How Apple's Agency Model for Publishers Fails to Merit Collusion Charges

[MacRumors]

Earlier this month, the U.S. Department of Justice, a number of U.S. states, and authorities in several other countries announced that they were filing lawsuits against Apple and six book publishers, alleging anticompetitive behavior in shifting to an Apple-backed agency model in which publishers set retail pricing and retailers such as Apple receive a 30% commission on the sales price.

Rather than settling the case as several of the publishers have opted to do, Apple has stood firm in its stance that the move did not represent collusion and price fixing but instead served as a way to give publishers control over pricing and break up Amazon's near-monopoly in the e-book market.

Former Wall Street Journal publisher and Press+ founder Gordon Crovitz published a column over the weekend outlining how Apple's plan for a 30% commission on publishers' sales is merely its standard business practice, not any sort of collusion to fix prices in the market.

'I don't think you understand. We can't treat newspapers or magazines any differently than we treat FarmVille."

With those words, senior Apple executive Eddy Cue stuck to his take-it-or-leave-it business model of a 30% revenue share payable for transactions through the iTunes service. Despite my arguments to Mr. Cue in Apple's Cupertino, Calif., offices last year on behalf of news publishers seeking different terms, to him there was no difference between a newspaper and an online game.

It was a sobering reminder that traditional media brands have no preferred place in the new digital world. It also should be the defense's Exhibit A in the Justice Department's antitrust case against Apple and book publishers: The 30% revenue-share model is Apple's standard practice, not, as alleged by the government, the product of a conspiracy.

Crovitz goes on to outline how the U.S. government's case against Apple and the publishers is misguided, with the agency model having been validated in numerous other industries by federal courts. And with the model looking exactly like that used for apps and other iTunes Store content, it suggests that Apple is not trying to accomplish anything special to gain control of the e-book market.

In fact, Crovitz notes that the e-book market has become significantly healthier since Apple's agency model was adopted by the major publishers.

Over the past couple of years, thanks to the agency model, the Kindle's market share has fallen to 60% [from 90% previously] thanks to competition from iPads and Barnes & Noble Nooks, and there is more variation in consumer prices, typically ranging from $5.95 to $14.95.

Pricing flexibility for publishers is necessary to allow innovation. Why shouldn't some e-books cost 99 cents and others that come with video and hardcover editions be $49.95? Why not give people the option to pay 10% more to access an e-book on all e-readers? Consumers should decide, not Amazon or the Antitrust Division.

With settlements already looking at unwinding the agency model to allow Amazon to once again begin controlling the e-book market by leveraging its consistent $9.99 pricing to drive competitors out of business, investors have become increasingly skittish about Barnes & Noble and other retailers trying to stake out their positions in the market. Consequently, there are real fears among authors, publishers, and retailers that the federal government's efforts are working quickly to restore an Amazon monopoly capable of bringing down its competitors.

Update: As noted by Chris Martucci and others, Crovitz fails to address the issue of the "most favored nation" clauses included in Apple's contracts with the publishers. These clauses prohibited the publishers from offering their content to any other retailer at lower prices than they offered through Apple. When combined with the apparent coordination among the publishers to break Amazon's near monopoly by shifting to the agency model, a case for anti-competitive behavior is more easily made.

But while simply removing the most favored nation clauses from Apple's contracts with the publishers would bring them more in line with the relationship between Apple and app developers, that move alone would not appear to satisfy the Department of Justice.

The government's settlements with several of the publishers have gone beyond the issue of most favored nation clauses and have required that the publishers essentially abandon the agency model as it currently exists. While the settlements would allow a modified form of the agency model to exist, they would require that retailers remain some control over the setting of retail prices.

Article Link: How Apple's Agency Model for Publishers Fails to Merit Collusion Charges

[gregwyattjr]

Can they please let Apple do what they wanna do? If the prices are too high, customers will let Apple know by closing their wallets.

