The lawsuit US publishers and Apple are facing over agency pricing

Five US publishers and Apple have been named in a US lawsuit that alleges the companies "illegally fix prices of electronic books" and that the publishing houses "forced Amazon to abandon its discount pricing and adhere to a new agency model, in which publishers set prices". The suit alleges that "collusion was a necessary ingredient of the publisher defendants’ anticompetitive plan to gain direct control over e-book pricing".

Sounds scary enough, but if you look at the detail of the complaint there isn't a whole lot of evidence to back it accusations of conspiracy, though it will nevertheless raise concerns on both sides of the pond, particularly as regulatory inquiries are ongoing.

US law firm Hagens Berman filed the suit in a San Francisco Federal Court against Apple, along with Hachette Book Group, HarperCollins, Macmillan, Penguin and Simon & Schuster, over the agency model of e-book pricing. The same firm is also investigating claims that several large e-book publishers are under-reporting the number of e-books sold, paying authors less than their share of royalties. Worryingly for publishers, the law firm claims that once approved, the lawsuit would represent any purchaser of an e-book published by a major publisher after the adoption of the agency model by that publisher, and has called for "potential plaintiffs" to get in touch via an online form.

The suit has its origins in the switch to the agency model in early 2010, led by Macmillan US, which resulted for a period in that publisher's e-books being delisted from the Amazon.com website. You can trawl through The Bookseller's articles from that time here. Though Macmillan moved first, it was closely followed by Hachette USA in early February, and ultimately by the three other US publishers named in the suit - but not by Random House, which did not switch until late last year, and is not named in the filing.

The suit alleges that this would not have happened without Apple's involvement and the deals already having been agreed to move to the agency model on the launch of the iPad (the iPad was announced in late January with those same five publishers were the first to put their e-books in the iBookstore). On Apple's motives it alleges that Apple believed that it "needed to neutralize the Kindle when it entered the e-book market with its own e-reader, the iPad, and feared that one day the Kindle might challenge the iPad by digitally distributing other media like music and movies".

It argues that given Amazon’s first-mover advantage and ever growing installed user base, publishers knew that no single publisher could slow down Amazon and unilaterally force an increase in e-book retail prices. "Not wanting to risk a significant loss of sales in the fastest growing market (e-book sales), the publishers named as defendants solved this problem through coordinating between themselves (and Apple) to force Amazon to abandon its pro-consumer pricing." It offers no evidence for this, instead choosing to state the obvious. It alleges that if Amazon had defied the publishers and tried to sell e-books below the publisher-set levels, the publishers "would simply deny Amazon access to the title". It claims that the defendant publishers control 85% of the most popular fiction and non-fiction titles.

Furthermore the suit contends that "Apple and the Publisher Defendants agreed that prices for Publisher Defendants’ e-books that were offered through the iBookstore would be calculated by a formula tied to physical books. This e-book formula would cause current prices for e-books to  increase and, at the same time, would guarantee Apple that the Publisher Defendants would not sell e-books at lower prices elsewhere, such as through other eBook distributors, including Amazon."

The suit claims there has been a direct impact on e-book prices. "The price of new bestselling e-books increased to an average of $12- $15 – an increase of 33 to 50 percent." It reproduces two graphs (though does not indicate the source, except "bestseller lists") which show prices of bestselling e-books rising since agency, that that the agency publishers price their e-books ahead of non-agency publishers (whose books are presumably priced by the retailer).

The suit also contains its own counter-arguments, agreeing with those who have claimed that Amazon's $9.99 price for e-books was unprofitable for the retailer and destabilising for the publisher. "In order to spur demand for eBooks (as well as for its own eReader, the Kindle), Amazon set $9.99 as the standard price for most new releases, even though at times Amazon purchased the content near or above $9.99.8  Notwithstanding Amazon’s pricing has driven rapid adoption of eBook sales, publishers have disapproved of Amazon’s discount model, fearing it would lead to lower sales of hardcover books and, in the long term, it would condition consumers to expect lower price points for all books."

It argues that while e-book sales "provided additional incremental unit sales over physical books, in an unrestrained market the margin per unit of sale for e-books is lower than physical books" and that by "slowing down the rate of adoption and increasing prices, new entrants into the digital market will be less inclined to demand a $9.99 price point made popular by Amazon".

Publishers Marketplace notes that Hagens Berman is based in a town called Seattle, and the complaint lauds Amazon but demonstrates contempt for publishers' "inefficient and antiquated business model . . . being hidebound and lacking innovation for decades." PM's Michael Cader says the essence of the complaint appears to "rest on twists of logic and reasoning--or tautologies--rather than any evidence not already known to the world".

He is right. The suit is a well-reseached backgrounder on a shift that it accurately describes as "radical", but I am struggling to find the smoking gun within the filing. It can write that collusion was necessary, and give logic to that argument, but that doesn't prove that collusion actually took place. You can view the full filing here.

Furthermore, the suit talks about Amazon’s "pro-consumer pricing", but doesn't address the issue of how it is to the consumer's advantage to sell e-books at levels that are unprofitable for the retailer and destabilising for the industry that originates those goods.

 

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