Tuesday, August 9, 2011

Class action lawsuit against Apple and Big5 publishers re price fixing of ebooks. History and sourcing provided.

Per a story run by paidContent.org, Seattle-based law firm Hagens Berman filed a class action lawsuit tonight against Apple and five of the “big 6” publishers (known as the Big5 when Random House declined to join the other five large publishers in fixed-pricing moves during the first year, explaining that bookstores probably understood pricing and customers more than RH did -- and as a result, Apple iBook Store did not allow the Random House eBooks in their store during that time).  Random House did join when the 2nd year started.

  The law firm claimed "that they illegally fixed e-book prices (through the agency model, in which case book publishers set their own e-book prices) in order to 'boost profits and force e-book rival Amazon to abandon its pro-consumer discount pricing."

Defendents named: Apple, Hachette, Simon & Schuster (NYSE: CBS), Macmillan, HarperCollins and Penguin.

Plaintiffs: Anthony Petru of Oakland, California and Marcus Mathis of Natchez, Mississippi.  Backgrounds on all can be read at Laura Hazard Owen's story at paidContent's website.  It's of interest that the law firm is based in Seattle (and Berkeley, California).

Here's more on "What's in it."

The complaint: Owens writes that the complaint begins by saying that Amazon's Kindle
' had "the potential to massively reduce distribution costs historically associated with brick-and-mortar publishing.  But publishers quickly realized that if market forces were allowed to prevail too quickly, these efficiency enhancing characteristics would rapidly lead to lower consumer prices, improved consumer welfare, and threaten the current business model and available surplus (profit margins).

  So, faced with disruptive eBook technology that threatened their inefficient and antiquated business model, several major book publishers, working with Apple Inc. (‘Apple’), decided free market competition should not be allowed to work -- together they coordinated their activities to fight back in an effort to restrain trade and retard innovation.  The largest book publishers and Apple were successful.” '   [Bolding was by Owen.]

This was of course considered more than potentially disruptive to the publishers' long-established way of doing things.

I've provided a history of stories and sources from that time, at the bottom of this blog article.

  The main complaint voiced by publishers was that the lower cost of Amazon's e-books (especially those on the NY Times bestseller lists) were "devaluing" their paper-bound books, especially the hardcover editions.  They openly wanted higher pricing on e-books and found not only an ally in Steve Jobs but an encourager (sourcing is in list of articles below).

  The complaint goes on to say that the publishers and Apple coordinated between themselves" to "force Amazon to abandon its proconsumer pricing" and that Apple "facilitated changing the traditional eBook pricing model due to what the plaintiffs describe as the Kindle's "competitive threat to Apple's business model."

  In my own eyes, Apple wanted to now join the e-book march finally, once Steve Jobs realized people DO still read after all (will insert source later), but the idea was to join or enter the field as its leader and the publishers were more than willing, as Apple's bookstore gave them leverage over Amazon.  For me, that would be normal business -- if they hadn't set fixed pricing for all stores, and with no online store allowed to sell below Apple's pricing, a condition which the publishers accepted -- and when Amazon said that the publishers should not then allow another store to offer lower pricing than Amazon, some raged at Amazon's daring to set this return-condition.

  paidContent goes on to add that the complaint points out that
the publisher-defendents "almost simultaneously announced that they were switching from a wholesale pricing model to an Agency model for eBook sales" in January 2010 and “the announcements to shift to the Agency model coincided with the release by Apple of the iPad tablet computer.

"In fact, when Apple announced the launch of the iPad on January 27, 2010, the Publisher Defendants agreed to allow Apple to use their trademarks in connection therewith.

  The same day Apple announced launching the iPad, it was also announced that Apple already struck deals with Hachette, HarperCollins, Macmillian, Penguin, and Simon & Schuster to switch to the Agency model for Apple’s iBookstore -- the application on Apple’s iPad that functions as an eBook reader (thus competing directly with the Amazon Kindle).”