[sha4000]

Well I don't think they are attacking the Agency Model per se but the way they went about putting the whole deal together. This article brings nothing new to the table IMO.

[Icaras]

Originally Posted by gregwyattjr

Can they please let Apple do what they wanna do? If the prices are too high, the customers will let Apple know by closing their wallets.

That statement alone should be enough to end this conspiracy theory once and for all.

[Small White Car]

If anything is wrong here, it's Apple's insistence that publishers have to give Apple the lowest price.

That's the one area where all this does differ from apps. If Angry birds was $2 on the iPhone and $1 on Android, there's nothing Apple can do about that. They're trying to make that a rule with books, though.

The good news is, I honestly think they can (and should) drop that and it won't hurt them. Then books really will be treated like apps, which is how I think it should be. (And I think Apple will still do just fine in that world.)

I'm not 100% clear if the DOJ would agree with me at that point or if they're trying to go further. My opinion depends on that and I don't have a really clear understanding of their intentions right now.

[terrymr]

The agency model isn't the problem.

The problem is that as a group the publishers decided Amazon couldn't have any more e-books unless it accepted the same deal.

I don't see how Apple has a hand in that however.

[basesloaded190]

Originally Posted by sha4000

Well I don't think they are attacking the Agency Model per se but the way they went about putting the whole deal together. This article brings nothing new to the table IMO.

And if I am not mistaken, the deal was put together by the publishers, not with Apple.

[blow45]

The article brings nothing new to the table and the author doesn't have the legal credentials to state whether apple is or is not guilty of collusion so categorically in the title. In my mind the evidence of Jobs' and Eddy Cue's memos to publishers are pretty damning, but I am neither a lawyer nor a judge.

[orbital]

Originally Posted by blow45

The article brings nothing new to the table and the author doesn't have the legal credentials to state whether apple is or is not guilty of collusion so categorically in the title. In my mind the evidence of Jobs' and Eddy Cue's memos to publishers are pretty damning, but I am neither a lawyer nor a judge.

Even if the author was a lawyer, they wouldn't know the details any more than you or I. Also its all speculation in the end.

[neiltc13]

This is opinion posted with a title that suggests it is fact. I expect better from MR.

[MhzDoesMatter]

Originally Posted by neiltc13

This is opinion posted with a title that suggests it is fact. I expect better from MR.

You expect better from a site that primarily publishes rumors?

[benpatient]

Originally Posted by basesloaded190

And if I am not mistaken, the deal was put together by the publishers, not with Apple.

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

[blow45]

Originally Posted by orbital

Even if the author was a lawyer, they wouldn't know the details any more than you or I. Also its all speculation in the end.

Yeah but they would know as much as to not state their opinions as a fact.

[charlituna]

Originally Posted by gregwyattjr

Can they please let Apple do what they wanna do? If the prices are too high, customers will let Apple know by closing their wallets.

I agreed with this. To a point.

The Most Favored Nation clause should be zapped. That is possible guilt by Apple since it is a flavor of using their market strength for tablets to perhaps gain in another market.

Otherwise let all parties use the terms they wish. There's nothing really to stop someone from using wholesale and setting pricing conditions. If the others party doesn't like it they give up the product.

[Penooker]

Originally Posted by MacRumors

With settlements already looking at unwinding the agency model to allow Amazon to once again begin controlling the e-book market by leveraging its consistent $9.99 pricing to drive competitors out of business

HAHAHAHAHAHAHA. Yes, when a company other than Apple is pricing items at a lower price, they are evil for driving out competitors that can't match the price.

Anyhow, like it's been mentioned many times before, the collusion comes from the other parts of the Agency model. There's lots of lawyers out there without a job -- get them to write your legal blurbs. That way, your readers wouldn't want to gag as much.

[badtzwang]

Originally Posted by gregwyattjr

Can they please let Apple do what they wanna do? If the prices are too high, customers will let Apple know by closing their wallets.

