Saturday, July 13, 2013

Explaining the Apple Ebook Price Fixing Suit

Adam C. Engst:

Again, there is nothing inherently illegal with the agency model, price caps, or an MFN clause. And there isn’t even anything wrong with combining them in negotiation with a single company. The problem comes when they’re combined in negotiation with six publishers that between them control nearly 50 percent of the book market, and over 90 percent of the New York Times bestsellers.


In Judge Cote’s opinion, the combination of Apple working with all the publishers simultaneously to fix ebook prices in such a way as to cause them to rise was where Apple violated the Sherman Antitrust Act. Whether the 2nd Circuit Court of Appeals upholds or strikes down Cote’s ruling remains to be seen.


Nor should you interpret Amazon’s role in this case to mean that Apple was somehow riding in on a white horse to save the day for customers. First, the agreements that Apple negotiated with the publishers caused ebook prices to rise, which is one of the things antitrust law is aimed at preventing. Second, although it’s easy to say that the iBookstore increased competition in the ebook market by providing an alternative to Amazon, Apple’s agency model and MFN clause ensured that the publishers would charge the same price everywhere, entirely eliminating competition on price. That in turn would likely have made it significantly harder for any new companies to enter the ebook retailing market and compete with Apple and Amazon.

Update (2013-08-14): Adam C. Engst:

It’s hard to see how the DoJ’s proposed terms would have any positive effect on the ebook industry, given what has already happened. Plus, the Court explicitly noted that agency agreements, and both MFN clauses and price caps, were perfectly acceptable in general, so it seems unreasonable to prevent Apple from using them. In fact, the publishers have filed a motion with the court, saying that the DoJ’s proposals would hurt them, by limiting Apple’s ability to discount books.

Update (2013-09-10): Adam C. Engst:

In the list of prohibited behaviors, Apple may not enforce a retail price MFN term or enter into any agreement with an ebook publisher that includes such a retail price MFN term. (MFN, or most-favored nation, means that a retailer can match other retailers’ prices, regardless of other agreements.)

Plus, Apple cannot enter into an agreement with any of the big five publishers who were also named in the suit (all of whom settled) that restricts Apple’s ability to “set, alter, or reduce” the retail price, with a series of staggered expiration dates for each publisher ranging from 24 to 48 months.

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