The Department of Justice could be filing a lawsuit against Apple over allegations of e-book price fixing as early as today, according to a recent report. Settlements with several of the publishers that were also targeted in the investigation could come this week, as well.
Citing “two people familiar with the matter,” Reuters reported last night that while some of the publishers have been engaged in settlement negotiations with the government, Apple has not. Early last month the Justice Department issued warnings to Apple and five major publishing houses – Simon & Schuster, Hachette, Penguin, MacMillan, and Harper Collins – that it was investigating them for violations of anti-trust regulations.
When the iPad launched in 2010, Apple announced agreements with several major publishers that completely changed the landscape of e-book sales. Previously, e-books had been sold using the same wholesale model under which physical books are sold: the publisher sells the books to the retailer (Amazon, Barnes & Noble, etc.), and the retailer then sets the price for the books. With the introduction of Amazon’s Kindle reader and the growing popularity of e-books, however, the publishers began to be unhappy with this model. In order to sell units of the Kindle, Amazon was selling many e-books at or below wholesale. Publishers worried that this practice would negatively impact the sales of hard copy e-books – particularly hardcover editions.
Prior to the launch of the iPad, Apple negotiated with the publishers to sell e-books through the iBooks store under an agency model. This model mirrors the pricing model in Apple’s App Store: the e-book prices are set by the publisher, and Apple receives 30% of all sales. While these agreements were extremely unpopular with both consumers and retailers (other than Apple), the publishers were extremely pleased. With Apple – and the immense popularity of the newly released iPad – behind them, the publishers were able to strong-arm Amazon and Barnes and Noble into similar agreements.
These agreements, however, caught the attention of both the U.S. Justice Department and the European Commission. Both organizations worried that the agreements between Apple and the publishers amounted to price fixing and violated antitrust laws. While there has been no word on the progress of the European investigation in some time, it seems that the Justice Department has concluded that antitrust laws were violated.
While the terms of the settlements with the publishers are not known, it is highly likely that they will be required to scrap the agency model and return to the wholesale model for e-books. What that will mean for the publishers’ bottom line is not entirely clear, however it could mean a significant boost in revenue for Amazon and Barnes and Noble, as well as a drop in e-book prices. The DOJ’s lawsuit against Apple will likely pursue a similar outcome. There has also been some speculation that the practice of windowing – releasing an e-book weeks or even months after the hardcover edition comes out – may be a target of the DOJ investigation as well.
What do you think? Does the agency model constitute price fixing? What about e-book windowing? Is the wholesale model fair to publishers? Let us know what you think in the comments.