U.S. Government Warns Apple and Publishers of Antitrust Lawsuit over e-Book Pricing

[sw1tcher]

Actually I believe it's called a most favored nation clause, which last time I checked was quite legal, and used in many industries.

Yes, it's legal. But not when there's also a condition on what the pricing can be.

A most favored nation clause is a contract provision in which a licensor agrees to give the licensee the best terms it makes available to any other licensee.

Let's say a licensor agrees to license rights to make sprockets to Company X for $70. The most favored nation clause would means that the licensor has to also license the rights to make sprockets to Company Y, Company Z, etc.. for $70. Nowhere does is say that Company X has to sell it for $100 and Company Y cannot sell it for less than $100.

Doing so is price fixing and runs afoul of anti-trust laws which is designed to promote free market competition.

 

[Hawkeye16]

Personally I think collusion should only warrant interaction when it is something of necessity.

eBooks are something you can get if you want, but you definitely don't NEED them. Let the free market do it's thing. If the price is too high, profits will sink and prices will lower until it hits an equilibrium.

If only the term "Free Market" didn't have such a bad rap, people might actually understand how it works...

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Let's say a licensor agrees to license rights to make sprockets to Company X for $70. The most favored nation clause would means that the licensor has to also license the rights to make sprockets to Company Y, Company Z, etc.. for $70. Nowhere does is say that Company X has to sell it for $100 and Company Y cannot sell it for less than $100.

Doing so is price fixing and runs afoul of anti-trust laws which is designed to promote free market competition.

I agree with this but from what I read it seemed like the publishers could not sell it to another company for less, but that company (say Amazon) could sell the product for whatever they want. It also said Amazon had sold books for a loss before to just attract people to it's other services as well.

 

[daxomni]

This isn't good! The government should not dictate what a company charges for it's products/services. If you are dissatisfied with Apple's pricing, you should buy your e-books from Amazon! If they overcharge, use Kobo or Barnes and Noble. If they overcharge, refuse to buy e-books until the pricing goes down. It's called the free market.

A free market is what Nigeria has. Is that really what you want? Personally I'd like regulated market that forbids contract clauses expressly preventing any price-based competition from other retailers.

 

[IJ Reilly]

In terms of sizes, on-demand printing offer wide range, eg CreateSpace offers 15 sizes including 12 industry standard sizes. Plenty. In terms of quality, I agree, offset is better but most consumers would not know the difference.

The disadvantage of offset printing is no options to make quick updates. Another one is that you'd have to deal with finding printer, negotiating price, checking quality, invoicing, warehouse storage and shipping. In on-demand scenario you just upload your PDF and you are done.

You're done, all right -- totally hosed! Seriously, I don't know anyone who's made any money publishing on-demand and I know several who've tried. The results look cheap, generic and non-professional. This method is just one half-step up from pure vanity publishing, and maybe not even that much, since the author has even less control over the results.

Offset, as far as I am concerned, is how real books are printed. All the issues you list are real (I know first hand), but worth addressing if you really take any pride in your work, and have any confidence that someone will want to buy it. I'm happy I took the time and made the effort. It sure wasn't easier, but the results are far better -- and I made results a primary criterion. I also made more money.

 

[DerekIvy]

Ebook prices

Such price agreements, as Apple is being criticized for placing in their ebook contracts, is common in government contracting. Many products that we purchase, which are also sold to the government, have a minimum price that is determined by government agreement. The government negotiates these prices and insists that vendor not sell product to anyone else for a lower price. For instance, I once wanted to purchase some round molded plastic tables from the manufacturer and was informed that they couldn't negotiate below a certain price because that was the minimum published federal price. The manufacturer could sell at a lower price point to me, but then they would have to lower their prices in all government contracts as well.

