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

[Bonte]

There is no "monopoly" requirement here; the fact that Apple had zero market share in e-books doesn't matter if Apple did, in fact, collude with the publishers.

Is this colluding?
"we don't want to sell your books if the price is lower in other stores"

Apple also demand a fixed pricing for there hardware if stores want to sell it, isn't this exactly the same as what the publishers are doing now?

 

[EbookReader]

would DOJ file a lawsuit if scenario 2 happened (agency, but no MFN clause, with bookseller allowed to discount up to 30%)


CURRENT REALITY: $14.99 book agency on all bookstores (but no store can discount)

Apple: $14.99 (keep 30%)
Nook: $14.99 (keep 30%)
Amazon: $14.99 (keep 30%)
GooglePlay: $14.99 (keep 30%)


WHAT IF ALTERNATE REALITY: $14.99 agency, but no MFN clause, with bookseller allowed to discount up to 30%.

Apple: $10.49 (keep 0%) ----(Apple is okay with 0% profit since it makes its money on hardware anyway)
Nook: $13.99 (keep 20%)
Amazon: $14.49 (keep 30%) -----(Amazon needs its 30% profit since it loses money on its Kindle Fire hardware)
GooglePlay: $11.99 (keep 10%)


there would be no lawsuit in my opinion.




p.s. Discount books = more buyers = more sales = better for publishers

and yet

they don't want bookstore to offer discount. Their motive: they want to slow down the popularity of ebook.


It's like Samsung telling Best Buy, Target, Walmart etc.... Don't Put on TV on sales. We want you to have the full 30%. Don't share this 30% with the customers.

 

[gnasher729]

Yup. And slightly off topic, I bought an audiobook from iTunes long ago. It was really crappy low sample rate audio, but that's what they had at the time. While later I found the same audiobook on Audible available at the low sample rate like iTunes, but also in various other formats including the top one - enhanced. I wrote to Apple and asked if I could get a newer better quality version. I mean their audiobooks are basically right from Audible. They replied "No - we do not offer higher quality downloads to previous purchased audiobooks.". Needless to say, I NEVER purchased another one from iTunes, and in fact went back to Audible and repurchased the same one - again and many others and have never even considered getting another one from iTunes. Same goes for Kindle books. I'm sold. I'm never going to the iBookstore.

Many iTunes audio books come straight from Audible. Whatever bit rate you get, you get the bit rate that Apple gets from Audible. And if you can't re-download an audio book from iTunes, it is because Apple's contracts with Audible don't allow it. I guess something anti-competitive must be going on there; I suppose Audible should be investigated.

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Some of you guys might want to read this article: http://news.cnet.com/8301-13579_3-57412369-37/this-is-why-doj-accused-apple-of-fixing-e-book-prices/ and see where Jobs stood on this topic. He didn't seem to care that we consumers would end up paying more, even telling the publishers that they'll get what they want this way (at our expense).

Unless they can call Steve Jobs to the witness stand in a court, it is quite irrelevant what he said.

 

[EbookReader]

Does Apple say apps, movies, music cannot be cheaper through any other vendor ("most favored nation status"). If not then they did treat books differently and may not be off the hook.

Nope. Because

Apple buy digital movies and digital music at wholesale. Same with other stores. For example, AmazonMP3 can sell Lady Gaga whole album at $0.99 if they wanted to (while Itunes sell it at $11.99). Oh, that did happened by the way.

apps are agency but no MFN
ebooks are agency but with MFN that forced all stores to have the same price


The court will decide:

Wholesale = okay by the court
Agency with no MFN = okay by the court
Agency with MFN that forced all stores to have the same price = ??? to be determined by the court ???

 

[bsolar]

Apple also demand a fixed pricing for there hardware if stores want to sell it, isn't this exactly the same as what the publishers are doing now?

No, it's not. Apple is a single entity, the publishers under fire are 6 and are supposed to be competitors, not colluders which meet and agree together about what should be the minimum price for their products.

 

[EbookReader]

This is the settlement that the 3 Publishers agreed to:

Basically, no ebookstore could make a LOSS on selling ebooks. It could use the loss-leader strategy but the store has to make a profitable overall. (even $0.01 counts as a profit).


http://news.cnet.com/8301-1023_3-57412592-93/whats-the-future-of-e-book-pricing/

HarperCollins, Hachette, and Simon & Schuster, which is owned by CBS, the parent company of CNET, will have a couple of pricing models to choose from. Either they can go back to the old way of charging wholesale pricing (retailers buy a book for right around half its list price and then sell it for whatever they want) or they can simply set the price for the book (as they are doing now under the "agency" model) and give a 30 percent cut to the retailer. Apple operates both its iBookstore and App Store under the latter terms.

