New Lawsuit Alleges That Book Publishers, Apple Colluded To Drive Up E-book Prices

A new lawsuit filed today by the law firm of Hagens, Berman, Sobol, and Shapiro alleges that a group of publishers including the Hatchette Book Group, HarperCollins, MacMillan, Penguin, and Simon & Schuster collaborated with Apple over several years to break Amazon's e-book pricing structure. The allegations are interesting in that they suggest formal cooperation between the various publishers and Apple, rather than painting the events of several years ago as the free market's solution to Amazon's attempt to dominate the market.

The Price of Digital Ink

Amazon's initial policy in the wake of the first-generation Kindle's enormous success was to set a flat $9.99 rate for the majority of new and bestselling e-book titles. The company stuck to its guns despite reluctance on the part of numerous publishers. With print hardcover prices ranging from $24-35 or more, publishers were unhappy over being forced to sell the digital versions at a fraction of the cost. Amazon's popularity made it impossible for any single publisher to secure a preferential rate and no publisher was willing to withdraw its products from sale and thereby miss the boat. If this sounds a tad familiar, it's because we saw a similar battle play out between the music industry and Apple over iTunes publishing several years ago.

The complaint alleges:
The Publisher Defendants worked together to force the eBook [sic] 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.The Publisher Defendants unlawful combination and pricing agreement would not have succeeded without the active participation of Apple... Apple had strong incentives to help the Publisher Defendants to restrain trade and increase the price of eBooks... Amazon's pro-consumer pricing meant that to enter the eBooks market Apple would likely be forced to sell at least some eBooks near or below its wholesale costs for an extended period of time. Apple did not want to enter the eBooks market subject to this margin pressure caused by Amazon's pricing. But at the same time, Apple believed that it had to enter the eBook market because the Kindle was (and is) a competitive threat to Apple's business model.

The Public Defendants and Apple implemented this unlawful agreement and combination on or before January 2010, when five of the six major book publishers of fiction and nonfiction works almost simultaneously announced they were switching from a wholesale pricing model to an Agency Model for eBook sales. This was an unprecedented shift in pricing (and sales model) in the book industry in the United States. The announcement to shift to the Agency Model coincided with the release by Apple of the iPad tablet computer. In fact, when Apple announced the launch of the iPad on January 27, 2010, the Publisher Defendants agreed to allow Apple to use their trademarks in connection therewith.

As a direct result... the price of eBooks has soared. The price of new bestselling eBooks increased to an average of $12-15--an increase of 33-50 percent. The price of an eBook now in many cases approaches or even exceeds the price of the same book in paper even though there are almost no incremental costs to produce each additional eBook unit.

Note that both sides of this battle used terms like "free market" to describe their own behaviors. Amazon set prices, but publishers were free to sell their ebooks through other websites or not at all. Publishers claimed they wanted price freedoms and decried Amazon's behavior as anti-consumer and monopolistic.

E-books have continued to sell like hotcakes under the new pricing model, but the allegations the suit alleges are serious ones. Proving them, however, is going to be difficult. The various publishers named in the suit wanted more control over their own product pricing. Apple wanted to further expand the types of media it sold under the iTunes umbrella. The iPad's larger screen and light weight made e-books an obvious fit, particularly since the Kindle and Kindle 2 had already demonstrated that people liked the idea of a tablet-style e-reader. The critical question is going to be whether or not the plaintiffs can demonstrate that Apple's entry into the e-book fray was the intentional result of collaboration and backroom deals.