The person that sets the ebook price is the publisher not Apple. Apple is just trying to be sure they don't get locked into a mult-year deal at a price that's higher than what their competitors might be paying. No one knows what an ebook costs and what it is worth. The market will decide that and it will change with time and consumer demand. Apple just wants a level playing field for all its competitors with regards to basic product pricing. It used to be that manufacturers would sign up for multiyear contracts on a specific volume of parts (such as RAM chips) at a specified price in order to insure their supply. The downside though, was that new production would come on line and lower the market price of the part and the manufacturer would be stuck paying over-market prices for these parts, which would impact the salability of his consumer product. Hence the importance to a company like Apple of a contract clause which allows the price charged to reflect the market. The price can go down to Apple, but by agreement it can't rise and so negatively affect their profitability and the retail pricing structure of their ebook marketplace. So the vendor takes into account the risks of this clause, and his own costs and profitability goals and sets his goal for product price. Apple uses its size, distribution approach, and marketing savy to attempt to drive the price down. And they meet somewhere in the middle. The market will then decide whether the negotiated price point is acceptable. If someone doesn't want to pay $15 for an ebook then they don't have to buy it. If they do then they are telling Apple that relative to other uses of $15 they find ebook purchases to be a proper use of their money. Of course we never want to pay more than we have to for anything and if we back this up by our purchases then either the market will disappear, or the vendor prices will fall, and Apple prices will fall as they see new competition and their business erode.

Distinct from iPads, there isn't much that distinguishes one book from another. Probably just size (amount of effort in digitizing, storing and downloading), popular appeal, and author/middleman commissions. This is a new market place, not exactly the same as iTunes, and I think we will have to see how things play out.

 

[BC2009]

Nobody investigating Amazon for its "dumping" practices? That clearly falls under anti-trust law as well. Microsoft got nailed for it years ago by giving away a free copy of Microsoft Money with Windows in order to force Quicken out of the market.

Amazon dumps tablets and eBooks to push other content.

Apple at least makes a profit on all segments of their business.

 

[rjohnstone]

Nobody investigating Amazon for its "dumping" practices? That clearly falls under anti-trust law as well. Microsoft got nailed for it years ago by giving away a free copy of Microsoft Money with Windows in order to force Quicken out of the market.

Amazon dumps tablets and eBooks to push other content.

Apple at least makes a profit on all segments of their business.

MS got busted for bundling, not dumping.
There's a difference.

Amazon makes a few bucks on each of their tablets. They just don't price them at 400+% manufacturing markup like Apple does.

Selling something at cost or even below cost is not illegal.

 

[sw1tcher]

Personally I think collusion should only warrant interaction when it is something of necessity.

eBooks are something you can get if you want, but you definitely don't NEED them.

True.

So if oil companies colluded to fix gas prices, nothing should be done because we technically don't need gas. We can always walk, ride a bike, etc.

There are a lot of things in this world that we don't "need." The problem is that price fixing prohibits fair competition and hurts consumers.

I agree with this but from what I read it seemed like the publishers could not sell it to another company for less, but that company (say Amazon) could sell the product for whatever they want. It also said Amazon had sold books for a loss before to just attract people to it's other services as well.

It's not that the publishers could not sell it to another company for less. With the Agency model, a retailer has to sell the eBook for $Y and nothing less (or more, from my understanding). This ensures that the publisher always gets 70% of $Y and the retailer gets the remaining 30%.

But what if the retailer decided, "Hey, the economy is still bad and lots of people are either underemployed or unemployed. Many have probably gone back to school to be more competitive in the job market, but paying $Y may be more than they can bear or afford right now. Let's sell them for $5 less than $Y to help them out." Nope. Sorry. Can't do that under the Agency model.

Since moving to the Agency model, publishers have told competing retailers (like Amazon) that if they didn't agree to the Agency model they wouldn't get the eBooks.

Here's what Steve Jobs said in his book:

"We told the publishers, 'We'll go to 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.'

and when referring to the publishers and Amazon:

"They went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.' "

--------------------

Nobody investigating Amazon for its "dumping" practices? That clearly falls under anti-trust law as well. Microsoft got nailed for it years ago by giving away a free copy of Microsoft Money with Windows in order to force Quicken out of the market.

Amazon dumps tablets and eBooks to push other content.

I don't see Amazon dumping (giving away for free) their tablets and eBooks like Microsoft dumped (gave away for free) Microsoft Money.

When a retailer sells something for less than cost, it's considered a loss leader.

Loss leader:

A loss leader is a product sold at a low price (at cost or below cost) to stimulate other profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. A loss leader is often a popular article.

One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.