The big change will be that retailers will be allowed to discount the price of e-books. Under the terms of the current agency model that caught the eye of the DOJ and precipitated the investigation and eventual antitrust lawsuit, no retailer could set a price for a book below Apple's price in its iBookstore. That so-called "most favored nation" (MFN) clause has been removed as part of the settlement.

So retailers are free to discount under the new terms -- but not without a caveat. The terms are only good for two years. After two years, publishers can negotiate a new agreement that would allow them to go back to the current terms and restrict discounting.

If that's not complicated enough, a retailer like Amazon, which was aggressively discounting titles to $9.99 under the former "wholesale" model (and losing money on bestselling titles), isn't permitted to take an overall loss on a publisher's catalog. In other words, a retailer's commissions have to at least equal the amount of discounts its offering. For example, if a retailer makes $100,000 from the 30 percent commission it gets from the catalog of publisher X, it can only discount (take a loss) of up to $100,000.

Could Apple (huge profit on hardware, huge cash reserve) compete versus Amazon (break-even/loss on hardware, low margin on all its products) on ebook pricing?

Apple should settle like the 3 Publishers that already did. This is not something worth fighting over.

1) Damage reputation
2) Uncertain outcome
3) lawyers fee will be HUGE

the longer this drag on, the worst it will be. Since Apple is doing "very well (70% market share)" buying digital music at wholesale and selling on Itunes, maybe it will do all right buying ebook at wholesale too.

 

[steve-p]

How successful has Apple been with iBooks though? I mean I still buy all my ebooks from Amazon, for a number of reasons. Kindle books are multiplatform. You can't even read iBooks content on your MBP, never mind on other operating systems or devices, but I can read Kindle books on iPad, iPhone, MBP, work Windows laptop, Kindle, etc. A lot of titles don't even seem to be available on iBooks anyway. I really don't see what iBooks offers that makes it even worth the same as Amazon, even if the prices were identical. Also whether or not Apple's terms are illegal, I don't care for them. It's the kind of scheme Microsoft might have cooked up in the Gates era. The wholesale model works perfectly well for other products, so I don't see why publishing should be a special case. As a fairly frequent consumer of ebooks, I let Apple know my concerns the only way they listen, by not buying.

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No, it's not. Apple is a single entity, the publishers under fire are 6 and are supposed to be competitors, not colluders which meet and agree together about what should be the minimum price for their products.

Surely that is the dictionary definition of a cartel, which is illegal in most of the developed world.

 

[Winni]

Should this exception apply only to Apple or all companies that try to gauge the consumers?

Of course this should apply to all companies. But your only way to fight crime is to go after one villain at a time, and Apple is not an underdog but a very visible big bully.

 

[bergmef]

This is the settlement that the 3 Publishers agreed to:

Basically, no ebookstore could make a LOSS on selling ebooks. It could use the loss-leader strategy but the store has to make a profitable overall. (even $0.01 counts as a profit).


http://news.cnet.com/8301-1023_3-57412592-93/whats-the-future-of-e-book-pricing/




Could Apple (huge profit on hardware, huge cash reserve) compete versus Amazon (break-even/loss on hardware, low margin on all its products) on ebook pricing?

Apple should settle like the 3 Publishers that already did. This is not something worth fighting over.

1) Damage reputation
2) Uncertain outcome
3) lawyers fee will be HUGE

the longer this drag on, the worst it will be. Since Apple is doing "very well (70% market share)" buying digital music at wholesale and selling on Itunes, maybe it will do all right buying ebook at wholesale too.

I don't think they will lose, just be dropped from the suit, but maybe they would want to lose. Lose this so it's been decided that you can sell for less, not sign an agreement that you have to make a profit (like the others) and switch to the wholesale model and sell the books for 25 cents while paying a wholesale price of 19.99. Even if they leave the profit part, they would argue it's bundled with the itunes store. It's only single digits, but it is still a profit.

 

[EbookReader]

once again, apple are the masters of misleading simplicity.

First, it is not their standard model, it is merely the same revenue share model they are using for the app store. It isn't the same as being used in their music store or tv/movie store, where they set retail prices. There is no precedent saying apple have a preferred model - if anything, the original itunes store would be their 'standard' model, and ibooks pricing is a move away from that.

