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Apple, Publishers Conspire to raise price of E-Books

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  • Apple, Publishers Conspire to raise price of E-Books

    F#ck Apple

    Apple, Publishers Conspire to raise price of E-Books
    Forbes.com
    Connie Guglielmo, Forbes Staff
    4-11-2012


    I doubt it will become a bestseller, but the U.S. Department of Justice’s 49-page civil suit against Apple is a really interesting read. You’ve got big names — Apple and Steve Jobs, Amazon, prominent publishers including HarperCollins, Macmillan, Penguin, Simon & Schuster, and U.S. Attorney General Eric Holder.

    And of course, there’s the drama — publishers dreaming up “Project Z” to conspire to set prices on e-books at clandestine meetings at upscale Manhattan restaurant in a plot that milked consumers for an extra “tens of millions of dollars” for e-books.

    Shortly after the suit was filed today, the DOJ held a press conference saying it had reached a settlement with three of the publishers — Hachette Book Group, HarperCollins and Simon & Schuster — while it continued its legal challenge against Apple, Macmillan and Penguin Group for “conspiring to end e-book retailers’ freedom to compete on price, take control of pricing from e-book retailers and substantially increase the prices that consumers pay for e-books. ”

    If I can’t convince you to read the government’s case yourself, here’s the short version:

    Apple and the book publishers, unhappy with how Amazon had set what they deemed to be an artificially low price for e-books at $9.99 after it launched its Kindle e-book reader, agreed on a plan where they would set the prices higher. Basically, they decided to ditch the so-called “
    wholesale model” — where publishers sell their wares to retailers, who then set the price — and instead adopted an “agency model,” where the publishers tell the retailers (like Apple/Amazon) what the final price of the book should be and what margin the retailer can earn out of the final price. Apple got MFN – most-favored nation pricing, with a guaranteed 30 percent “commission” on each e-book sold, publishers were able to set e-book pricing $3 to $7 higher than Amazon’s, and consumer’s got stuck with higher prices.

    Here’s the long version:

    The story starts in November 2007, when Amazon released its first Kindle and started selling e-books, including newly released and best-selling book for a “substantially” lower price of $9.99, according to the suit. Publishers didn’t like Amazon’s price discounting and “feared the 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.”

    And they wanted the change in pricing to come before “the wretched $9.99 price point,” as one CEO called it, became an “entrenched consumer expectation.”

    By 2009, the government says, the publishers realized they couldn’t get Amazon to budge on its pricing (they were selling lots of e-books and Kindles, after all). And so, the only thing left for the publishers to do was to “conspire” to raise retail e-book prices and limit competition in the sale of e-books. That’s where Apple comes in.

    Apple, preparing to launch the iPad in 2010, was apparently considering whether it would sell e-books that could be read on its new tablet. While Apple had “long believed that it would be able to trounce Amazon” by opening up its own e-book store, the government contends that it was not happy that the $9.99 pricing had reduced retailer margins on e-books to “levels that Apple found unattractive.”

    And now for the collusion: Apple and the publishers agreed to switch from the longstanding wholesale model for print and e-books, to the new agency model, where Apple would get a guaranteed 30 percent cut of each e-book sold.

    Under the agency model, publishers would take control of retail pricing by appointing retailers as ‘agents’ who would have no power to alter the retails prices set by the publishers. As a result, the publishers could end price competition among retailers and raise the prices consumers pay for e-books through the adoption of pricing tiers.

    Their scheme worked, says the DOJ, because of Apple’s help — and the company’s desire to avoid a price war with Amazon. Then CEO Steve Jobs supposedly described it this way: “We’ll go to [an] agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.”

    Which brings me to the bottom of Page 4, where the government claims the plan — what “Apple proudly described as an aikido move” — was put into play in late 2009, with the publishers entering into agreements with Apple in advance of the release of the iPad.

    These Apple Agency Agreements” conferred on the Publisher Defendants the power to set Apple’s retail prices for e-books, while granting Apple the assurance that the Publisher Defendants would raise retail e-book prices, while granting Apple the assurance that the Publisher Defendants would raise retail e-book prices at all other e-book outlets, too.

    Instead of $9.99, the publishers, starting on April 3, 2010, set up price tiers based on the book’s hardcover list price. Best-selling and newly released titles carrying a list price between $25.01 and $35 would be priced at $12.99, $14.99 or $16.99, as an example.