Loss Lead describes the concept that an item is offered for sale at a reduced price and is intended to lead to the subsequent sale of other items, the sales of which will be made in greater numbers, or greater profits, or both.

If you have children, you'll see this time and time again during the back-to-school season. A certain office supply chain will sell, for example, a pack of pencils for $0.01 to draw customers into the store in hopes that they'll also pick up pens, erasers, binders, a backpack, etc.. that carries a profit for the company.

 

[saturn88]

You're done, all right -- totally hosed! Seriously, I don't know anyone who's made any money publishing on-demand and I know several who've tried. The results look cheap, generic and non-professional. This method is just one half-step up from pure vanity publishing, and maybe not even that much, since the author has even less control over the results.

Well, you'd be surprised and "totally hosed" . The current best selling HTML5 book is self-published digitally on-demand via CreateSpace. I don't want to mention names or place links here, but you can check yourself the Sales Rank Express site. This self-published author sells more books vs. similar books published by major publishing houses such as New Riders, O'Reilly Media or Peach Pit Press.

I am another example. I did not get rich but I sell enough so my self-published book royalties cover my monthly mortgage payments. I wrote my digital photography book for other reasons then profit and I really did not expect making even this kind of money. And I just got this offer to sell reprint rights to one Asian country.

Digital printing gets better these days especially if you just need B&W printing, while design quality vary even for major publishers - I just bought this pretty crappy looking book by Focal Press.

 

[winston1236]

Sounds feasible to me, I know for a fact when I check e-book vs hardcopy prices I've found e-books to be much more expensive on numerous occasions. This doesn't make sense from a printing and delivery standpoint, and makes me believe these companies are trying to take advantage of the hype and popularity behind ebooks as a new technology. I hope they come down hard on Apple and Publishers if it's true, ripping off customers should not be a business model for any company. No sympathy for greed.

of course they are thats the american way, charge as much as you possibly can not what it cost you to make >.<

 

[MacDav]

Success is corrupting Apple.

I just bought an ebook for $17.95 and thought to myself..."WTF am I doing".
"This is way to high". However, I wanted to have it on my iPad to read whenever and wherever. Then I thought... "you can do the same thing with a real book". Then I thought... "but then you'd have to carry your iPad and a real book around". So I went with the iPad and spent the money. Still it didn't feel right when I know it costs them pennies for digital delivery. Power corrupts and right now Apple is all powerful.

 

[Rennir]

I understand what Apple is trying to do, and it doesn't seem that bad to me. They just don't want to get ripped off. But isn't that Apple's responsibility to make sure that they get the best deal possible? They're the ones responsible for negotiating what price publishers will offer their books in the iBookStore. If those publishers offer it for a cheaper price elsewhere, isn't it Apple's fault for being too easy during negotiations? It doesn't seem to me like a publisher has any obligation to offer the same price to everyone. They should offer the price that each company/negotiator is willing to pay. If it turns out that Apple is willing to pay more, then so be it.

 

[gnasher729]

How is that not price fixing? Apple sells a certain eBook for $14.99. Another retailer wants to sell that very same eBook for $9.99, but they can't since Apple "specified that publishers could not let rival retailers sell the same book at a lower price."

Look at it this way: Apple agrees with the publisher to sell the book for $14.99. For some reason the same publisher than makes an agreement to sell through Amazon for $9.99. Apple won't sell much. People who pay $14.99 and then find out they could have bought the same book for $9.99 at Amazon will be very unhappy and angry with Apple. So what would you expect Apple to do? I would expect them to stop selling the book for $14.99, and since they can't sell it for $9.99, they are not going to sell it at all.

 

[Rodimus Prime]

Look at it this way: Apple agrees with the publisher to sell the book for $14.99. For some reason the same publisher than makes an agreement to sell through Amazon for $9.99. Apple won't sell much. People who pay $14.99 and then find out they could have bought the same book for $9.99 at Amazon will be very unhappy and angry with Apple. So what would you expect Apple to do? I would expect them to stop selling the book for $14.99, and since they can't sell it for $9.99, they are not going to sell it at all.

It more of a problem with the agency model in general mixed with Apple demanding to have either have or match the lowest price.

