Apple, Four Publishers Settle With EU Over Ebook Price-Fixing, Penguin Pending

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Apple and four of the largest publishers in the world have agreed to a settlement to resolve an investigation by the European Union into the matter of alleged ebook price fixing.

The settlement agreed to by Apple, Hachette, HarperCollins, Macmillan and Simon & Schuster seems nearly identical to the settlement agreed to by the same group less Macmillan in the U.S. The publishers will sign new agreements with retailers that will give retailers control over ebook pricing for at least the next two years and they will be barred from signing contracts with “most-favored nation” clauses for the next five years.

According to a report from Reuters, Penguin, a fifth publisher under investigation is in talks with the EU and should resolve the matter shortly.

In the U.S., a settlement was agreed upon and then approved in early Sept. Since then, the three settling publishers — Hachette, HarperCollins and Simon & Schuster — have signed new ebook retail agreements with partners like Amazon and Barnes & Noble. Since, prices for top-selling ebooks have fallen as retailers have gained control over pricing.

See the statement from the EU below.

[Statement]

Statement on commitments from Apple and four publishing groups for sale of e-books

Statement at Midday Briefing / Berlaymont press room / Brussels

13 December 2012

The European Commission has just accepted the commitments offered by Apple and four top international publishing groups in relation to suspected infringements on the market for ebooks in the EEA. The Commission’s decision puts an end to a suspected concerted practice aimed at raising retail prices for e-books in the European Economic Area.

This market is nascent in Europe and extremely dynamic so that quick and decisive action was called for.

The publishers concerned are Hachette Livre, part of France’s Lagardère Group; Harper Collins, owned by News Corporation of the US; Simon & Schuster of the CBS Group still of the US; and Macmillan, which belongs to the German publishing group Georg von Holtzbrinck.

We are also currently engaged in constructive discussions on the matter with a fifth publisher – Pearson, owner of Penguin – in order to achieve a possible settlement that would allow the Commission to close the proceedings against them.

Our investigation has permitted the reconstruction of the sequence of events at stake. These events were motivated by the publishers’ concerns relating to Amazon’s low retail prices for e-books and the resulting impact on their core businesses. At the time, Amazon was the uncontested leader in the retail market for e-books.

In December 2009, at least these four publishers and Apple started to discuss Apple’s entry into the e-book market and its conditions.

Apple and the four publishers seemingly shared the goal of limiting retail-price competition. To achieve this goal, they agreed in January 2010 to jointly switch the sale of e-books from a wholesale model, where the retailer is free to set the price, to an agency model where the retail price of e-books is determined by the publishers themselves. This switch was done according to the same key terms and on a global basis.

Our concerns focussed on this joint switch to the agency model on the same key pricing terms. In particular the agency contracts with Apple included what can be called a “most-favoured customer” clause for retail prices. According to this clause, if any retailer sold an e-book at prices lower than that on Apple’s iBookstore, the publishers would have to match that lower price on Apple’s store, further lowering their revenues.

This clause may seem benign at first sight. But it effectively made it very costly for publishers to allow other retailers to sell at lower prices than Apple since that low price would then have to be extended to Apple’s store. This means the incentives of publishers were aligned and they could face Amazon and other retailers as a group. In consequence, the concerned publishers took the necessary steps to switch all retailers to agency agreements in order to take away their discretion in setting retail prices.

Amazon and other retailers were faced with what we suspect was a concerted and coordinated demand by these four major international publishers to agree to agency models of distribution. They were told they might not be supplied with e-books if they did not agree to the switch. Retailers had little option but to surrender their discretion in setting retail prices if they wanted to avoid a serious disruption of their business.

So unsurprisingly this joint move by major publishers resulted in retailers then agreeing to such a change.

Apple and the publishers clearly understood that the design of the Apple contracts and the most favoured customer clause would force others to accept the agency model and that all four publishers would have the incentive to take control of retail pricing in this manner at the same time. Our strong suspicion is that this was part of a global strategy to restrict competition at retail level and achieve higher prices.

Obviously, the coordination of commercial behaviour between competitors – here, with the help of Apple – is forbidden by our competition rules. Whatever the publishers’ initial concerns about retail prices, dealing with this situation through collusion is not acceptable. Our preliminary conclusion was therefore that this behaviour could possibly constitute an infringement.

As the practice was implemented first in the US and a short time later in Europe, we have worked closely with the US Department of Justice on this case to seek a global solution. Three publishers settled with the DoJ in September and litigation with other companies is still on-going.

To settle the case, the four publishers and Apple offered commitments that contain the following key provisions:

    Apple and the four publishers will terminate the current agency agreements that are the result of the collusive conduct;

    For a period of two years, the publishers cannot, subject to certain conditions, hamper e-book retailers from setting their own prices for e-books or, from offering discounts and promotions;

    For a period of five years neither the four publishers nor Apple can conclude agreements for e-books with retail-price Most Favoured Customer clauses.

These are the commitments we accepted. The alternative would probably have been to impose fines at the end of a long procedure. However this was not the best solution in the case of a nascent and very fast-moving market. Accepting these commitments means removing immediately the results of the collusion and restoring normal competitive conditions. This route is the quickest way to bring competition back to this market, to the benefit of all consumers who buy e-books in Europe.

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