    The Amazon Threat

    The government says the publishers were also worried that Amazon would supplant them as the “gate-keepers of the publishing world,” since it was in a good position to “enter the digital publishing business and thereby supplant publishers as intermediaries between authors and consumers.” (One CEO was p****d at Amazon for a January 2010 program in which the retailer offered copyright holders the ability to sell their e-books directly on Amazon, cuttig out the publishers, and earn royalties up to 70 percent.)

    And so, says the DOJ, the publishers knew that the only way to bend Amazon to their will, pricing wise —and to make sure that one publisher didn’t go rogue and undermine the plan — was to act together. Collectively, the publishers “accounted for nearly half of Amazon’s e-book revenues, and by refusing to compete with one another for Amazon’s business, the Publisher Defendants could force Amazon to accept the Publisher Defendants’ new contract terms and to changes its pricing practices.”

    The suit claims that the publishers spoke on the phone, exchanged emails and met privately as a group, about once per quarter, in “private dining rooms of upscale Manhattan restaurants…No legal counsel was present at any of these meetings.”

    “The Chef’s Wine Cellar,” a private room at Picholene, was apparently a favorite watering hole of Penguin Group CEO John Makinson and the other CEOs. They also met at Alto, another Manhattan restaurant. The menus were not disclosed.

    The group also met up in Europe (but I can’t find any mention of specific restaurants, there).

    As for Apple, the government describes Apple plans around e-books, citing an email from iTunes chief Eddy Cue to Jobs in Feb. 2009, saying that “it would be very easy for us to compete and I think trounce Amazon by opening up our own e-book store.” It also claims “Apple also contemplated illegally dividing the digital content world with Amazon, allowing each to ‘own the category’ of its choice — audio/video to Apple and e-books to Amazon.”

    Ultimately, Apple opted for the plan that gave it the 30 percent guarantee, according to the DOJ.

    Apple declined to comment today. Amazon put out a statement, calling the suit and settlement “a big win for Kindle owners. We look forward to being allowed to lower prices on more Kindle books.”

    Macmillan CEO John Sargent said that the government’s demands “were too onerous,” which is why it didn’t settle. “After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model,” Sargent said. “We also felt the settlement the D.O.J. wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents.”

    Makinson, of Penguin, was also quoted today, explaining their two reasons for not settling. “The first is that we have done nothing wrong. The decisions that we took, many them of them costly and difficult, were taken by Penguin alone. The second, and equally powerful, reason for our decision to place this matter in the hands of a court is that we believed then, as we do now, that the agency model is the one that offers consumers the prospect of an open and competitive market for e-books.”

    Author Scott Turow, president of the Authors Guild, has been vocal in his opposition to the DOJ’s suit and said Amazon, which he’s called “the Darth Vader of the literary world,” has had a “chokehold” on the e-book market. In a March 9 open letter to guild members, Turow said he hoped the DOJ wouldn’t bring its suit and said, “Our government may be on the verge of killing real competition in order to save the appearance of competition.

    That didn’t sway the government. “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 said today.

    Sixteen states have also brought suit against Apple and the remaining publishers.
    Standard lengthy disclaimer / warning / terms of use: All postings by "NSRLink" are fictional, public information, for entertainment purposes only, should never be taken seriously, and in no way should be construed to represent the positions, views, ideas, or thoughts of any railroad carrier, person, entity, organization, or otherwise. By reading anything posted or associated with the user ID, "NSRLink," any entity agrees they shall not be offended, harmed, sad, defamed, inflamed, upset, mad, harassed, have their feelings hurt, or similar. Parties or entities not agreeable to these "terms of use" are hereby required to block this profile "NSRLink" and agree to not read or view posts so they will no longer be offended, harmed, sad, defamed, inflamed, upset, mad, harassed, have their feelings hurt, or similar in any manner, and may do so via UserCP "Edit ignore List" & adding "NSRLink" to the list. Thank you & good day to you.