If Apple was buying the books a whole sell price which would allow Apple to control the price they sell the books at. The current agreements prevent that from happening.

The reason this is going on is why Apple is named is from Apple entering the market prices have gone up for ebooks not down. Now it is not directly Apple's fault but they did change it from a whole sell industry to an agency industry which allowed the publishers to do the antitrust.

Hopefully the DOJ expands this and goes after the textbook industry as well for the same crap and working together to raise prices. In the early 2000's the record industry got busted in antitrust for raising the prices of CD's. Prices over night dropped by around 50%.

 

[mdriftmeyer]

Personally I think collusion should only warrant interaction when it is something of necessity.

eBooks are something you can get if you want, but you definitely don't NEED them. Let the free market do it's thing. If the price is too high, profits will sink and prices will lower until it hits an equilibrium.

If only the term "Free Market" didn't have such a bad rap, people might actually understand how it works...

----------



I agree with this but from what I read it seemed like the publishers could not sell it to another company for less, but that company (say Amazon) could sell the product for whatever they want. It also said Amazon had sold books for a loss before to just attract people to it's other services as well.

A. A Free Market does not exist
B. A Free Market requires a level field of regulations/standards for all players
C. A Free Market requires a referee [Government] when players violate said regulations/standards.
D. A Free Market cannot exist in a world of Oligopolies.
E. Deregulation creates closed regional monopolies [Ma Bell]

 

[IJ Reilly]

Well, you'd be surprised and "totally hosed" . The current best selling HTML5 book is self-published digitally on-demand via CreateSpace. I don't want to mention names or place links here, but you can check yourself the Sales Rank Express site. This self-published author sells more books vs. similar books published by major publishing houses such as New Riders, O'Reilly Media or Peach Pit Press.

I am another example. I did not get rich but I sell enough so my self-published book royalties cover my monthly mortgage payments. I wrote my digital photography book for other reasons then profit and I really did not expect making even this kind of money. And I just got this offer to sell reprint rights to one Asian country.

Digital printing gets better these days especially if you just need B&W printing, while design quality vary even for major publishers - I just bought this pretty crappy looking book by Focal Press.

Now I know someone who made money with on-demand! I suspect you are few and far between. Most of the stuff coming out of these printers is pure vanity publishing with a new high-tech name.

In your case, have you gone back and figured out how much you'd have made if you'd had the book conventionally printed? Yes, it requires more work, but wouldn't it have been worth it?

Sure, design can be bad no matter where you go. I was kind of a control freak with my book. For better or worse I wanted to write, design, publish, and distribute it. Learned a lot, knowledge that can be applied to the next time.

 

[jayhalleaux]

Let's say a licensor agrees to license rights to make sprockets to Company X for $70. The most favored nation clause would means that the licensor has to also license the rights to make sprockets to Company Y, Company Z, etc.. for $70. Nowhere does is say that Company X has to sell it for $100 and Company Y cannot sell it for less than $100.

I agree with what you are saying but with some caveats. Firstly, let agree that Amazon & Apple both charge 30% or the cost of the book. (Prior to Apple entering the market, I believe Amazon charged around 70% so I would not exactly call them the saviors of the content holders). Secondly, the MFN clause would give Apple the ability to make sure that their customers are getting a matching price for the ebooks, compared to Amazon. Now the reason we have higher prices is inherent to the agency model. If publishers are able to set higher prices then the books cost more. I would say this problem has more to the publishers than who is delivering the product.

Granted, Amazon was able to lower ebook prices because they were the only store in town. Once Apple entered the mix and offered publishers access to direct, non-discounted pricing, the publishers forced Amazon to use a similar pricing scheme because Amazon no longer had leverage on them.

I guess the question is who should say what price ebooks should be sold at? People preferred the $10 price point set by Amazon, but the publishers wanted a price around $12-13 (sometimes more). Due to being the new kid on the block, Apple said OK to the publishers. iTunes initially set the 99 cent price point for songs but capitulated to $1.29 for popular songs due to pressure from the music industry. I'm not seeing anyone saying price-fixing there.

