US prosecutors have pointed the finger at Apple as the ringleader in alleged price-fixing in the electronic book market. The comments come in a court memo ahead of a scheduled trial next month.
The long-running saga is based around two rival pricing structures. Traditionally printed books involve the publisher setting a wholesale price and then the retailer deciding how much to charge the buyer (and in turn how much profit or even loss to take.)
On the one hand, such a model creates an incentive for retailers to compete on price. On the other hand, it allows larger booksellers to set prices where they take very low profit margins or even a loss in order to attract customers to their (physical or virtual) stores, something smaller rivals can’t do.
Amazon had initially decided to use this “wholesale model” for electronic titles. However, both Apple and publishers were much keener on the “agency model” in which the publisher sets the price and then the retailer takes a fixed percentage before passing on the rest to the publisher.
This effectively gives publishers more power to control prices and avoid consumers being able to shop around. What competition does exist comes in the percentage retailers offer publishers.
The Department of Justice alleged that Apple and five major publishers acted unlawfully in working together to promote the agency model. The claim is that the firms conspired to threaten to stop dealing with Amazon unless it adopted that pricing structure (which it did.) The DoJ says this threat was timed for maximum impact by coming right as Apple was about to launch its own e-book store, the implication being the publishers would give Apple a tremendous advantage in setting up as a rival to Amazon.
Over the past year the publishers have, one-by-one, all agreed to settle the case without formally admitting legal wrongdoing. The settlements mean the companies can’t use the agency model for any new deals until 2015; during that time they are also barred from guaranteeing a particular retailer won’t be undercut. They’ve also agreed to strike individual deals with publishers rather than have standard terms from which they won’t waver.
Apple has continued to hold out and that part of the case is now scheduled for trial on June 3. So far it had appeared it would be a difficult case as, although Apple clearly benefited from the alleged collusion, there didn’t seem any clear signs it was responsible for any wrongdoing.
Now the DoJ believes it has hard evidence. It’s produced an e-mail from Steve Jobs to James Murdoch of News Corporation, parent company of HarperCollins, reading “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” — something prosecutors believe is evidence of price-fixing.
Another e-mail, from an Apple executive to Jobs, appears to be an admission that Apple pressured Random House (which wasn’t part of the alleged collusion) into signing up to the agency model. The message takes credit for Random House coming on board and says it was partly because of “the fact that I prevented an app from Random House from going live in the app store.”
Prosecutors also say they’ve got a statement from the former head of Random House specifically suggesting threatening to withdraw its electronic books from Amazon unless it also adopted the agency model.
Apple continues to deny the allegations, issuing a statement reading ” The market has been thriving and innovating since Apple’s entry, and we look forward to going to trial to defend ourselves and move forward.”