  • #2
    Department of Justice Press Release

    Department of Justice Press Release

    US JUSTICE DEPARTMENT REACHES SETTLEMENT WITH THREE OF THE LARGEST BOOK PUBLISHERS AND CONTINUES TO LITIGATE AGAINST APPLE INC. AND TWO OTHER PUBLISHERS TO RESTORE PRICE COMPETITION AND REDUCE E-BOOK PRICES

    Department Settles with Hachette, HarperCollins and Simon & Schuster; Litigates Against Apple, Macmillan and Penguin to Prevent Continued Restrictions on Price Competition


    WASHINGTON — The Department of Justice announced today that it has reached a settlement with three of the largest book publishers in the United States– Hachette Book Group (USA), HarperCollins Publishers L.L.C. and Simon & Schuster Inc.–and will continue to litigate against Apple Inc. and two other publishers–Holtzbrinck Publishers LLC, which does business as Macmillan, and Penguin Group (USA)–for conspiring to end e-book retailers' freedom to compete on price, take control of pricing from e-book retailers and substantially increase the prices that consumers pay for e-books. The department said that the publishers prevented retail price competition resulting in consumers paying millions of dollars more for their e-books.

    The civil antitrust lawsuit was filed in U.S. District Court for the Southern District of New York against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster. At the same time, the department filed a proposed settlement that, if approved by the court, would resolve the department's antitrust concerns with Hachette, HarperCollins and Simon & Schuster, and would require the companies to grant retailers–such as Amazon and Barnes & Noble–the freedom to reduce the prices of their e-book titles.

    "As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles," said Attorney General Eric Holder. "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."

    "With today's lawsuit, we are sending a clear message that competitors, even in rapidly evolving technology industries, cannot conspire to raise prices," said Acting Assistant Attorney General Sharis A. Pozen in charge of the Department of Justice's Antitrust Division. "We want to undo the harm caused by the companies' anticompetitive conduct and restore retail price competition so that consumers can pay lower prices for their e-books."

    The department's Antitrust Division and the European Commission cooperated closely with each other throughout the course of their respective investigations, with frequent contact between the investigative staffs and the senior officials of the two agencies. The department also worked closely with the states of Connecticut and Texas to uncover the publishers' illegal conspiracy.

    According to the complaint, the five publishers and Apple were unhappy that competition among e-book sellers had reduced e-book prices and the retail profit margins of the book sellers to levels they thought were too low. To address these concerns, they worked together to enter into contracts that eliminated price competition among bookstores selling e-books, substantially increasing prices paid by consumers. Before the companies began their conspiracy, retailers regularly sold e-book versions of new releases and bestsellers for, as described by one of the publisher's CEO, the "wretched $9.99 price point." As a result of the conspiracy, consumers are now typically forced to pay $12.99, $14.99, or more for the most sought-after e-books, the department said.

    The department alleges the conspiracy began in the summer of 2009. CEOs from the publishing companies met privately as a group about once per quarter. The meetings took place in private dining rooms of upscale Manhattan restaurants and were used to discuss confidential business and competitive matters, including Amazon's e-book's retailing practices.

    The complaint states that the companies accomplished their conspiracy by agreeing to stop the longstanding practice of selling e-books, as they long sold print books, on wholesale to bookstores, and leaving it to the bookstores to set the price at which they would sell the e-books to consumers. Through their conspiracy, the companies imposed a new model under which the publishers seized e-book pricing authority from all of their retail bookstores and raised prices for e-books.

    As stated in the department's complaint, one publisher's CEO said, "Our goal is to force Amazon to return to acceptable sales prices through the establishment of agency contracts in the USA. . . . To succeed our colleagues must know that we entered the fray and follow us."

    The publishers also agreed with Apple to pay Apple a 30 percent commission for each e-book purchased through Apple's iBookstore and promised, through a retail price-matching most favored nation (MFN) provision, that no other e-book retailer would sell an e-book title at a lower price than Apple.

    As stated in the department's complaint, Apple's then-CEO Steve Jobs said, "the customer pays a little more, but that's what you [publishers] want anyway." Based on the commitments to Apple, the publishers imposed agency terms, over some objections, on all other e-book retailers. As a result, no e-book retailer is able to compete by using its commission to discount or reduce the price that the publishers set for their e-book titles or offer any special sales promotions to encourage consumers to purchase those e-books. The department said that the intent and effect of the publishers' contracts with Apple was to raise the prices that consumers nationwide pay for e-books.

    Under the proposed settlement agreement with Hachette, HarperCollins and Simon & Schuster, they will terminate their agreements with Apple and other e-books retailers and will be prohibited for two years from entering into new agreements that constrain retailers' ability to offer discounts or other promotions to consumers to encourage the sale of the publishers' e-books. The settlement does not prohibit Hachette, HarperCollins and Simon & Schuster from entering new agency agreements with e-book retailers, but those agreements cannot prohibit the retailer from reducing the price set by the publishers.