 

[3282868]

Look at it this way: Apple agrees with the publisher to sell the book for $14.99. For some reason the same publisher than makes an agreement to sell through Amazon for $9.99. Apple won't sell much. People who pay $14.99 and then find out they could have bought the same book for $9.99 at Amazon will be very unhappy and angry with Apple. So what would you expect Apple to do? I would expect them to stop selling the book for $14.99, and since they can't sell it for $9.99, they are not going to sell it at all.

Yet this is how the "free market" works in other industries. In example, appliances. BestBuy and Sears have different prices and/or offer company specific "discounts" to attract buyers to the same merchandise (may it be better service plans or discount(s) using their credit cards).

This relates in that Sears and BestBuy aren't working together in order to keep company A and B's merchandise at the same price point and/or exclusive to their store (in general). Consumers are free to pick which company to by product A from at a different, competitive price. This system will not be held if the agreement between Apple and major publishing houses is held.

This is tantamount to what certain power companies did not long ago. Two competing power companies got together and decided on raising their kw/hour. There was no legitimate reason such as a shortage of resources or overloaded grid(s), it was simple greed. Both power companies raise their price of electricity (a necessity, yes, but none the less a prime example), and use excuse A or B as feigned justification. This rule also applies to the oil and gas industry, which have a heyday in raising gas prices due to "speculation" or "uncertainty" in the Middle East (years later we learn that Katrina didn't impact oil prices and refineries, but rather future traders and CEO's decided on doubling the price on crude in ONE day, making billions for the oil and gas industry and millions for traders).

Basic principle: when the parents are away the children will play. The free market is a concept, and like other systems is flawed and requires an objective third party to regulate companies. Further, now that companies have been ruled "a person" by our Supreme Court, many are lobbying to ensure all applicable laws are properly set in motion for said industry. If companies can now give unlimited funds to any political group or organization as a private entity, they should be treated through and through as a private entity, subject to the same laws, regulations and taxes. This is a major contention I take with the private sect, especially the privatization of the prison system in California which has lead to the over crowding system (more prisoners = more money for the companies paid by state).

All these examples simply lead to the conclusion that regulation and laws must be enforced.

 

[saturn88]

Now I know someone who made money with on-demand! I suspect you are few and far between. Most of the stuff coming out of these printers is pure vanity publishing with a new high-tech name.

In your case, have you gone back and figured out how much you'd have made if you'd had the book conventionally printed? Yes, it requires more work, but wouldn't it have been worth it?

Big publishers have a lot of failed books too.

I am quite happy about printing quality. The laminated cover is flawless. And to me the design is actually more important then printing quality.

Yes I know that offset costs less but I can't really calculate the difference since it takes a leg work to compare various offset printers to get quotes, paper and printing samples. Offset printing quality/cost vary much more then digital printing.

But actual printing cost is only one variable. Book printed offset has much longer time to the market. Even the writing process for offset takes longer. And time is money, especially if I write about software or technology which is constantly evolving. But once the book is out there and stable I actually could go ahead and look into offset reprint, if I don't mind dealing with printers and inventory.

 

[guerro]

Here's an idea. Why doesn't the US Govt go f uck itself. Sick and tired of the Govt.

 

[sw1tcher]

Look at it this way: Apple agrees with the publisher to sell the book for $14.99. For some reason the same publisher than makes an agreement to sell through Amazon for $9.99. Apple won't sell much. People who pay $14.99 and then find out they could have bought the same book for $9.99 at Amazon will be very unhappy and angry with Apple. So what would you expect Apple to do? I would expect them to stop selling the book for $14.99, and since they can't sell it for $9.99, they are not going to sell it at all.

That's not what's happening though.

Before, with the wholesale model, a publisher and a company (Company A) negotiates a price that the company will pay to get the book for. Company B does the same thing. Company C does the same thing. The price Company A, Company B, Company C, etc. paid the publisher for the book could all be different or the same.

These companies were now free to sell the book for whatever price they felt will generate sales, be profitable, etc. It could have been more than the negotiated price or it could have been less than the negotiated price. Regardless of the selling price, the publisher still got paid. But publishers didn't like this wholesale model because

- they felt that if a company sold a book for less than the negotiated price, it devalued the book or made the book look like it wasn't any good (a flop).

- the publisher couldn't always negotiate a better price in their favor, especially if a company had selling and pricing power.