Second, the app store does not have terms that require publishers to not sell their products more cheaply on other platforms. If you want to write angry birds ios and sell it for $1.99, and also sell it on android for 99c, you can. With ibooks you can't. While the headline rev share is the same, the model overall is not.

+1

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I don't think they will lose, just be dropped from the suit, but maybe they would want to lose. Lose this so it's been decided that you can sell for less, not sign an agreement that you have to make a profit (like the others) and switch to the wholesale model and sell the books for 25 cents while paying a wholesale price of 19.99. Even if they leave the profit part, they would argue it's bundled with the itunes store. It's only single digits, but it is still a profit.

You need to read the SETTLEMENT again.

http://news.cnet.com/8301-1023_3-57412592-93/whats-the-future-of-e-book-pricing/

If that's not complicated enough, a retailer like Amazon, which was aggressively discounting titles to $9.99 under the former "wholesale" model (and losing money on bestselling titles), isn't permitted to take an overall loss on a publisher's catalog. In other words, a retailer's commissions have to at least equal the amount of discounts its offering. For example, if a retailer makes $100,000 from the 30 percent commission it gets from the catalog of publisher X, it can only discount (take a loss) of up to $100,000.

Apple can't bundle this with the Itunes store to show a profit.

It's an overall loss on a publisher's catalog.








why is ebook so special that Apple has to sell it under agency with a MFN clause that prevent other retailers from discounting/ having a sales?

when Apple standard practice is wholesale. Music and movies.

Apps are different because there are no Universal Music, Warner Music, Sony Music, EMI in the apps world

or no Warner Movie Studio, Disney Movie Studio, Sony Movies Studio, 20th Century Movie Studio, etc.. of the app world.

Guess which category ebook fall under?

 

[koobcamuk]

This. is. so. boring.

Please can we have information regarding a mac? 17" MBP? 15" MBA? new iMacs?

I am so bored of these legal cases.

 

[StuBeck]

What horrendous "reporting." Not reporting on the most important aspect of the suit, and only bringing it up after people call you out on it?

 

[marksman]

This. Excellent post.


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

It is not an excellent post because it ignores the fact that retailers often put conditions on supplier and using Wal-Mart as an example is a horrible one.

Apple already essentially sets MSRP as the price their items can sell for.. Nobody is selling iPod Touches for $100 as a way of getting people into their stores.

I don't know why this part keeps being forgotten. The publishers can still tell Amazon they can't sell their books for $9.95. The only problem was before Apple there was zero competition and Amazon could just refuse.

 

[marksman]

I completely agree - the problem isn't the price - it is the attempt to limit what anyone else can charge. What is significant is that they aren't just saying that other businesses can't get a better wholesale price > they are forcing everyone to set the same retail price.

I also don't understand all the noise about Amazon's lower prices. My understanding is that Amazon is selling the products cheaper and cutting the savings out of their profits. There's nothing wrong with the Publishers saying this is the lowest price we will sell the ebook to Amazon. If the publisher says our lowest price for this new book is $12 and Amazon decides to sell it at $9.99 > that does no harm to the publisher, author, etc.? They still received their $12.

If you don't like that, then you shouldn't shop on Black Thursday - a lot of those great deals are loss-leaders that are sold at or below cost to get people into the store with the hopes they will buy other things as well!

Same thing that Amazon is doing!

It is legal for manufacturers to set a minimum retail price everywhere but Maryland

 

[bsolar]

The only problem was before Apple there was zero competition and Amazon could just refuse.

And things changed in which way exactly?

Let me get this straight: the ebooks market gains a new big competitor with Apple entering the fray against Amazon. Since Apple became a competitor in the market prices for ebooks increased overall and people actually think this is free market competition at his finest?

PS: it's obvious publishers should be able to set their own prices, but they are supposed to be competing between themselves. When they meet and decide to agree to set the same higher prices together they stop being competitors and open themselves to the collusion accusation.

 

[bergmef]

+1

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You need to read the SETTLEMENT again.

http://news.cnet.com/8301-1023_3-57412592-93/whats-the-future-of-e-book-pricing/

If that's not complicated enough, a retailer like Amazon, which was aggressively discounting titles to $9.99 under the former "wholesale" model (and losing money on bestselling titles), isn't permitted to take an overall loss on a publisher's catalog. In other words, a retailer's commissions have to at least equal the amount of discounts its offering. For example, if a retailer makes $100,000 from the 30 percent commission it gets from the catalog of publisher X, it can only discount (take a loss) of up to $100,000.