    The proposed settlement agreement also will prohibit Hachette, HarperCollins and Simon & Schuster for five years from again conspiring with or sharing competitively sensitive information with their competitors. It will impose a strong antitrust compliance program on the three companies, which will include a requirement that each provide advance notification to the department of any e-book ventures they plan to undertake jointly with other publishers and that each regularly report to the department on any communications they have with other publishers. Also for five years, Hachette, HarperCollins and Simon & Schuster will be forbidden from agreeing to any kind of MFN that could undermine the effectiveness of the settlement agreement.

    The ongoing litigation against Apple, Macmillan and Penguin seeks to restore price competition among e-book retailers in the sale of the litigating publishers' e-books. Under the existing agency agreements, Macmillan and Penguin prohibit e-book retailers from exercising any pricing discretion on their titles, and Apple is freed from any price competition with other retailers in selling those e-books.

    Hachette Book Group USA has its principal place of business in New York City. It publishes e-books and print books through its publishers such as Little, Brown and Company and Grand Central Publishing.

    HarperCollins Publishers, L.L.C. has its principal place of business in New York City. It publishes e-books and print books through publishers such as Harper and William Morrow.

    Macmillan has its principal place of business in New York City. It publishes e-books and print books through publishers such as Farrar, Straus and Giroux, and St. Martin's Press. Verlagsgruppe Georg von Holtzbrinck GmbH owns Holtzbrinck Publishers LLC, which does business as Macmillan, and has its principal place of business in Stuttgart, Germany.

    Penguin Group (USA) Inc. has its principal place of business in New York City. It publishes e-books and print books through publishers such as The Viking press and Gotham Books. Penguin Group (USA) Inc. is the U.S. subsidiary of The Penguin Group, a division of Pearson plc, which has its principal place of business in London.

    Simon & Schuster Inc. has its principal place of business in New York City. It publishes e-books and print books through publishers such as Free Press and Touchstone.

    Apple Inc. has its principal place of business in Cupertino, Calif. Among many other businesses, Apple distributes e-books through its iBookstore.

    The proposed settlement, along with the department's competitive impact statement, will be published in the Federal Register, as required by the Antitrust Procedures and Penalties Act. Any person may submit written comments concerning the proposed settlement within 60-days of its publication to John R. Read, Chief, Litigation III Section, Antitrust Division, U.S. Department of Justice, 450 Fifth Street, NW, 4th Floor, Washington, DC 20530. At the conclusion of the 60-day comment period, the court may enter the final judgment upon a finding that it serves the public interest.

    The court will determine a pretrial schedule for the case against Apple, Macmillan and Penguin once the companies file their responses to the government's lawsuit.
    Standard lengthy disclaimer / warning / terms of use: All postings by "NSRLink" are fictional, public information, for entertainment purposes only, should never be taken seriously, and in no way should be construed to represent the positions, views, ideas, or thoughts of any railroad carrier, person, entity, organization, or otherwise. By reading anything posted or associated with the user ID, "NSRLink," any entity agrees they shall not be offended, harmed, sad, defamed, inflamed, upset, mad, harassed, have their feelings hurt, or similar. Parties or entities not agreeable to these "terms of use" are hereby required to block this profile "NSRLink" and agree to not read or view posts so they will no longer be offended, harmed, sad, defamed, inflamed, upset, mad, harassed, have their feelings hurt, or similar in any manner, and may do so via UserCP "Edit ignore List" & adding "NSRLink" to the list. Thank you & good day to you.

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    • #3
      Steve Jobs' legacy......it will take some time to unravel his schizophrenic ways, but Apple and the world will be better for it.
      sigpic ΜΟΛΩΝ ΛΑΒΕ "Come and get them" Leonidas I to Xerxes, at Battle of Thermopylae

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      • #4
        I remember reading this section of the Steve Jobs book an i'm not surprised of this because he was clearly trying to make Amazon bend to his will.
        There is something I want to get off my chest. It's about that summer, when you went away to community college. I got an offer to do Playgirl Magazine, and I did it. I did a full spread for Playgirl Magazine. I mean spread man, I pulled my butt apart and stuff. I was totally nude. it was weird, I... I mean you probably didn't hear about it because I went under the name of Mike Honcho. But I just wanted you to know that. If you can hear me, if it got into your brain somehow. That I spread my buttcheeks as Mike Honcho.

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        • #5
          Apple on one hand Microsoft on the other.
          Only 511 ft lbs of Tq and only 1100 degrees EGT, damn, I need more fuel...

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