DOJ’s Statement of Support for Apple’s Ebook Price-Fixing Punishment

[Press Release]

STATEMENT BY ASSISTANT ATTORNEY GENERAL BILL BAER ON REMEDY TO ADDRESS APPLE’S PRICE FIXING OF E-BOOKS
Remedy Requires Apple to Modify Agreements with Five Publishers; Provides for a
Court-Appointed External Monitor; Includes Anti-Retaliatory Provisions to Protect Publishers; Prohibits Apple from Engaging in Future Anticompetitive Conduct

WASHINGTON – Assistant Attorney General Bill Baer of the Department of Justice’s Antitrust Division issued the following statement today after the U.S. District Court for the Southern District of New York issued an order regarding a remedy to address Apple Inc.’s illegal conduct:

“We’re pleased that the court has issued an order supporting the Department of Justice’s efforts to address Apple’s illegal price fixing conduct. Consumers will continue to benefit from lower e-books prices as a result of the department’s enforcement action to restore competition in this important industry. By appointing an external monitor to ensure future compliance with the antitrust laws, the court has helped protect consumers from further misconduct by Apple. The court’s ruling reinforces the victory the department has won for consumers.”

The court’s order requires Apple to modify its existing agreements with the five major publishers with which it conspired – Hachette Book Group (USA), HarperCollins Publishers L.L.C., Holtzbrinck Publishers LLC, which does business as Macmillan, Penguin Group (USA) Inc. and Simon & Schuster Inc. – to allow retail price competition and to eliminate the most favored nation (MFN) pricing clauses that led to higher e-book prices. Apple is prohibited from serving as a conduit of information among the conspiring publishers or from retaliating against publishers for refusing to sell e-books on agency terms. Apple is also prohibited from entering into agreements with e-books publishers that are likely to increase the prices at which Apple’s competitor retailers may sell that content.

Additionally, the court has decided to appoint an external monitor to ensure that Apple’s internal antitrust compliance policies will be sufficient to catch future anticompetitive activities before they result in harm to consumers. The monitor, whose salary and expenses will be paid by Apple, will work with an internal antitrust compliance officer who will be hired by and report exclusively to the outside directors comprising Apple’s audit committee. The antitrust compliance officer will be responsible for training Apple’s senior executives about the antitrust laws and ensuring that Apple abides by the relief ordered by the court.

On April 11, 2012, the department filed a civil antitrust lawsuit in the U.S. District Court for the Southern District of New York against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster, for conspiring to end e-book retailers’ freedom to compete on price by taking control of pricing from e-book retailers and substantially increasing the prices that consumers paid for e-books.

At the same time that it filed the lawsuit, the department reached settlements with three of the publishers – Hachette, HarperCollins and Simon & Schuster. Those settlements were approved by the court in September 2012. The department settled with Penguin on Dec. 18, 2012, and with Macmillan on Feb. 8, 2013. The Penguin settlement was approved by the court on May 20, 2013, and the Macmillan settlement on Aug. 14, 2013. Under the settlements, each publisher was required to terminate agreements that prevented e-book retailers from lowering the prices at which they sell e-books to consumers and to allow for retail price competition in renegotiated e-book distribution agreements.

The department’s trial against Apple, which was overseen by Judge Denise Cote, began on June 3, 2013. The trial lasted for three weeks, with closing arguments taking place on June 20, 2013. The court issued its opinion that Apple Inc. violated Section 1 of the Sherman Act on July 10, 2013. The department and 33 state attorneys general submitted a proposed remedy to the court on Aug. 2, 2013. Apple submitted a separate remedy. The court held remedy hearings on Aug. 9 and 27, 2013, and asked the parties to revise their proposals. The department, 33 state attorneys general and Apple submitted a joint remedy to the court on Sept. 5, 2013.

2 thoughts on “DOJ’s Statement of Support for Apple’s Ebook Price-Fixing Punishment

  1. Pingback: Judge Signs Order: the New Ebook Publishing Landscape

  2. Michael W. Perry

    So goes one of the most ridiculous lawsuits file by the DOJ since the New Deal went after two Brooklyn Jews, the chicken butchering Scheschters, in the 1930s.

    Price fixing against Apple? At the time of Apple’s alleged wrongdoing the iPad had just come out and it controlled 0% of the ebook market in comparison to Amazon’s 90%. What can someone with that market share do? And how could be so stupid as to think that they could grow that market share by having higher prices than Amazon?

