Apple blasted for e-book price fixing

On Wednesday, a federal judge ruled that Apple, Inc. conspired with publishers to raise the prices of e-books.  Judge Denise Cote did not mince words in her ruling, writing that “Apple not only willingly joined the conspiracy, but also forcefully facilitated it… This price-fixing conspiracy would not have succeeded without the active facilitation and encouragement of Apple.”

The publishers in question, including HarperCollins and Simon & Schuster, settled out of court, but Apple stayed in the fight to the end, and swiftly announce plans to appeal today’s ruling.  A spokesman called the price-fixing allegations “false” and insisted Apple was actually crusading in favor of competition, because they want to break “Amazon’s monopolistic grip on the publishing industry.”

CNN Money offers a concise rundown of the case:

Publishers hated Amazon’s discounted price structure, under which the retailer set the prices for e-books. Amazon sold many titles for $9.99 each, a price publishers thought was far too low.

Apple entered the e-book market in 2010 with the launch of the iPad — and that’s when, the suit alleges, publishers saw a way out of Amazon’s “wholesale” pricing. Apple offered the five book companies an “agency model,” in which the publishers set their own prices and Apple took a 30% cut off the top.

Judge Cote said Apple orchestrated a conspiracy by telling the publishers that the company would only move forward with the agency model plans if it had a “critical mass” of publishers on board. Apple also made sure to include a clause saying publishers on Apple’s platform had to match the lowest price found elsewhere — including that of Amazon.

Those agreements, called “most-favored nation” clauses, aren’t inherently illegal under antitrust laws — but Cote said Apple illegally used them to “effect an unreasonable restraint of trade.”

Apple kept all the publishers apprised of its negotiations with their competitors. The judge said in her ruling that Apple’s negotiations served as the linchpin for the conspiracy, promising all the publishers that they would get “identical terms … in every material way.”

On the other hand, critics of Amazon’s pricing model have alleged they were abusing their deal with publishes to dump e-books at prices below market value.  Brian Fung at National Journal notes that Amazon is so powerful that publishers were worried their business plan would drag down the price of dead-tree books, too.  After all, customers will only be willing to pay a certain premium for that hard copy.  And the most enthusiastic customers are those most likely to conclude that the massive price advantage of e-books justifies the cost of purchasing a reading device, which Amazon also happens to sell very cheaply.  (Just ask the tablet manufacturers trying to compete with those new color high-def Kindle Fires.)

But… once Apple’s new pricing regime was up and running, that little “best price” clause came into play.  The publishers couldn’t charge more for Apple version of their books if Amazon was still dumping them at discount prices.  Since they lost control over the price of the books under their agreement with Amazon, they had what we might politely call a very potent incentive to terminate those agreements.

The end result of this conflict, in National Journal’s estimation, was a slide in Amazon’s market share from 90 percent (which looks a bit monopolistic) to 60 percent (which most certainly does not.)  It’s somewhat reminiscent of the computer operating system wars of the Nineties, in which a supposedly closed market ended up being quite competitive indeed.  The immense advantages of the dominant company (Microsoft then, Amazon now) are obvious, but did they do anything wrong to build that position?  We don’t want to punish companies for being too successful.

And consumers certainly don’t want their own interests trampled by market-distorting schemes designed to kneecap the corporate Goliath who brings them low prices and superior service.  It’s safe to say that very few consumers think e-books should be more expensive.  That’s certainly not what they have in mind when they hear talk about the importance of competition.

Consumer price expectations for e-books are doubtless influenced by their intangible nature, as they wonder how companies can get away with charging them $12 or more for a virtual product that didn’t cost much to produce.  (Naturally, consumers don’t fully appreciate the costs of producing and distributing these e-book files, but it’s also fair to say those costs are vastly lower than what it takes to print and distribute dead-tree books.)

And e-books have one huge disadvantage, beyond the preference for paper and print enjoyed by some readers: it’s very difficult to share them with friends.  This has become a big issue with software in general, in this era of digital-rights management, but it’s particularly acute with electronic books, since the dead-tree variety is so easy to hand off to friends.  Some e-books can be shared, but at least on the Kindle, this feature is restricted to certain titles (the entry for the book says whether “lending” is enabled in the product details area.)

If all artificial pressures were removed, where would the price of e-books settle?  That’s probably still an open question, but we might be getting closer to finding out.  Competition in the virtual arena remains a fascinating subject.