eBook Price Fixing Charges Leveled Against Apple and Five the “Big 6” Publishers in Class Action Complaint

paidContent's Laura Hazard Owen reviews the class action lawsuit filed on August 9, 2011 in the US District Court for the Northern District of California against Apple, Hachette, Simon & Schuster, Macmillan, HarperCollins and Penguin alleging the defendants unlawfully fixed eBook prices through the agency model to "“boost profits and force e-book rival Amazon to abandon its pro-consumer discount pricing.” In The Lawsuit Against Apple And Big Publishers: What’s In It, she highlights the main points of the complaint and explains agency pricing, the model whereby book publishers set their own eBook prices, in the context of the traditional wholesale model where publishers offer a suggested retail price that allows vendors to discount.

Remember, the argument for agency pricing of eBooks was that it allowed publishers to control pricing by establishing the value of their eBooks. Also remember that when Amazon finally caved in to several major publishing houses' demand to switch from the wholesale to the agency model for Kindle editions, the Company complained that the switch resulted in eBook pricing being too high but Amazon had no alternative but to acquiesce if the Company wanted to continue selling Kindle editions of titles offered by the publishers. Regarding Amazon's cave-in, complaints and pricing practices, see Amazon Plays Hardball With Small- and Medium-Sized Publishers Over eBook Pricing Model and the LLB posts cited therein.

Quoting from the Complaint's Introduction:

1. In November 2007, Amazon revolutionized the book publishing industry by releasing the Kindle, a handheld digital reader for electronic books or “eBooks.” Using proprietary “electronic ink” technology, the Kindle replicated the appearance of ink on paper and introduced numerousefficiency-enhancing characteristics, including portability and other advantages of a digital format. A major economic advantage to eBook technology is its 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.

2. The original Kindle sold out in less than six hours. To gain market share, take advantage of its first-mover advantage, and capitalize on the tremendous efficiencies associated with eBooks, Amazon set eBook pricing levels significantly below prices for physical books (“paper books” or “hardcover books”). Amazon set the prices of many of the popular new released eBook titles at $9.99. Amazon instituted this pro-consumer, discounted pricing even though on many titles publishers charged Amazon a wholesale price at or above $9.99.

3. Even though publishers were reaping the benefits of Amazon’s successful efforts to vastly expand the consumer base and increase volume of units sold via Amazon’s investment in eBook sales, publishers also feared Amazon’s $9.99 pricing. Amazon’s discount pricing threatened to disrupt the publishers’ long-established brick-and-mortar model faster than the publishers were willing to accept. Being hidebound and lacking innovation for decades, the publishers were particularly concerned that Amazon’s pro-consumer pricing of eBooks would negatively impact theirmoribund sales model, and in particular the sale of higher priced physical copies of books. And, longer term, publishers anticipated Amazon would eventually use its market power to reduce the publishers’ share of the available surplus (profit margins) from each eBook sale.

4. 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 eBook retail prices. If one publisher acted alone to try and raise prices for its titles, that publisher would risk immediately losing a substantial (and growing) volume of sales. Not wanting to risk a significant loss of sales in the fastest growing market (eBook sales), the publishers named as defendants (“Publisher Defendants”) solved this problem through coordinating between themselves (and Apple) to force Amazon to abandon its pro-consumer pricing. The Publisher Defendants worked together to force the eBook sales model to be entirely restructured. The purpose and effect of this restructuring was to halt the discounting of eBook prices and uniformly raise prices on all first release fiction and nonfiction published by these Publisher Defendants. Under the Publisher Defendants’ new pricing model, known as the “Agency model”, the Publisher Defendants have restrained trade by coordinating their pricing to directly set retail prices higher than had existed in the previously competitive market.

5. The Publisher Defendants’ unlawful combination and pricing agreement would not have succeeded without the active participation of Apple. Apple facilitated changing the eBook pricing model and conspired with the Publisher Defendants to do so.

Download the Complaint.

I'm thinking LLB co-editor Mark Giangrande may be watching this lawsuit for a possible follow-up to his June 2011 Antitrust Chronicle article, The Rejection of the Amended Google Book Settlement Agreement: A Librarian’s Perspective. [JH]