Re the 5 publishers switching to the agency model, the complaint says:
  “As a direct result of this anticompetitive conduct as intended by the conspiracy, the price of eBooks has soared.  The price of new bestselling eBooks increased to an average of $12 - $15 -- an increase of 33 to 50 percent.  The price of an eBook in many cases now approaches -- or even exceeds -- the price of the same book in paper even though there are almost no incremental costs to produce each additional eBook unit.   The price of the Publisher Defendants’ eBooks sold on the iBookstore, facing no pricing competition from Amazon or other e-distributors for the exact same eBook titles, has remained at supra-competitive levels."

paidContent notes what appears to be an assumption on the part of the plaintiffs that the $9.99 pricing (or less) for NYTimes bestsellers Amazon used was the "correct" price for an e-book.

  They also note something generally known now by long-time Kindle users but not so much by those new to e-readers, who blame high pricing on Amazon and other online stores who must follow the same publisher policies:

  "The agency model requires publishers to price their e-books the same at all e-bookstores.  Publishers can also put their e-books on sale and extend sale prices across all e-bookstores."

I've left out portions of the article of course. Go to Owen's article to read the rest of it.  She'll have "More to come after I have interviewed the parties involved and done some more research on this."

You can download the full complaint in PDF format.

For those new to the situation and interested in the background of the e-book pricing wars, earlier stories posted here include the following articles, which I'll later put on a separate page, with a bit more info.

  . Amazon removes Macmillan books - Jan. 30, 2010
  . Amazon surrenders to Macmillan and Steve Jobs - Jan. 31, 2010
  . Steve Jobs pulls his puppet strings but says too much (a key one) - Jan. 31, 2010
  . Amazon plays hardball to keep lower pricing option - Mar. 18, 2010
  . Amazon and Hachette e-books (and missing buy buttons) - Apr. 2, 2010
  . WashPost: State AG probes Apple, Amazon over e-Book prices. What? - Aug. 3, 2010
  . Why are some e-book prices higher than hardcover ones? - Oct. 6, 2010
  . Newspapers headline Amazon UK forum rebellion against Agency pricing - Nov. 3, 2010

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  1. In addition to the Connecticut attorney general investigation (which you reference), the Texas AG is also pursuing an action. Outside the US: the UK Office of Fair Trading (OFT in the UK), and the competition folks in the EU more generally are also pursuing investigations. OFT appears to be going at this quite aggressively (raids and all). Agency pricing has also been deemed to be illegal in Australia.

    My guess is that agency pricing will ultimately be found to be anti-competitive, but it will take time to arrive at that position -- buying some breathing room for Apple and the big 6.

    In the meantime indie publishing proceeds apace, and phenomena like John Locke are just the beginning -- market forces will eventually drive prices down, and new authors away from the tradpub career route.

    Whatever happens with agency pricing, the big 6 are facing major business model changes -- beyond their ability to control.

  2. Ed,
    The UK OFT is the subject of the last link in that bottom set.

    I keep wondering as more attention is drawn to this, whether the DOJ might not just say, Hmmmm and start something, though I think there were initial 'inquiries' already. They usually just stop there.

    Steve Jobs seems disinterested in reading as a focus or in people who read a lot, and there's little that's positive that he does with the iBook Store. Now, there's added reason for iPad users to not go there. Most reviewers really like the Cloud Reader's store, how it works...

  3. I think the question will be what the Big 6 do with that breathing room. What they should be doing is preparing for the aftermath of the events Ed describes - steadily dropping prices and, quite possibly, a settlement in multiple countries, if not a verdict - while also adapting to the change in markets (understanding that e-books are not the same as physical books and can't be treated the same way).

    What I suspect will happen is that they will simply stall for time, and the fallout from the lawsuit will hit at precisely the wrong time for them: as their profits continue to fall, they'll be required to shell out a significant amount of money for people who bought e-books at inflated prices.

    Apple will suffer as well, but they can afford to: I doubt such a settlement would have nearly as much of a financial impact on them. PR-wise, though, being "convicted" of price-fixing could cause problems, given that the markets where they had or have dominance (music players, tablets, cell phones) are becoming less relevant or more competitive (or both). (Of course effects can vary widely. Nintendo was busted for price-fixing in both the 90s and 00s, and I doubt most people even remember that. In fact, the Wikipedia article on Nintendo didn't even mention the 1991 settlement when I first looked it up.)


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