    The fact that Apple was allegedly working with major publishers who did have large market shares matters little. The ebook market is perhaps the freest market in human history. If Hachette overprices their novels, they can be stomped in the dust by a housewife whose novel, written on a kitchen table and released through Smashwords, can match, copy for copy the sales of the largest publishing giant.

    And if the DOJ were really interested in lower ebook prices, they’d take a look at what Amazon demands before they’ll pay publishers the industry-standard 70% royalty rate. To get it an ebook MUST be priced between $2.99 and $9.99. Otherwise, Amazon only pays 35%, perhaps the most measly rate in the industry.

    Consider for instance, a publisher who’d be quite happy to release a book for $1.99. Here’s how the royalties work out (not counting a download fee that only Amazon charges):

    Priced at $1.99 the book earns 1.99 x 0.35 or 70 cents
    Priced at $2.99 the book earns 2.99 x 0.70 or $2.09

    That’s almost three times as much in royalty for RAISING the price of the book. If that isn’t price fixing to force prices higher, then what is?

    Or look at the other end of the market, a textbook or professional book whose cost of production and limited sales potential means it has to earn $15 per copy to merely recoup the cost of creating it. Look at the publishers options:

    1. Sell it at the maximum price that earns 70% or $9.99. That will earn $6.99, an over $8 loss. No one can stay in business under those terms.

    2. Establish a price above that will earn $15 royalty even at a mere 35% royalties. That is: 15 / .35 or $42.86. That means the book’s lowest price is likely to be around $50. That’s the pricing Amazon currently forces on publishers. High, high, high to recoup for those low royalties.

    But notice what that break even price would be if Amazon paid industry-standard 70% royalties for books over $9.99. It is: 15 / .7 or $21.43. That means the book would probably sell for around $30.

    Isn’t forcing a publisher who’d otherwise be willing to sell a book for $30 to sell it for $50 (60% more) price fixing? It certainly is. But it is worse than that. In Apple’s allegedly evil scheme, most of the profit from the higher prices went to the publishers. In Amazon’s scheme, virtually all of it goes to Amazon. Do the math and see what this pricing scheme means for Amazon.

    Paying only 35% royalties on a $50 book means that Amazon pockets 65% or $32.50 on the sale of a $50 book. Nice income for hosting a webpage and doing a file download.

    But if Amazon paid the industry-standard rate of 70%, it would mean that Amazon would pocket only 30% or $9 on the sale of a $30 book. That means that Amazon is making $23.50 additional profit from the sale of each book because it is artificially forcing the price up and forcing publishers to accept much smaller royalty payments–and all that done without the slightest business justification. And keep in mind that Amazon, even today, controls 70% of the ebook market. It can get away with dictating those terms. It is big enough to fix prices.

    Any lawyer can see the enormous lawsuit potential here. It’d involve two class groups. 1. Publishers forced to accept 35% royalties rather than the industry-standard 70%. They’d get all they’ve been paid yet again. 2. Customers forced to pay perhaps 60% more than they’d have otherwise paid for their purchases. They’d get massive refunds for some very pricey books. And notice that we’re still not touching the millions of customers forced to pay $2.99 for a book that might have sold for $1.99. Nor does that take into account publishers and authors who lost sales because of Amazon has artificially fixed prices high.

    Such a settlement would dwarf anything Apple or the Big Six is paying out. And unlike the DOJ’s ridiculous lawsuit, Amazon’s punishment would be wholly justified. It did use its huge 70-90% market share to force publishers to accept sub-standard royalties and to raise prices in ways that did not profit the publishers but reaped huge rewards for Amazon. This tale has only one bad guy.

    Why isn’t something be done about this? What I’ve described is middle-school arithmetic, requiring a trivial knowledge of elementary algebra and an awareness of Amazon’s royalty rates that can be acquired in about 10 seconds using a Google search.

    I’ve got my suspicions about why the current administration’s DOJ has such a hands-off approach to Amazon, but it doesn’t explain why state attorney generals aren’t pursuing this matter, particularly in those state’s where Amazon is sucking money out of the state’s economy. Nor does it explain why none of the tens of thousands of aggressive tort lawyers in this country aren’t filing a host of class action lawsuits. And it’s certainly not because the money isn’t there. In 2012, Amazon was the 56th largest corporation in the world, up from 78th the year before.

    If I were an Amazon executive, I’d head this disaster off as fast as I could. I’d convene an emergency meeting and announce a flat 70% royalty rate ASAP.

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