When Amazon first started selling ebooks in 2007, the retail giant priced best sellers and new releases at just $9.99 a download.
Five publishing houses thought that price was too low -- and decided to do something about it, the U.S. Department of Justice charges in a civil antitrust lawsuit brought today in federal court in Manhattan. What they did was forge a deal with Apple, the authorities allege. Specifically, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster, together with Apple, agreed to move to an "agency" model -- meaning that the publishers would set prices and Apple would act as their agent, selling the books for a 30% commission.
"The plan -- what Apple proudly described as an 'aikido move' -- worked," the government alleges. "Over three days in January 2010, each publisher defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010."
Previously, books were sold online on the "wholesale" model, meaning that companies like Amazon purchased books at wholesale and then decided what price to charge.
How did the publishers pull this off?
The CEOs of the publishing companies met once each quarter in private rooms in Manhattan restaurants -- like "The Chef's Wine Cellar" at Picholine -- and discussed matters like Amazon's ebook pricing, the government alleges.
By the time Apple launched the iPad in January of 2010, the company said it would sell bestseller ibooks for prices ranging from $12.99 to $14.99. Yet at an Apple press conference, when a reporter asked then-CEO Steve Jobs how he would compete with Amazon’s $9.99 downloads, he responded, "that won't be the case .... the prices will be the same,” the government alleges.
Next, the publishers demanded that Amazon also move to an agency model, according to the complaint. Macmillan was the first to request that Amazon do so. Amazon initially refused, even though that meant it had to stop selling Macmillan books. Within days, however, the retail giant changed its mind.
"Amazon quickly came to fully appreciate that not just Macmillan but all five publisher defendants had irrevocably committed themselves to the agency model across all retailers," the complaint says. "Just two days after it stopped selling Macmillan titles, Amazon capitulated and publicly announced that it had no choice but to accept the agency model, and it soon resumed selling Macmillan's e-book and print book titles."
The bottom line is that consumers had to pay more for e-books, the feds say. Three publishers -- Hachette, HarperCollins, and Simon & Schuster -- have already agreed to settle the complaints, the Justice Department said today. If the agreements are approved by a judge, the companies will have to end their contracts with Apple, and also end any contracts with retailers that limit their ability to offer discounts. The publishers can renegotiate those contracts, but can't prevent the retailers from offering discounts for at least two years.
The Justice Department says the effect should be lower prices at Amazon and Barnes & Noble. Amazon agrees. The company said it "look(s) forward to being allowed to lower prices on more Kindle books," according to CNET.
But some have said that Apple and the publishers might have prevented Amazon from monopolizing the book selling market. "The irony bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition," Authors Guild president Scott Turow said in a blog post last month, in response to a report about the impending antitrust filing.
He said in the post that Amazon was "using e-book discounting to destroy bookselling, making it uneconomic for physical bookstores to keep their doors open."
"As it announced the launch of the Kindle, publishers learned that Amazon would be selling countless frontlist e-books at a loss," Turow wrote. "Amazon’s predatory pricing would shield it from e-book competitors that lacked Amazon’s deep pockets," he wrote. "Critically, it also undermined the hardcover market that brick-and-mortar stores depend on. It was as if Netflix announced that it would stream new movies the same weekend they opened in theaters."
Since the publishers moved to an agency model, however, Amazon's market share fell from around 90% to 60%, Turow said. "Customers are benefiting from the surprisingly innovative e-readers Barnes & Noble’s investments have delivered, including a tablet device that beat Amazon to the market by fully twelve months. Brick-and-mortar bookstores are starting to compete through their partnership with Google, so loyal customers can buy e-books from them at the same price as they would from Amazon."
Meanwhile, Apple, Macmillan and Penguin are fighting the case.
"The terms the DOJ demanded were too onerous," Macmillan CEO John Sargent said today. "After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model."