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

ibooks iconEarlier 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

neiltc13 Avatar
136 months ago
This is opinion posted with a title that suggests it is fact. I expect better from MR.
Score: 23 Votes (Like | Disagree)
Krevnik Avatar
136 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.
Score: 11 Votes (Like | Disagree)
badtzwang Avatar
136 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?
Score: 10 Votes (Like | Disagree)
MhzDoesMatter Avatar
136 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?
Score: 7 Votes (Like | Disagree)
Small White Car Avatar
136 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.
Score: 7 Votes (Like | Disagree)
linuxcooldude Avatar
136 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?
Score: 6 Votes (Like | Disagree)

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