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Publishers fork out $52m in Apple ebook pricing settlement

US states follow DoJ suit, but they're looking for cash

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Publishers Hachette and HarperCollins have forked out $52m to settle a lawsuit that alleged the pair had been involved in price-fixing in the ebook market.

Just as the ink was drying on the US Department of Justice's suit against Apple and five publishing houses over alleged price-fixing, 15 State Attorneys General and the Commonwealth of Puerto Rico filed more legal action in a district court in Texas.

The DoJ, as a regulator, wants to halt anticompetitive practices rather than score refunds for American ebook buyers – who have purportedly overpaid for their digital reading. This is where the state attorneys come in.

The states* have filed for "Injunctive Relief and Civil Penalties on behalf of Consumers" and have already bagged some restitution from two of the publishers.

“Publishers deserve to make money, but consumers deserve the price benefits of competition in an open and unrestricted marketplace,” said Connecticut Attorney General George Jepsen in a canned statement. “Those interests clearly collided in this case and we are going to work to ensure the ebook market is open once again to fair competition.”

HarperCollins, Hachette and Simon & Schuster have no appetite for fighting the cases in court and have already settled with both the DoJ and the attorneys general.

The former two have reached an agreement with Texas and Connecticut, according to Jepsen's office, to pay $52m in "consumer restitution", based on a formula using the number of states involved and the number of ebooks sold in each state. Money talks with Simon & Schuster are ongoing.

All three firms have also settled with the DoJ in an agreement that will force them to rip up their current agency agreements with Apple. The publishers are forbidden from trying to stop or hold back retailers from discounting books for two years - a practice called retail price maintenance that has been allowed before.

And they're also forbidden from adding most-favoured nation clauses, which promise a reseller that they won't give the books to anyone else at a cheaper price, to any agreement on ebooks.

While the agency pricing model isn't in itself illegal, the plaintiffs in both cases are arguing that the addition of most-favoured nation clauses, the publishing houses' alleged agreements with each other to all give Apple and everyone else the same price and their insistence that all their customers switch to the agency model they wanted, prove a conspiracy to set the price of ebooks.

Most often, they're accused of doing this to get rid of the dominance of Amazon. The publishers wanted this because they were afraid consumers would get used to dead-cheap ebooks and only want inexpensive reads, and would even want physical books to fall in price, destroying their business models.

Apple supposedly wanted this because it wanted its own iBookstore to get an easy slice of the market when it launched the iPad and it didn't want to change its own business model, which was to seek agency agreements on all stuff sold through its tech.

Apple, Penguin and Macmillan – the remaining defendants in the cases – have all elected to fight on so far, although the case could still be settled at any time by any one or all of them.

Pundits have expressed confusion at how Apple and the publishers' conduct could be anticompetitive, since Amazon was quickly establishing what could easily have become a monopoly through cut-throat pricing of ebooks to promote its Kindle ereaders.

Amazon seemed happy, under the wholesale model of pricing, to buy books at a percentage of the recommended retail price and then sell them on at less than cost or very close to it. Its aim was to make its Kindle popular and establish dominance in a fledgling market.

Presumably, if the cases are won against the remaining firms, Amazon will go right back to its intensely aggressive pricing. However, from a competition point of view, that's fine as long as Amazon doesn't actually become a monopoly.

The point of anticompetitive legislation is to ensure the best price for the customer, so at this point that means taking aim at Apple and publishers. Once that fight is won, if Amazon becomes too much of an ebook behemoth, it could easily be the next target of regulatory scrutiny.

Typically, however, aggressive pricing is allowed because companies can only do it for so long. In Amazon's case, the assumption is it would keep prices low until it saw widespread Kindle uptake, then put them back to normal again. And that assumption will only be proved right or wrong if Apple and the other firms' agency model gets thrown out for good. ®

Bootnote

*The states involved in the case are: Texas, Connecticut, Alaska, Arizona, Colorado, Illinois, Iowa, Maryland, Missouri, Ohio, Pennsylvania, South Dakota, Tennessee, Vermont and West Virginia, along with Puerto Rico.

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