E-book price fixing? Feds file a lawsuit

Late Thursday, the Justice Department warned Apple and five of the world's biggest publishing companies that they're about to be hit with a lawsuit.

By The Fiscal Times Mar 9, 2012 1:59PM
By Suzanne McGeeThe Fiscal Times

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 you can order a paperback copy for $10.20. Downloading the book onto your Kindle, however -- which means you only own the right to read it, not the book itself, and that 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 Thursday, it warned Apple (AAPL) and five of the world's biggest publishing companies that they're about to be hit with a lawsuit. Simon & Shuster (owned by CBS (CBS)), Hachette Book Group, Penguin (a division of Pearson PLC (PSORF)), Macmillan, and HarperCollins (owned by NewsCorp (NWS)) 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 e-books they sold, just as it was up to them to determine what prices to charge for the print editions. In practice, that meant Barnes & Noble (BKS) could decide what to charge a customer to load Tracey Chevalier's novel onto a Nook, and Amazon (AMZN) could set its own price -- perhaps the same, perhaps not.

Nowadays, if you download an e-book 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, agree 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.

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." 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 e-book 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 e-books priced perhaps only $1 below the price of a new hardcover as borderline offensive behavior.

Many are systematically boycotting e-books while others have slashed their spending on both e-books 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 e-book issues ranging from pricing to limits on the number of times a title can circulate before the license expires.)

Regardless of the outcome of the looming conflict between the publishers, Apple and the Justice Department, this is likely just the first round in what will be an ongoing war over who controls the e-book market. Certainly, e-books seem to have caught on among consumers far more rapidly and more widely than publishers had expected; only now are publishers catching up to such basics as negotiating author contracts to reflect the possibility that a majority of sales may be in e-book form.

For their part, readers appear willing to compromise on price if there is some movement on the part of e-book vendors to give them more rights over the content -- or even, as one book purchaser proposed, if purchasing an e-book gave the owner an option to buy a "real" copy of the same book at a discount later on.

Apple has a history of developing electronic products that are coveted not only for their reliability, but also for their design and cachet -- products that command a premium price as a result. (When was the last time you caught a retailer selling iPads at a discount to the price in an Apple store or on the company's own website?) It's still unclear whether they can convince consumers that downloading a book on an iPad is worth more than picking up a paperback copy -- especially when the pricing model that Apple creates affects those who may never own an Apple product.

In the short run, the Justice Department lawsuit will create some headaches and some legal fees for publishers and for Apple, but isn't likely to significantly impact the latter's business. In the longer haul, however, publishers will have to figure out how to do better than simply react to the challenges created to their traditional market by the nascent e-book revolution.

Already, this has created a mechanism for authors to bypass the traditional publishing procedure and sell directly to consumers. To date, those authors haven't been the likes of James Patterson, who could easily sell as many books directly as he does via his publisher.

But publishers need to prepare for the day when a future James Patterson decides to do precisely that, and avoid any bones of contention that might cause an author to become disgruntled. (Such as the decision to sell e-books at lofty prices, prompting boycotts and angry letters from former fans.)

For now, the only clear winner in the e-book mess is Amazon, whose stock soared 2.11% Thursday on news of the pending Justice Department lawsuit and the prospect of at least a partial dismantling of the current pricing scheme.

Rival Barnes & Noble, however, saw its stock sink 2.65%; higher-margin e-book sales, without the prospect of having to trim those margins to compete with Amazon on price, have been good for B&N. Any changes to the agency model may put another burden on the bricks-and-mortar retailer that is already battling to keep its bookstores profitable and to make the Nook a moneyspinner.

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