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

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.

Top Rated Comments

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76 months ago
This is opinion posted with a title that suggests it is fact. I expect better from MR.
Rating: 23 Votes
76 months ago

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?

The problem is that "screwing over the consumer" isn't always so cut and dry by checking who costs more. Especially when wholesale pricing allows Amazon to use newer titles and the kindle itself as loss leaders. It not only creates an unrealistic price expectation, but it tends to squeeze out players that can't afford to slash their own wrists in the game of price cut-throat. Amazon can fuel losses in Kindle sales from video games, furniture, TVs, peripherals, food, clothing, etc. B&N can't.

And what happens when Amazon does get themselves setup as the 'de-facto e-book source' under their model? Do those loss leaders go away? What keeps them going? Prices on older books that just never seem to get lower because Amazon needs the margins? Which is worse? Higher initial prices or higher final prices?

The PC OEM market has effectively commoditized themselves doing stuff like this. Look at how slowly the survivors (Dell and HP) are able to respond to the move to mobile devices and slates. Look at the fact that Intel had to do a big chunk of the R&D to bring ultrabooks to Apple's competitors. Perhaps the e-book market needs to be commoditized as well, but not around a single retailer with vertical integration lock-in.
Rating: 11 Votes
76 months ago

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?
Rating: 10 Votes
76 months ago
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.
Rating: 7 Votes
76 months ago

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?
Rating: 7 Votes
76 months ago
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.
Rating: 6 Votes
76 months ago

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."
Rating: 6 Votes
76 months ago

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?
Rating: 6 Votes
76 months ago

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.

This statement implies that Apple does this.
What product does Apple sell that's cheap?
I don't think Apple has ever sold a product below cost, in fact they are known for high margins. So...?


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?

When all competition is zapped and Kindle is the only place to get ebooks, are you so naive to think that the price would still be $9.99
Rating: 5 Votes
76 months ago

Do you have horse-blinder implants? Seriously you spell out what has happened that is illegal yet fail to notice its right in front of your face. OF COURSE Apple's Model forces prices to be the same, its about 99% of what the clause is, stating that you can not sell it for a LOWER PRICE than your selling it through APPLE, what more do you need to prove that's not fixing the price?

Here what you can't seem to open your eyes to, Apple is not a bookstore, so they don't purchase any books to sell they let you sell your book through there kiosk for 30% of the total, they watched Amazon choked them out of the ebook market the same way Apple is choking all the other tablet and phone mfgs out of there markets, by buying up all the available the available components, so Apple decided to try reverse that on Amazon buy having the 6 major publishing houses set higher prices and enforce Apple's Model as the only thing they could do because they contractually signed with Apple. You CAN'T DO THAT.

If Apple wants to buy a million copies of Harry Potter to bring the price down a couple bucks they're more than entitled to, but that sad fact is they're not buying any so they have no basis for setting the price for products they neither make, sell, or buy. If it were Apple published iBooks from iBookApple they could set the price all they want on the titles they have to offer, sadly not for everyone elses release.

Don't waste your time, he gets it perfectly well, and he knows what he's doing perfectly well. He lets the threads on this issue move along dodging the arguments he can't tackle by avoiding to reply and then dominates them with posting at the end so he can have the last word. If this guy doesn't have vested interests I am Obama.

I ll quote him for you from another thread, first bit os his reply to me, the second one is his intitial statement

Are you just being argumentative? Obviously, I was referring to the loss leader sales, not all sales.
There is a downside to competing on price alone. (Especially when the market leader is willing to lose money on each sale to drive out the competition.)

He claims now that the competition isn't eliminated it's just switched to publishers competing. But apple's competition isn't publishers, it's other booksellers (if apple with a mere store front and a standard 30% cut on everything can qualify as a bookseller that is). So apple very conveniently would like no competition from b&n, amazon or anyone else and a guaranteed 30% cut for doing close to nothing but maintaining a store front on existing shop infrastructure, with minimal bandwidth costs because it's ebooks, hence the SJ memo along the lines of the customer will pay a little bit more but that's what you want anyway, so through in with apple for $12.99 and $15.99 per book.

Because to begin with apple never wanted to have the extra hassle of functioning as a bookseller and managing a proper bookshop which would mean buying wholesale and then managing prices to be competitive with others across a line of book products. They don't know how to do that, they don't have the personnel or the infrastrure because they are not booksellers. Hence the app store model and the 30% cut and e collusion with publishers. But in the app store for that 30% they have to work to provide the coding tools, the environment, and at least a rudimentary checking of the app, and they cant request the app to not be cheaper elsewhere. In their bookstore they had some audacity to ask for 30%, and require no one should price lower.

At the end of the day the reading public has apple to thank for ebook prices rising considerably over the past few months...
Rating: 5 Votes

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