Apple digs in against the government’s ebook lawsuit - impact on consumers is far from clear

by David Needle

April 13 2012


Apple spoke out against government charges it colluded with book publishers to set ebook pricing.

Technology and legal analysts are divided over whether Apple and its codefendant publishers will successfully defend themselves against the government’s charge that they colluded to raise eBook prices.

But one thing is clear: Some ebook prices will now come down, according Amazon. 

“We look forward to being allowed to lower prices on more Kindle books,” Amazon said in a statement following the news this week that three publishers had settled with the government though two others are still being sued along with Apple. 

Apple’s motivation for developing the so-called “agency model” of pricing with publishers before the launch of the first iPad back in 2010 was to better compete with Amazon which was selling ebooks for $9.99, well below the hardcover equivalent. Amazon still controls about 60% of the ebook market, but that share is reportedly down from as much as 90% before the launch of the iPad. 

Under the agency model, publishers could charge whatever they wanted to but since the agreement also guaranteed Apple got a 30% cut on books sold at its online store, the price consumers paid went up. 

“Amazon immediately reacted because they feel like they now have some cover with the government’s case whereas before they were forced to play the agency model game” said analyst Roger Kay, president of Endpoint Technologies Associates

Meanwhile, Apple finally responded publicly to the charges today. Apple spokesman Tom Neumayr told Macworld:

“The DOJ’s accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry. Since then customers have benefited from ebooks that are more interactive and engaging. Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.” 

Richard Epstein, a legal expert and Senior Fellow at the Hoover Institution, said in a post that the government case looks shaky for several reasons, noting in part: “... there is no need for any collusion on this issue.  

“If a single publisher had dreamed up this new scheme, it could have refused unilaterally to sell any books to Amazon or anyone else unless they bought into the model.  Why is it illegal for Apple to come up with a bright idea that helps its competitive position with Amazon?” 

The government's "compelling complaint"

But Forbes quotes Dan Balto, a former attorney in the DOJ’s Antitrust Division as coming down strongly in favor of the government’s case: 

“This is one of the most compelling complaints I’ve ever seen. . . . Government enforcers fantasize about this kind evidence, but this is beyond their fantasies.” 

Balto was referring specifically to a quote from the late biography of Steve Jobs where he explained the rational for the agency model: 

“We told the publishers, ‘We’ll go the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.’ [The publishers] went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.’” 

Analyst Tim Bajarin sides with Apple’s view and doesn’t expect the company to lower prices or settle the case. And he says if Amazon follows through on its plans to lower ebook prices, it will have to take a serious hit on its profit margins. 

“I don’t think publishers are going to change what they’re charging, so Amazon is going to have to eat that price,” said Bajarin, president of Creative Strategies

Author Scott Turow slams Amazon

Whatever the legal justification for the government's case, some argue that lower ebook prices means less money for authors and the book industry as a whole. 

In a blog post last month titled “Grim News” author Scott Turow came down on Apple’s side, saying in part: 

“We have no way of knowing whether publishers colluded in adopting the agency model for e-book pricing. We do know that collusion wasn’t necessary: given the chance, any rational publisher would have leapt at Apple’s offer and clung to it like a life raft. Amazon was using e-book discounting to destroy bookselling, making it uneconomic for physical bookstores to keep their doors open.”

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