The curious case of e-book price fixing

Canadian book lovers are constantly complaining that the cost of hardcover books is more in this country than in the U.S. despite the fact that the Canadian dollars is basically at par with the U.S. greenback.

A recently released court document will only add fuel to this fire. You can read the entire document by clicking here.

The U.S. government has sided with monopoly rather than competition in bringing a case of e-book price-fixing against Apple, (Nasdaq: AAPL)the company said in a filing on Tuesday before a federal court.

The Department of Justice filed in April an antitrust lawsuit against Apple and five large publishers, accusing the companies of working together to raise prices of e-books, in retaliation for competitor pricing most e-books at US$9.99 beginning in late 2007.

Three publishers – Hachette Book Group, HarperCollins and Simon & Schuster – agreed to settle the lawsuit, the DOJ said.

Apple’s reply to the court is in line with a statement issued by Apple in April after the DOJ filed its case, in which it said that “the launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry.” The company added: “Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.”

The government’s complaint does not allege that all e-book prices, or even most e-book prices, increased after Apple entered the market, the company said in the filing before the U.S. District Court for the Southern District of New York. Apple had in fact no interest in seeing price increases, it said.

The government’s complaint against Apple is fundamentally “flawed as a matter of fact and law,” Apple said. The company said it has not conspired with anyone, was not aware of any alleged conspiracy by others, and never fixed prices.

At the time Apple entered the market, Amazon sold nearly nine out of every ten e-books, and its power over price and product selection was nearly absolute, Apple has stated. The company’s entry helped grow the number of e-book titles, the range and variety of offerings, sales, and improved the quality of the e-book reading experience.

Instead the government focuses on increased prices for a handful of book titles, Apple said.

Apple offered any publisher interested in the iPad platform and its iBookstore the ability to sell its e-books directly to consumers, rather than dealing only with a single dominant buyer, Amazon, it said.

One of Amazon’s most successful marketing strategies was to lower substantially the prices of newly released and best-selling e-books to $9.99, a price that the defendant publishers saw as a challenge to their traditional business model, according to the DOJ lawsuit.

The defendant publishers feared that lower retail prices for e-books would result in consequences such as lower wholesale prices of e-books and lower prices for print books. The publishers wanted higher retail e-book prices across the industry before the $9.99 price became an “entrenched consumer expectation,” the DOJ said. The publishers then allegedly teamed up with Apple to push up e-book prices.

Apple in its reply has denied conspiring with the publishers or of having or sharing a goal of restraining price competition as alleged by the DOJ.

The DOJ’s lawsuit alleged that the late Steve Jobs, then Apple’s CEO, approved of a new pricing model that would raise the price of e-books. “We’ll go to [an] agency model, where you set the price, and we get our 30 per cent, and yes, the customer pays a little more, but that’s what you want anyway,” he is quoted in court papers as describing his company’s strategy for negotiating with the publishers.

“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,” Jobs wrote to one publishing executive during pricing discussions, according to the DOJ lawsuit.

In early 2010, the defendant publishers agreed to shift to a new pricing model called the agency model, where they set the prices for e-books, instead of retailers, the DOJ alleged. In an agreement with Apple, all new books would be priced at $12.99 to $16.99, according to the DOJ. Retailers lost their ability to compete on price and millions of e-books that may have been sold at $9.99 or lower were now sold at higher prices, DOJ said.

In its reply, Apple said that without the agency agreements, it would not have entered e-book distribution, given the circumstances of the business as it existed prior to its entry. It had already used the agency model in its App Store, including in sales of books through the store before the iBookstore was set up. But it did not seek to limit e-book retail price competition, did not reach an agreement to cause retail price competition to “cease” and did not agree that “retail eBook prices would increase significantly,” it said in the filing.

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Jim Love, Chief Content Officer, IT World Canada

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