Apple didn't like the wholesale model because they couldn't (and likely didn't want to) compete with Amazon, Barnes & Noble, et al on price since Amazon, Barnes & Noble, et al have been in the book selling business a lot longer than Apple and thus have a larger customer base. This gives Amazon, Barnes & Noble, etc. pricing power. As a result, Amazon, Barnes & Noble, etc. are all able to negotiate a lower price than what Apple can get the book from the publisher for. Apple didn't like this because it would affect their profit margins.


Enter the Agency model. The publisher offers a book to Company A, Company B, Company C, etc. for $X; $X is the same for everyone. Those companies now must sell the book for $Y. $X is 70% of whatever $Y is.

But if the publisher is still getting their 70% cut ($X), then why should a company be prevented from selling the book at whatever price they see fit? This is the problem. It's price fixing.

Apple created this Agency model so that Apple didn't have to compete on pricing. Apple saw that they couldn't compete with Amazon, Barnes & Noble, et al on price so Apple came up with this Agency model. Plus, Apple wanted to be guaranteed a 30% cut of the selling price; Nice and consistent profit margin there.

Let's say this happened with a physical book and not an eBook. Say a publisher offers a book to Company A, Company B, Company C, etc. for $X and those companies have to sell the book for $Y, but the book turns out to be a total flop. How are these companies suppose to get rid of the books if they're not allowed to mark them down below $Y? Who wants to be stuck with inventory that doesn't sell? When a item doesn't sell well, a company puts that item on clearance to move it out. But because this is a digital copy and there's no physical inventory, the publishers think it's okay.


Interestingly, we don't see Apple complaining about how unfair it is that other tablet manufacturers have to pay more for their touch screens than Apple does. Since Apple has selling power with the iPad, Apple's able to negotiate a more favorable price for the touch screens than their competitors. Why isn't Apple pushing for a fair pricing model on tablet parts like they did with eBooks? As long as something benefits Apple, it must be okay.

 

[walie]

You seem to be operating under a fundamental misunderstanding of the situation.

Apple doesn't sell the book at $15. The publisher sets the price. Apple's requirement is that if the publisher sets the price at $10 elsewhere, they have to set it at $10 on the iBookstore as well.

This is not price fixing, which is a term used to describe collusion to keep prices high. This is a requirement that a given price be the lowest, always. This results in lower prices.

um, no, you have it backwards. Apple mandated that if the publishers want to put a book for sale in ibooks, then they have to sell it at a price with 30% going to Apple, and the book in question isn't allowed to be sold at a lesser price anywhere outside itunes

 

[doctor-don]

Agreed that I am not a fan of government interference, but then again ... it is also a function of the government to keep a free market. If there was collusion to force others to raise their prices, then that is a place where the government has a rightful claim for interference.

And I'm still waiting for the government to step in concerning the collusion of the oil companies and the price the consumers have to pay at the pump.

 

[doctor-don]

Personally I think collusion should only warrant interaction when it is something of necessity.

eBooks are something you can get if you want, but you definitely don't NEED them. Let the free market do it's thing. If the price is too high, profits will sink and prices will lower until it hits an equilibrium.

If only the term "Free Market" didn't have such a bad rap, people might actually understand how it works...

----------



I agree with this but from what I read it seemed like the publishers could not sell it to another company for less, but that company (say Amazon) could sell the product for whatever they want. It also said Amazon had sold books for a loss before to just attract people to it's other services as well.

If you are a student who is required to buy an eBook for a class, then you would not appreciate having to pay as much as or more than the printed version. This would be my worry if the government did not pursue antitrust lawsuits.

 

[Lochias]

The problem is truth

The activity that the publishers are involved in IS allegedly illegal, so I don't see what your problem is.

The problem is that the claim is false in that it goes against established law (in the US, anyway, as of 2007). Price-fixing is illegal between competing companies, not between manufacturer and retailer, which can enter into any price split they choose.

http://www.law.cornell.edu/supct/html/06-480.ZS.html

Apple has chosen not to buy and then resell books, but to act as agent, getting a cut based on a price set by the publisher.

Publisher can, should, and do set their own prices. Any other publisher can and should compete as they think best, at whatever prices they choose. That is not what is at issue here.