Apple can't bundle this with the Itunes store to show a profit.

It's an overall loss on a publisher's catalog.








why is ebook so special that Apple has to sell it under agency with a MFN clause that prevent other retailers from discounting/ having a sales?

It doesn't, it says apple gets to have the exact same sale.

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It is legal for manufacturers to set a minimum retail price everywhere but Maryland

The funny thing with Maryland, they do have a minimum gas price. No undercutting or taking a loss. My state sucks!

 

[BaldiMac]

That's only if you ignore a part of the DoJ claims. Just one example from the excellent The Verge analysis, emphasis mine:

I didn't ignore that at all. Those are the charges.

Monopolies are addressed in Sec. 2 of the Anti-Trust Act. The current action pertains to Sec. 1 of the Act. Here's what it says:

There is no "monopoly" requirement here; the fact that Apple had zero market share in e-books doesn't matter if Apple did, in fact, collude with the publishers.

Yep. You are taking my comment about the term monopoly out of context.

 

[thewitt]

I love the way you guys claim the author of the article has no credibility and cannot say Apple is innocent, yet you guys know Apple is guilty.... Ha ha ha

 

[Beerstalker]

It is legal for manufacturers to set a minimum retail price everywhere but Maryland

Are you sure about that? As far as I knew all they could do was set a MAP (Minimum Advertised Price). Stores can sell the products for whatever price they want, they just can't advertise it with a price below MAP. So in the ads they have to have stuff like "New Low Price", or online they have to make you add it to your cart before you can see the price.

This is done to protect authorized resellers, and the brand name/reputation. Panasonic doesn't want some dealer selling off a bunch of Plasma's below MAP pissing off all the other authorized resellers because they can't afford to match that price. They don't want those other retailers threatening to drop Panasonic's products because they are allowing others to sell so much cheaper, etc. They also don't want to start being seen as a "cheap" TV, they prefer to be seen as "top tier" etc.

 

[bsolar]

I love the way you guys claim the author of the article has no credibility and cannot say Apple is innocent, yet you guys know Apple is guilty.... Ha ha ha

I don't care about who the author of the article is or how much credibility he has. I care about the arguments he uses to back up his opinion. So far the arguments fail to address the DoJ claims in their entirety, focusing on some aspects which alone can very well be legit. Even the Macrumors post now has an amendment stating that the author's arguments are incomplete. Emphasis mine:

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.

This doesn't mean Apple & co. are guilty already, only that the DoJ's claims appear to have some substance.

 

[thewitt]

Fortunately for Apple, it's unlikely any of you will be on the jury - if the DOJ is foolish enough to let this get to the courts.

My bet is a quiet out of court settlement and the Agency model continues in place without the most favored nation clause.

 

[bsolar]

My bet is a quiet out of court settlement and the Agency model continues in place without the most favored nation clause.

My bet is the DoJ will not be satisfied with a settlement merely excluding the most favoured nation clause but wants to reach a situation where the publishers have much less strenght in dealing with retailers/agents/whatever and so less control on the prices.

In my opinion this is because the Agency model would be fine with actual competition form the publishers making use of it. The problem is that if the DoJ's claims are correct, the publishers are not interested in competing between themselves and cannot be left dictating the prices with the degree of control which the Agency model allows.

Whether the DoJ will have his way, I don't know.

 

[marksman]

People seem to be hung up on the MFN part of the agreement, but MFN isn't illegal, just competing publishers agreeing to set the same prices.




You're not seeing the whole picture. The concern on the part of the publishers is that Amazon would would use their near monopoly to bring down prices to the point where the publishers and authors can no longer make money.

Some have argued that amazon's prices are low to the point of being predatory and that they've been damaging in that they've skewed the public's view of the value of a book.

Personally I want to see the publishers stay in business and authors continue to make a living.

And to put things in perspective, while ebook prices may have gone up a bit, aren't those prices generally still much cheaper than buying a hard copy of a new release book (even taking into account the cost of printing)?

Lots of naive people who don't see Amazon's long-term plan. They intended to stranglehold the e-book market to fruition and then either jack prices up or force publishers to deeply discount their books to them so they can continue to sell them for the low price but still make money. Neither option is good for the long term benefit of books or book readers. People are being really short sighted here and I think this whole thing is insane.

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Some of you guys might want to read this article: http://news.cnet.com/8301-13579_3-57412369-37/this-is-why-doj-accused-apple-of-fixing-e-book-prices/ and see where Jobs stood on this topic. He didn't seem to care that we consumers would end up paying more, even telling the publishers that they'll get what they want this way (at our expense).

