Justice Department Weighs Antitrust Suit Against Apple, Book Publishers
On Thursday, reports emerged that the Justice Department had warned Apple and five of the nation's largest book publishers that it was weighing an antitrust suit against them. This action, reportedly, stems from negotiations surrounding the development of Apple's iBookstore in early 2010.
Prior to Apple's entry into the market, Amazon's dominance in the e-book sector was virtually unchallenged. Amazon bought books from publishers under the 'wholesale' model,obtaining them at a wholesale price of approximately half the book’s MSRP. This enabled Amazon to offer steep discounts to readers but resulted in lower revenue for publishers. After consultation with publishers, Apple offered a new deal: the 'agency' system:
When Apple entered the market, it offered a different model. Publishers could set their own selling prices and take 70 percent of the revenue. This so-called “agency” model is also how Apple’s App Store works, and publishers liked it because they could prevent a race to the bottom in e-book pricing. As the Journal notes, the agency model also allowed other e-book sellers to stay competitive with Amazon, preventing an iTunes-like situation where one retailer would dominate the competition.
So naturally, the agency model became a lot more popular after Apple entered the business. Apple also reportedly stipulated that publishers who used the agency model couldn’t sell their books for cheaper elsewhere.
This model was adopted by some of the largest publishing houses, including those singled out by the DOJ: Simon & Schuster, Hachette, Penguin, Macmillan and HarperCollins.
The Justice Department argues that these terms inhibit competition and harm the consumer. Publishers contend that Amazon's bookselling strategy was artificially lowering the prices of e-books, helping to consolidate a eventual monopoly. While all companies refused to comment, there are reports that at least some publishers are in negotiations with the Justice Department.
Less certain is how this will affect other players in the e-book space: most notably, Barnes and Noble and Google. The latter has had its own brushes with the DOJ: its dominance of web search has raised questions and challeges from competitors, and the Google Books digitization effort met resistance from from publishers, consumer rights groups and even the Author's Guild. It recently relaunched Google Books as an element of a larger e-commerce effort, Google Play - a market for music, boos and apps - and promptly became involved in a price war with Amazon.
Such battles are a luxury Barnes and Noble can little afford. Despite its recent efforts at tablet innovation, the bookseller is hobbled not only inexperience in the tech sector but by the cost of running its brick-and-mortar stores.It has benefited from what some call the artificially high prices in the e-book sector, but this could quicky come to a halt if the agency model is dismantled by the DOJ. Barnes and Noble may then finally have to choose between its Nook and its bookstores; the wrong choice, and it may follow its former competitor Borders into oblivion.