Ebook Price Fixing? Chapter 1: Feds File a Lawsuit
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The Fiscal Times
March 9, 2012

So, you’ve just finished watching Scarlett Johansson in the film version of “Girl with a Pearl Earring," and decide that you want to read the book by Tracey Chevalier on which it was based. You log on to Amazon.com and discover that while you can order a paperback copy for $10.20, downloading the book onto your Kindle – which means you only own the right to read it, not the book itself; you can’t lend it, give it away or resell it when you’re done – will cost you $12.99. How, you wonder, can you end up paying more for less? Then you spot the small print – “This price was set by the publisher."

The Justice Department also has been paying attention to that small print, it seems. Late yesterday, it warned Apple and five of the world’s biggest publishing companies that they’re about to be hit with a lawsuit. Simon & Shuster (owned by CBS), Hachette Book Group, Penguin (a division of Pearson PLC), Macmillan, and HarperCollins (owned by NewsCorp) are being asked to defend the “agency pricing” model that they agreed to with Apple when the latter launched its first iPad back in early 2010.

Until then, it was up to booksellers to set a price for the ebooks they sold, just as it was up to them to determine what prices to charge for the print editions. In practice, that meant that Barnes & Noble could decide what to charge a customer to load Tracey Chevalier’s novel onto a Nook, and Amazon could set its own price – perhaps the same, perhaps not.

Maybe it was Walter Isaacson’s bio of Steve Jobs that put the issue on the front burner at the Justice Department.

Nowadays, if you download an ebook onto any device, the price will be the same wherever you go, thanks to the stipulation by Apple that the publishers, in exchange for being allowed to set the price under which books were sold via iPad, agreed not to let any other retailers sell the book for less. When Amazon tried, some of those publishers simply yanked their books from Amazon’s site, making them unavailable for purchase.  (Barnes & Noble didn’t make as much fuss, largely because the company and its Nook reader has less market clout, and couldn’t afford to match the price cuts that Amazon was offering on Kindle books for Nook books.)

Maybe it was Walter Isaacson’s bio of Steve Jobs that put the issue on the front burner at the Justice Department. According to Isaacson, Apple “told the publishers, ‘we’ll go to the agency model, where you set the price … and yes, the customer pays a little more, but that’s what you want anyway.” (Emphasis added.) That’s likely to be at the heart of any action by the Justice Department: an allegation that Apple and the five publishers acted together to raise prices, thus violating antitrust rules. For their part, the publishers have said that because the agency agreement has caused more electronic booksellers to be able to exist and compete with each other, it hasn’t been anticompetitive.

From the consumer’s point of view, that logic is tough to swallow. If you want to buy “Girl with a Pearl Earring," you’re not going to find an ebook copy that is priced below $12.99. (In contrast, competitive vendors mean that you can pay as little as a penny for a used copy of the same paperback edition that Amazon itself is selling new for $10.20.)

While the discounts that Amazon offered on new bestsellers – pricing them at $9.99 or so – may have been artificially low, removing them sparked a grassroots rebellion among Amazon customers.  They view token discounts on ebooks priced perhaps only $1 below the price of a new hardcover as borderline offensive behavior.

Many are systematically boycotting ebooks while others have slashed their spending on both ebooks and “dead tree” books (as the real thing is referred to among the Kindle and Nook crowds) and are turning to the libraries instead. (Meanwhile, libraries are also battling with publishers on ebook issues ranging from pricing to limits on the number of times a title can circulate before the license expires.)

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.