Wednesday, April 11, 2012

In Part I of this article, I talked about the emergence of the e-book as a mainstream commodity on the open US market. In Part II, I briefly outlined the switch from a traditional wholesale model to the agency model in 2010.

In December of 2011 the United States Department of Justice launched an investigation into Apple and the big six publishers (Hachette, HarperCollins, McMillan, Penguin Group, Random House, and Simon & Shuster) for suspicion of non-compliance with anti-trust laws in using the agency model. These laws are meant to encourage competition, ensure ethical business practices, protect consumers, and to prevent any one company from gaining a monopoly. A monopoly is defined as when a sole entity has the complete control of a commodity in a marketplace. By definition, every media company (whether for books, movies, or music) has a monopoly over it's content because they own the copyright on the material. You can only buy that content from them (or from the companies a media company retails through), and the media company controls nearly all aspects of that product's creation. But the DOJ was worried that the big six had taken this one step further and were colluding with each other to fix prices at a level that was beneficial for them, but not to the consumer. While the monopoly end of media business is the nature of the beast, price fixing is not. The DOJ has also expressed concern over Apple's 'fair nation clause': a publisher who sells its content to Apple may not sell that same content to another company for less than what it was sold to Apple for.

As part of it's investigation, the DOJ contacted each of the companies named in the investigation, as well as several smaller companies who also follow the agency model but who are not named as being in collusion to fix prices. Smashwords, one of the largest and most well respected self publishing platforms, posted on their blog the information they provided to the DOJ during the investigation, which took place in March of 2012. This is a listing of their sales with Apple's iBookstore from October of 2010 until March of 2012. Remember, under the 'fair nation clause' of their Apple contract, Smashwords and Smashword's authors cannot price their content lower than their Apple iBookstore price at another retailer. Overall, they showed that prices had gradually dropped during the period of agency pricing by a not insignificant amount.

Also in March of 2012, the DOJ offered Apple and several large publishers a settlement agreement. This agreement does not mean that the DOJ found criminal wrongdoing on the part of those it was offered to, it only means that if the parties accept the settlement the DOJ agrees not to take them to court. Because of the large legal expenses involved in going to court, it is sometimes advantageous to settle. The only part of the settlement that I have found that's been made public yet is that it would forbid those publishers who signed it from selling through Apple. Should all of the parties named in this settlement have taken the agreement, that would have effectively been the end of the iBookstore, leaving the field of e-books primarily to Amazon and to Barnes & Noble. However, as we saw in 2009 and 2010, this is a competition that Barnes & Noble cannot win. Over time, the e-book market would shrink to just Amazon, perhaps at great detriment to the publishers. In effect, people like the chief executive of Barnes & Noble are arguing that the breaking of the agency model will result in less competition, not more.

As of today, April 12, 2012, the DOJ has launched a civil lawsuit against Apple, Simon & Shuster, HarperCollins, Hachette, McMillan, and Penguin Group. Random House accepted the DOJ's settlement, thereby avoiding the extensive legal costs of this lawsuit. HarperCollins and Hachette are listed in court documents as also having accepted the settlement, so I am unclear as to why they are listed in the lawsuit.

John Sargent, the CEO of McMillan both during the Amazon face-off and through today's struggle with the DOJ, issued a statement regarding the lawsuit. In it he defends his and his company's innocence in price colluding, as well as derides the DOJ's settlement as having large long term negative effects.

So that's the story of why you pay the price you pay for your e-books, right up to today. I'll keep watch over the next few weeks and months, and be back with Part IV once the dust has settled.


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