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Along with filing a lawsuit against Apple and five of the “Big Six” publishers for collusion over e-book prices, the U.S. Justice Department also filed terms of a proposed settlement in the suit with Hachette, HarperCollins and Simon & Schuster. Apple, Penguin and Macmillan have not accepted these settlement terms. The DOJ will continue to litigate its antitrust suit against them.
“For the growing number of Americans who want to take advantage of this new technology, the Department of Justice is committed to ensuring that e-books are as affordable as possible,” Attorney General Eric Holder told a press conference Wednesday afternoon. “As part of this commitment, the Department has reached a settlement with three of the nation’s largest book publishers – and will continue to litigate against Apple, and two additional leading publishers – for conspiring to increase the prices that consumers pay for e-books.”
According to the filing, settling publishers will be immediately required to do the following:
Terminate its current contracts with Apple within seven days of the court’s acceptance of the settlement;
Terminate any other contracts with e-book retailers that restrict the retailer’s ability to set final prices for books or contain a “most favored nation” provision prohibiting price competition, as soon as possible;
Renegotiate contracts with Apple and other retailers, with a two-year prohibition on any contract that prevents retailers from discounting retail prices (see below);
Notify the Department of Justice before entering into any joint ventures between it and another publisher related to e-books;
Designate an antitrust compliance officer and provide the DOJ with a copy of its agreements with any e-book retailers quarterly for five years.
Furthermore, any future agreements between the settling publishers and e-book retailers will have to observe serious restrictions, at least for a time. For two years, e-bookstores must be permitted to discount retail prices of books at their own discretion.
This doesn’t kill the agency model outright, but does modify it well beyond what’s widely recognized today. In particular, the proposed settlement states: “These provisions do not dictate a particular business model, such as agency or wholesale, but prohibit Settling Defendants from forbidding a retailer from competing on price and using some of its commission to offer consumers a better value, either through a promotion or a discount.” Discounts, promotions, and some control over retail pricing must all be at least partially under the retailers’ control, even if the agreement is technically an agency-commission model, rather than a wholesale one.
This doesn’t kill the agency model outright, but does modify it well beyond what’s widely recognized today. Suppose a publisher prices a book at $10 list price, and a retailer agrees to a 30 percent commission, or $3 on a full list sale. Under these conditions, those retailers would be permitted to sell the book below list price, presumably taking the discount out of their own $3 commission. The publisher would still net $7, but lose its ability to maintain prices.
The DOJ’s proposed terms expressly permit publishers to set a soft floor on discounts, but not a hard floor. Publishers can enter into one-year agency agreements that stipulate that the retailer can sell individual titles at a loss, but must show a profit overall for all the books it sells from that publisher’s catalogue.
The DOJ’s proposed terms expressly permit publishers to set a soft floor on discounts, but not a hard floor. It says that retailers must have some discretion to set prices and compete with other retail bookstores — that publishers cannot absolutely fix the retail price of books. And it opts, in virtually every case of potential uncertainty, for giving maximum discretion to the retailer.
For five years, the settling publishers are prohibited from entering into any agreement with retailers including a “most favored nation” provision, whereby it agrees not to sell books at a lower price or on more favorable terms to any other retailer. This was a key clause in Apple’s contracts with publishers, which both allowed and compelled them to insist on the same prices and terms with other retailers.
Finally, retailers must be allowed to stagger their negotiations with publishers, so they aren’t dealing with multiple publishers seeking similar agreements at the same time.
The bulk of the other conditions imposed simply prohibit any and all continued collusion between the settling publishers: direct or indirect communication, retaliation against retailers, and so forth.
This is the fine line the DOJ is trying to walk between dictating business terms to publishers and retailers and simply permitting the exact same circumstances to re-emerge after dissolving the contracts tainted under the appearance of collusion.
In fact, in five years, we may end up with exactly the same kinds of agreements publishers and retailers have today. But that will be a decision made by the market, not by any real or perceived conspiracy between publishers and a single retailer that imposed that model on the market.
Additional reporting by Mark Riffee in Washington, DC. Photo by Mark Riffee for Wired
Competitive Impact Statement[#embed: https://www.scribd.com/embeds/88892887/content?start_page=1&view_mode=list&access_key=key-2ggofrx8818ikrb5co7r]
