Saturday, January 14, 2012

Is Apple forcing customers to pay more for e-books? - Global developments in the alleged e-book price-fixing case (Article)

By Pola Karolczyk, Attorney at law, LL.M. candidate

European investigations 

On December 6, 2011 the European Commission announced that it opened formal proceedings to examine whether five major international publishers (Hachette Livre (Lagardère Publishing, France), Harper Collins (News Corp., USA), Simon & Schuster (CBS Corp., USA), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of inter alia Macmillan, Germany) have engaged in anti-competitive practices with regard to the sale of e-books in the European Union.

The European Commission’s formal investigation was preceded by dawn raids conducted in March 2011 at various headquarters of publishers located in certain EU member states. The European Commission has also taken over the investigation conducted by the British Office of Fair Trading (“OFT”). An investigation that was originally started as a result of numerous complaints, but ultimately closed in order to cede leadership of the investigation to the European Commission.

Official press releases on the European Commission’s and OFT’s website concerning this case offer very limited information as to the actual nature of the alleged infringement and the role of Apple in the scheme. The European Commission indicates only that the proceeding will focus on agency agreements made by publishers and gives no explanation of Apple’s involvement in the case. The OFT website provides even more limited guidance, indicating only that the proceedings were closed at a stage where there were no conclusive determinations to be made.

However, fortunately for those who are eager to learn more about the alleged e-book pricing scheme between publishers and Apple, the case has also attracted attention in the US and led to at least one lawsuit filed on August 9, 2011 in U.S. District Court in Northern California. Since all the publishers named as defendants in the Northern Californian lawsuit are also subject to the European Commission’s investigation, it is likely that the publishers will face similar allegations in the proceedings before the European Commission. 

American developments

The Northern California lawsuit has been filed by a number of individuals as a part of a class action against Apple and five leading American publishers - Hachette Book Group, Inc., HarperCollins Publishers, Inc, Macmillan Publishers, Inc., Penguin Group (USA) Inc. and Simon & Schuster, Inc. The complaint alleges that the five leading publishers colluded with Apple to increase prices of e-books. 

According to the complaint, the purpose of the price-fixing scheme was to force Amazon to abandon its new e-books pricing policy under which all e-books were offered at a price of $ 9.99. New pricing policy intended to drive the adoption of Amazon’s revolutionary e-book reader – Kindle – which was introduced in November 2007. Amazon’s strategy relied on the assumption that some of the e-books will be sold below their purchase cost but the losses will be recouped by increased sales of Kindle.

As the complaint explains, the Amazon’s successful launch of e-books reading platform was perceived as a threat by both, major publishers and Apple. Publishers allegedly feared that ultra-competitive prices of e-books are going to undermine established pricing schemes for printed books and eventually encourage customers to switch to e-books that are priced at a lower margin. At the same time Apple was concerned that Amazon’s Kindle will emerge into a multimedia platform able to compete with Apple’s products. In addition, strong position of Amazon on the market for e-books reduced Apple’s chances for a successful entry into this market (customers will be already accustomed to the Amazon’s e-book reader). 

The complaint presents a theory according to which the leading publishers and Apple stroke a deal which addressed equally publishers’ and Apple’s concerns. At the time of introduction of iPad, Apple concluded agreements with five leading American publishers to sell their e-books through its eBook store only on the basis of the so-called “agency model”. Contrary to the previously existing wholesale model, the agency model assumed that the e-books’ retail price will be determined by the publishers and no longer controlled at the retail level. This mechanism aimed at preserving publishers’ high margins on e-books – and as a natural consequence – also the high margins on the printed books. The new model was also beneficial for Apple because higher prices for e-books guaranteed that Apple’s intended investment in e-book market would pay off. 

The switch to a new model could be successful only if implemented by all the major publishers at the same time – and, as the complaint claims – this is exactly what happened. In addition, the publishers had to coerce Amazon to abandon competitive prices and conform to the new model. Allegedly, at least some of the publishers threatened that they will cease to distribute their titles through Amazon if the pricing scheme is not changed. Since Apple’s e-book store had already been launched at that time, the publishers had a potential alternative outlet for their e-books. 

All allegations formulated in the Northern Californian lawsuit have yet to be proven by the plaintiffs in the court proceedings as the lawsuit is still in its earlier stage in the US. Interestingly enough, however, the case will be proceeding simultaneously with the European Union investigation, a fact that has increasingly become a trend in cases involving American tech giants such as Apple or Google. Certainly Apple has attracted a lot of the European Commission’s attention in the past few years in the proceedings concerning iTunes (2008) and iPhone applications (2010), none of which however have resulted in any injunctive decision. The e-book case appears to be high on the European Commission’s priority list due to the fact that the spread of e-books in Europe is still limited. As the European Commission has indicated in its press release the case will be treated as a matter of priority. 

For further information please see the
EU memo




39 comments:

  1. Last year I did some research on this topic with a colleague, including the competitive concerns arising from both pricing schemes; here is the link for those that are interested:

    http://www20.gencat.cat/docs/economia/80_ACCO/Documents/Arxius/Tesines%20BGSE/09.competition_ebook_market.pdf

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