom to lower the prices of their e-book titles, it will provide for a more open and fair marketplace.” (A PDF of the Complaint is available at http://bit.ly/IzcRyO.)

At the press conference, Connecticut Attorney General George Jepsen said he and Texas Attorney General Greg Abbott reached an agreement with Hachette and HarperCollins to provide $51 million in consumer restitution. Jepsen said details will be worked out in the coming weeks. A formula based on the number of participating states and the number of e-books sold in each state will determine the distribution of money, he said.

The suit against Apple in Manhattan federal district court accuses the company of conspiring to increase the price of e-books. Pozen said consumers paid two to three dollars more for book titles.

“We allege that executives at the highest levels of these companies ' concerned that e-book sellers had reduced prices ' worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers,” Holder, who reads e-books, said in a statement (available at http://1.usa.gov/I1tJyF).

After “unilateral efforts” to steer Amazon away from the discount offerings, the complaint filed in the New York federal district court states, the publishers enlisted Apple in late 2009, when the company was gearing up for the launch of the iPad, and considering whether or not to sell e-books for the device.

Following negotiations, prosecutors allege, Apple would sell e-books as an agent of the publishers rather than a traditional wholesaler, giving up its ability to set the retail price in exchange for a 30% commission on each copy sold. The publishers then allegedly set up similar agency agreements with all other retailers, giving the publishers the power to limit retail price competition among themselves.

“As a direct result, those retailers lost their ability to compete on price, including their ability to sell the most popular e-books for $9.99 or for other low prices,” the complaint states.

Hachette said in a statement that the company, after much deliberation, “reluctantly agreed” to the settlement with the Justice Department.

DOJ's suit also names two other publishers as defendants: Holtzbrinck Publishers, which does business as Macmillan, and Penguin Group. (For a full list of the defense lawyers in the case, go to http://bit.ly/IRJ56k.)

Analysis

So, with three publishers having settled so far (Apple, Penguin and Macmillan haven't), our ALM affiliate publication Corporate Counsel talked to experts for their view of how the case may eventually fit into the landscape of antitrust enforcement and the digital marketplace.

Whether it's Amazon peddling e-books, Apple shilling music downloads via iTunes, or Google and Microsoft marketing their Web-based services, the suit highlights the increasing importance of online channels (or intermediaries) as gateways to the market ' and the fewer of them there are, the more powerful each one is. There's also very little regulation to control digital intermediaries, like iTunes or Amazon's Kindle storefront. And that dynamic has an impact on just about any company that wants to put its product in front of the buying public.

“What this [lawsuit] basically says is, any form of colluding to protect the producers, or primary sellers, is illegal,” says Eric Clemons, professor of operations and information management at the University of Pennsylvania's Wharton School. “Given that you aren't allowed to collude to protect yourself ' because that is traditional restraint of trade ' and given that we have very limited regulations to control the intermediaries, this is going to put enormous pressure both on traditional intermediaries and on traditional producers, or primary sellers.”

Vasant Dhar, co-director of the Center for Digital Economy Research at the Stern School of Business at New York University, says to the victor go the spoils.

“These markets tend to be winner-take-all,” says Dhar.

The upshot: Platform providers like Amazon get pricing power. How will the marketplace counter that?

“In this particular case, the mentality is, 'We need pricing power, and this is what the price is,'” Dhar explains. But he says the “larger lesson” is that preserving pricing power is an obsolete approach to business. In the digital era, companies need a different mindset. They should be changing the way they engage with and attract customers altogether ' not getting stuck on defending the status quo within the new technological context. And because electronic versions of many products are cheaper to produce and distribute, they should be priced lower, too.

“You need more intelligent business models now,” he says.

Former chief counsel for global compliance at Kraft Foods Inc. Theodore Banks, of Shoeman, Updike and Kaufman, says it's still too early to draw concrete conclusions. “What I try to discern from cases like this are: What are the risk factors? Where would I counsel caution on the part of a company?”

Whenever prices for consumer goods go up, alarm bells sound in the marketplace. Enforcers start fielding complaints, and politicians begin to voice concerns, if for no other reason than a higher price is easy to see ' even if the explanations behind it are complex.

“Anytime prices go up, based on something you've done, that's a risk factor,” Banks says.

When considering an action that will affect prices, the questions for counsel are: Should we be doing this? Does the potential benefit outweigh the risk?

As the U.S. Department of Justice (DOJ) prepares to battle Apple over alleged price-fixing in the electronic books market, top department officials said they are hopeful consumers will benefit from the settlement reached with three publishers.

Sharis Pozen, the acting head of the DOJ Antitrust Division, said the government believes the settlement with three publishers ' HarperCollins Publishers, Simon & Schuster, and Hachette Book Group ' will restore price competition and lead to lower prices for e-books.

In a complaint filed in U.S. District Court for the Southern District of New York prior to the settlement, prosecutors alleged that Apple colluded with Hachette Book Group, HarperCollins Publishers, Macmillan, The Penguin Group, and Simon & Schuster to raise the price of e-books in response to Amazon's practice of offering $9.99 electronic copies of new releases and bestsellers on its Kindle platform.