So you're comfortable spending $15 for an eBook that might have otherwise cost you $10 under Amazon's former wholesale model? Why are you on Apple's side when its screwing you over as a consumer?

[MhzDoesMatter]

Originally Posted by blow45

Yeah but they would know as much as to not state their opinions as a fact.

This isn't opinion. Apple's agency model alone does fail to merit collusion charges. The complaint alleges an active conspiracy that goes beyond the business model itself. Motive, not means.

[genovelle]

Originally Posted by terrymr

The agency model isn't the problem.

The problem is that as a group the publishers decided Amazon couldn't have any more e-books unless it accepted the same deal.

I don't see how Apple has a hand in that however.

e-books are a new and evolving market that the publishers business rely on. If they decided to stop selling their product to 3rd parties and just sell through their own stores I guess that would be wrong too.

[blow45]

Originally Posted by benpatient

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

This. Excellent post.

Jobs’ own email to a publisher proves to be quite damning with Jobs stating that the publishers could work with Apple or pursue one of two other choices: “Keep going with Amazon at $9.99” or “hold back your books from Amazon.”
http://idealab.talkingpointsmemo.com...ice-fixing.php

He wrote one of the publishers in an email published by the DOJ, "Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99
http://www.dailytech.com/article.aspx?newsid=24447

If this isn't colluding and price fixing then what is?

[mdriftmeyer]

Originally Posted by neiltc13

This is opinion posted with a title that suggests it is fact. I expect better from MR.

The column is under Opinions on the WSJ site. This is an Op-Ed.

[terraphantm]

I haven't really kept up with this, but I thought the legally questionable issue was that Apple requires the publishers to sell their books for the same price through all vendors. So even if a company like Amazon were willing to take a much smaller share than 30%, they couldn't because of the publishers' agreements with Apple. This issue doesn't really apply to the app-store since you can't actually sell iPhone apps through any other store.

[linuxcooldude]

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

I thought the deal was, that if they price the same book at a lower price else where they must offer it at the same price inside the iTunes store too?

[macthetiger85]

Originally Posted by Small White Car

If anything is wrong here, it's Apple's insistence that publishers have to give Apple the lowest price.

That's the one area where all this does differ from apps. If Angry birds was $2 on the iPhone and $1 on Android, there's nothing Apple can do about that. They're trying to make that a rule with books, though.

The good news is, I honestly think they can (and should) drop that and it won't hurt them. Then books really will be treated like apps, which is how I think it should be. (And I think Apple will still do just fine in that world.)

I'm not 100% clear if the DOJ would agree with me at that point or if they're trying to go further. My opinion depends on that and I don't have a really clear understanding of their intentions right now.

Except that's not true. An ebook is going to have the same content on whatever medium. Changes come from the distributor and those features. In other words it's up to Apple to differentiate iBooks from Kindle App and the overall usability of the app. The content is not different.

However, in terms of apps, the content is different. Apple gives specific APIs to developers, you can't take an iOS app and republish it as an Android app, you have to rewrite it from scratch. Sure some images and the functionality might be the same, but they are as different as different can be at their core.

[blow45]

Originally Posted by MhzDoesMatter

This isn't opinion. Apple's agency model alone does fail to merit collusion charges. The complaint alleges an active conspiracy that goes beyond the business model itself. Motive, not means.

Apple's agency model though, as opposed to the agency models others might have suggested, involved requiring publishers to offer the lowest price to them. The agency business model in general doesn't involve this.

[macthetiger85]

Originally Posted by terrymr

The agency model isn't the problem.

The problem is that as a group the publishers decided Amazon couldn't have any more e-books unless it accepted the same deal.

I don't see how Apple has a hand in that however.

I think it's because Apple told them to take the model or don't sell on iBooks.
You're right they could have chosen to not, but the whole ultimatum doesn't sit right with a lot of people.