I see a lot of comments in here with the usual biases. But the root of this issue is based in the fact that some big companies got together and worked up a way to make something more expensive at the expense of the consumer. Worse, by some reports, it appears that it could have been Apple's idea or encouragement of the idea that helped it along.

If this was oil companies getting together to drive up the cost of oil/gas, we wouldn't be so quick to defend their actions. If this was pharmaceutical or food industries driving up the cost of medicine or food, we wouldn't be so quick to defend their actions either. If this was ONLY the book publishers actions resulting in higher prices for us consumers, we'd probably bash them for being "greedy crooks." (see a million "then, I'll just steal it"-type posts all over this site and others).

However, Apple is in this particular mix... so we know it can't be wrong. Defend it. Spin it. Change the topic. Argue entirely different points. Pretend that somehow the authors will be better paid... or be motivated to write more great books. Etc. Because we can never find fault with something Apple does.

The idea of capitalism-based competition is that big companies compete against each other, not conspire together. Sure, that doesn't always work (some do conspire) but when it's blatant, even the government will occasionally step in... especially when it's an election year and some politicians are looking for a little more campaign contributions from deep pockets.

You are a perfect example of the short-sightedness. All of this led to Amazon being removed as the only real force in e-books which would have and again might mean massive surcharges for years to come.

People seemingly want to ignore this for some reason, and I am not sure why. Amazon had zero intentions of selling books below cost forever. Their practices were designed to prevent competition from the beginning. Ebooks simply never got big enough before Apple got into it for them to enact their plan to screw consumers badly.

Continue to play into Amazon's plans though...

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Exactly. Well said.

Simple logic here folks. Before Apple got involved, I paid $9.99 to Amazon all the time. INSTANTLY, after Apple got involved I pay $13, $15, or more. The cause and effect could not be more clear and had NOTHING to do with any kind of market forces. Markets move more randomly than this. This was clearly orchestrated by someone.

Hmmm, now which deceased mogul could have the influence to move the market players so simultaneously and precisely? That's a quandary...

This is the legal equivalent of "duck typing" in programming. Look it up.

You are simply ignorant. Amazon was the ONLY real source of ebooks before Apple got involved. The publishers did not like what Amazon was doing but they had no choice.

This same position Amazon held would later be used for Amazon to then charge $25 per book once they totally had the market cornered and the market matured. It is naive to think that was not the plan.

So feel free to blame Apple for the prices going up but thank them from unleashing your binds as a pawn in Amazon's little game.

It is too easy to fool some people. You were simply tricked so easily.

 

[EbookReader]

It doesn't, it says apple gets to have the exact same sale.

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which basically mean booksellers can't discount some of their 30% even if they want to because of the "apple - the exact same retail price" clause.


Apple: $14.99 (keep 30%)
Nook: $14.99 (keep 30%)
Amazon: $14.99 (keep 30%)
GooglePlay: $14.99 (keep 30%)

is the same thing as

Apple: $14.99 (keep 30%) - can't discount even if the bookseller want to
Nook: $14.99 (keep 30%) - can't discount even if the bookseller want to
Amazon: $14.99 (keep 30%) - can't discount even if the bookseller want to
GooglePlay: $14.99 (keep 30%) - can't discount even if the bookseller want to

The language is different but the FINAL RESULT is the same. Which in effect eliminated price competition among bookstores.

Imagine if there is no price competition between all retailers for things like groceries, gas, tv, computer etc....

or digital music (aka Amazon MP3 / GooglePlay can't price lower than Itunes).

 

[marksman]

Is Walmart a most favored nation? I think so, if an item is to expensive they just remove it from there stores, i don't see a difference with Apple policy exept that Apple's is in writing and Walmart is in practice.

That is a good point. In a previous life I was a retail buyer. If we could not get terms on an item that allowed us to sell it for the lowest price in our market we did not carry it. Apple could take that attitude with each and every book and if they are not sold at a cost they like they will not carry it. In this case that cost would be so they could make their margins and match Amazon.

Of course this would just play into Amazon's plan to takeover ebooks. `

The bottom line though is manufacturers are allowed to set minimum retail prices, and retailers are allowed to refuse to sell items that they don't feel are being sold/priced for them in line with other retailers.

The charges seem to say if they acted in concert to do this they are wrong. I am not sure if doing a bunch of legal things in some sort of concert would meet a violation of the law or not.