“Publishers saw the rise in e-books, and particularly Amazon's price discounting, as a substantial challenge to their traditional business model,” reads the complaint. “The Publisher Defendants feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid.”

The settlement reached with DOJ requires the publishers to terminate their agreements with Apple and other e-book retailers. The publishers will be restrained from entering into new agreements that “constrain retailers' ability to offer discounts or other promotions to consumers,” DOJ said.

Pozen, joined by Attorney General Eric Holder Jr. to announce the settlement and the antitrust suit against Apple, said at a press conference April 11: “By requiring the companies to allow retailers the freedom to lower the prices of their e-book titles, it will provide for a more open and fair marketplace.” (A PDF of the Complaint is available at http://bit.ly/IzcRyO.)

At the press conference, Connecticut Attorney General George Jepsen said he and Texas Attorney General Greg Abbott reached an agreement with Hachette and HarperCollins to provide $51 million in consumer restitution. Jepsen said details will be worked out in the coming weeks. A formula based on the number of participating states and the number of e-books sold in each state will determine the distribution of money, he said.

The suit against Apple in Manhattan federal district court accuses the company of conspiring to increase the price of e-books. Pozen said consumers paid two to three dollars more for book titles.

“We allege that executives at the highest levels of these companies ' concerned that e-book sellers had reduced prices ' worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers,” Holder, who reads e-books, said in a statement (available at http://1.usa.gov/I1tJyF).

After “unilateral efforts” to steer Amazon away from the discount offerings, the complaint filed in the New York federal district court states, the publishers enlisted Apple in late 2009, when the company was gearing up for the launch of the iPad, and considering whether or not to sell e-books for the device.

Following negotiations, prosecutors allege, Apple would sell e-books as an agent of the publishers rather than a traditional wholesaler, giving up its ability to set the retail price in exchange for a 30% commission on each copy sold. The publishers then allegedly set up similar agency agreements with all other retailers, giving the publishers the power to limit retail price competition among themselves.

“As a direct result, those retailers lost their ability to compete on price, including their ability to sell the most popular e-books for $9.99 or for other low prices,” the complaint states.

Hachette said in a statement that the company, after much deliberation, “reluctantly agreed” to the settlement with the Justice Department.

DOJ's suit also names two other publishers as defendants: Holtzbrinck Publishers, which does business as Macmillan, and Penguin Group. (For a full list of the defense lawyers in the case, go to http://bit.ly/IRJ56k.)

Analysis

So, with three publishers having settled so far (Apple, Penguin and Macmillan haven't), our ALM affiliate publication Corporate Counsel talked to experts for their view of how the case may eventually fit into the landscape of antitrust enforcement and the digital marketplace.

Whether it's Amazon peddling e-books, Apple shilling music downloads via iTunes, or Google and Microsoft marketing their Web-based services, the suit highlights the increasing importance of online channels (or intermediaries) as gateways to the market ' and the fewer of them there are, the more powerful each one is. There's also very little regulation to control digital intermediaries, like iTunes or Amazon's Kindle storefront. And that dynamic has an impact on just about any company that wants to put its product in front of the buying public.

“What this [lawsuit] basically says is, any form of colluding to protect the producers, or primary sellers, is illegal,” says Eric Clemons, professor of operations and information management at the University of Pennsylvania's Wharton School. “Given that you aren't allowed to collude to protect yourself ' because that is traditional restraint of trade ' and given that we have very limited regulations to control the intermediaries, this is going to put enormous pressure both on traditional intermediaries and on traditional producers, or primary sellers.”

Vasant Dhar, co-director of the Center for Digital Economy Research at the Stern School of Business at New York University, says to the victor go the spoils.

“These markets tend to be winner-take-all,” says Dhar.

The upshot: Platform providers like Amazon get pricing power. How will the marketplace counter that?

“In this particular case, the mentality is, 'We need pricing power, and this is what the price is,'” Dhar explains. But he says the “larger lesson” is that preserving pricing power is an obsolete approach to business. In the digital era, companies need a different mindset. They should be changing the way they engage with and attract customers altogether ' not getting stuck on defending the status quo within the new technological context. And because electronic versions of many products are cheaper to produce and distribute, they should be priced lower, too.

“You need more intelligent business models now,” he says.

Former chief counsel for global compliance at Kraft Foods Inc. Theodore Banks, of Shoeman, Updike and Kaufman, says it's still too early to draw concrete conclusions. “What I try to discern from cases like this are: What are the risk factors? Where would I counsel caution on the part of a company?”

Whenever prices for consumer goods go up, alarm bells sound in the marketplace. Enforcers start fielding complaints, and politicians begin to voice concerns, if for no other reason than a higher price is easy to see ' even if the explanations behind it are complex.

“Anytime prices go up, based on something you've done, that's a risk factor,” Banks says.

When considering an action that will affect prices, the questions for counsel are: Should we be doing this? Does the potential benefit outweigh the risk?