August 3, 2010
CT AG Investigates e-Book Pricing
Connecticut Attorney General Richard Blumenthal has sent letters to Apple and Amazon over their deals with publishers. Blumenthal is concerned with "most favored nation" deals that Apple and Amazon have struck with major publishers for e-books. These deals require the publishers to give the best prices they offer to these distributors. As he says in his letter to Amazon,
Essentially, in this context, an MFN is a promise by a supplier (i.e., the publisher) to treat a buyer (i.e., Amazon) as well as it treats its best, "most favored" customer. In other words, if the publisher lowers its price for e-books to Apple, the publisher must offer that price to Amazon as well.
These types of agreements, as he further notes, are not per se legal or illegal. It depends on the market. These types of agreements are used a lot in the health care industry to keep health care costs down. If Blue Cross pays out $700 to a health care provider and that same provider charges $650 to another insurance plan, then Blue Cross also gets the benefit of the lower cost. In theory, as goods or services are priced lower, those with MFN clauses get the benefit of those lower prices. One assumes that the benefits are passed on to consumers, though that gets complicated. The courts have endorsed MFN contracts in the health care industry.
Blumenthal's concern is that the pricing for individual e-book titles from major distributors is more or less the same. There is no allegation of collusion among the distributors, nor any evidence that suggests collusion beyond the price consumers pay. I can understand his concern. At the same time, Amazon tried to pull an Apple when it tried to dictate pricing to publishers by limiting consumer costs to $9.99 per e-book. It was the publishers who balked by threatening to withhold distribution. The threat had teeth with Barnes and Noble, Google, Apple, and others getting into the game. Amazon caved in to get the distribution deal. In that context, MFN deals make perfect sense to Amazon, and probably Apple and others who may have them.
I think, in this case, that the distributors are more at the mercy of the publishers than the other way around. Blumenthal should consider an investigation into how publishers set their prices for e-books if he wants to understand how this market works. He may also want to consider how Google may factor into this. The mythical Google bookstorewas supposed to be launched this summer, with June as a likely target date. That time is obviously past though summer still lingers. No major distributor by volume will want to have artificially higher costs, and I would expect Google would want to have the same kind of treatment as Amazon and Apple. My best guess is that this investigation will not lead to any substantial surprises in how the e-book market is structured. Blumenthal is known for his investigatory activity as Connecticut Attorney General. If I were cynical enough, I would wonder if this had anything to do with his current Senate campaign. [MG]