Ed's Blog

U.S., States Sue Apple, Publishers Over E-Book Price Conspiracy

By Ed Mierzwinski
Senior Director, Federal Consumer Program

Today, U.S. Attorney General Eric Holder, Connecticut Attorney General George Jepsen (a Democrat) and Texas Attorney General Greg Abbott (a Republican) on behalf of 16 states announced settlements with several publishers -- Hachette Book Group, Simon & Schuster and HarperCollins --over an alleged conspiracy with Apple and other publishers to attack Amazon's pricing model, secretly set e-book prices and thereby harm consumers. However, Apple and the publishers Macmillan and Penguin Group USA have refused to settle and are being sued by the U.S. and the states. Here is a copy of the U.S. government's complaint (here are additional materials) filed in the Southern District of New York.

The economic issue is beween the Amazon wholesale pricing model-- which allows retailers to set prices based on the market -- or the alleged conspirators' "agency" model, where retailers must accept prices set by the publishers. According to the New York Times, the non-settling firms believe that the Justice Department's position favors a return to a threatened e-book monopoly by Amazon, its Kindle reader and its "wholesale" pricing model and places the entire publishing system, down to the author level, at risk. So they refused to agree and are being sued.

The economics of the two models can be debated. But the governments allege consumers lose with the agency model. From the New York Times, "[according to Connecticut Attorney General Jepsen] the price of an e-book was inflated as much as $5 and the states believe the damages to consumers are in excess of $100 million. The settling publishers have agreed in principle to provide more than $51 million in restitution to consumers who purchased e-books, Mr. Jepsen said."

While the economics can be debated, the government's case also relies on the antitrust laws. The alleged conspiratorial practices engaged in by Apple and the publishers include a series of illegal negotiation meetings between CEOS and other senior officials in restaurants in New York and Europe followed by myriad phone calls and emails resulting in illegal joint execution of new agency pricing contracts that would not have been in any of their firms' individual interests.The government quotes Apple as referring to the play as "an aikido move." According to Wikipedia, aikido is a martial art which "is performed by blending with the motion of the attacker and redirecting the force of the attack rather than opposing it head-on."

The government alleges that these conspiratorial actions constitute a per se violation of the antitrust laws.  Similar sorts of historical violations are taught as illegal actions not just in law school, but in many economics and political science classes as well, so the scope of the allegations is staggering. They had to have known.

The publishing and content industries have certainly been changed by the digital revolution. The e-book is a part of that change. The digital revolution did not, however, give companies the authority to ignore the antitrust laws. We and others will watch the effect of this action on consumers.

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