Anti-trust investigations in both the US and the EU into the pricing and distribution models for eBooks have cast a number of issues firmly into the spotlight. At a broader legal level, the discussion centres around whether an agency distribution model (which leaves control over retail pricing in the hands of the publisher) or a traditional wholesale distribution model (which gives retailers the power to set final prices to consumers) is the most appropriate for the distribution of electronic titles.

Within that broader framework sits the anti-trust case that has been pursued on both sides of the Atlantic, focussing on whether the publishers colluded with each other and Apple in moving towards an agency model. But in many ways, and absent creative settlement commitments negotiated with the regulators, the anti-trust case should be irrelevant to the final outcome over which distribution model prevails.

In fact, the US settlement (reached between the Department of Justice and three of the eBooks publishers) specifically permits “Agency Agreements with E-book Retailers”, albeit under certain conditions, such as a prohibition on the publisher from interfering with the retailers’ ability to reduce the final price paid by consumers. It remains to be seen how the European Commission approaches settlement in its ongoing discussions with Apple and the publishers.

What is clear is that concerns centre not around the principles behind distribution of titles under an agency agreement, but rather over possible collusion which may have occurred to ensure that the industry as a whole moved together to the new model.

Battle lines have been drawn at the retail level between the likes of Apple and Amazon. Apple has presented itself in this instance as a pro-competitive new entrant breathing competition into a marketplace increasingly dominated by Amazon (who by some measures accounted for nearly 90% of all digital book sales). For publishers, the rise of eBooks represents an opportunity to claw back control from retailers; control that had been lost with the abolition of the net book agreement. It also affords an opportunity to arrest a perceived “race to the bottom” in terms of the quality and breadth of titles reaching publication.

Proceedings in the EU and the US are somewhat at a crossroads, with a number of publishers (but not Apple) choosing to settle with the US Department of Justice (DOJ) to avoid a lengthy anti-trust investigation. Details of the settlement and of the defences mounted by Apple and the remaining publishers, together with the ongoing review in Europe, mean that we are far from the final chapter of this particular saga.

US settlement

April witnessed the publication by the US DOJ of the details of its settlement with three eBooks publishers: Hachette, Harper Collins and Simon & Schuster. Each of the publishers has effectively agreed that they will, amongst other things:

  • terminate their agreements with Apple, particularly those containing a mostfavoured nation clause
  • cease imposing constraints, for a two year period, upon a retailer’s ability to control prices and to offer discounts to consumersc
  • ease sharing competitively sensitive information with each other for a five year term
  • implement anti-trust compliance programmes (this latter commitment is interesting given the suggestion that publishers were not only aware of the anti-trust implications, but had also sought external advice in relation to particular aspects of the agency versus distribution debate)

In contrast to its stance in Europe (see below), Apple is vigorously defending its position in the US, filing an emotive defence in May which describes the US Government’s complaint against it as being “fundamentally flawed” – an opening statement which sets the tone for the remainder of the document. Attacking the Government’s lawsuit as “contrary to law and sound economic policy”, Apple argues that, in light of Amazon’s pre-existing dominance in the eBooks market, “the Government sides with monopoly, rather than competition, in bringing this case”, and also asserts that Apple’s entry brought about competition in the market and enhanced benefits for consumers. Apple asserts, for example, that its entry into the eBooks market, “then dominated by Amazon… is inherently pro-competitive and has led to greater consumer choice, output and quality in ebooks”.

Indeed, Amazon’s dominance is something that has been corroborated by the recently filed defences of the other non-settling publishers in the US, Penguin and MacMillan. In particular, Penguin’s defence, in describing new entry as “presumptively pro-competitive,” credits Apple’s market entry as having “prevented Amazon from having cemented itself as a monopolist that would continue to dominate the sale of ebooks and eReaders”, while Macmillan’s defence has in tandem criticised Amazon as having “erected impenetrable barriers to entry to meaningful competition in ebook distribution, thus protecting its more than 90% share of the business”.

Irrespective of Amazon’s dominance, however, the more crucial question for the anti-trust regulators is whether Apple and the publishers engaged in collusive behaviour notwithstanding the unfavourable market conditions. Apple openly admits two things. First, that in the absence of the agency model it would not have entered the eBook market and, second, that it has previously sold eBook titles through the App Store under an agency model. Neither of these, in isolation or in tandem, amount to an admission of guilt. Rather, Apple flatly denies any allegations of collusion or breach of the anti-trust laws, stating that it “engaged in individual negotiations with each publisher, and reacted on an independent basis to the separate input of each publisher.” Likewise, MacMillan stated that it took the “unilateral decision” to accept the terms offered by Apple, while the preamble to the Penguin defence states that it “independently negotiated and ultimately entered into a vertical distribution agreement with Apple”.

European proceedings

Meanwhile, in Europe the European Commission also announced in April that it had “received proposals of possible commitments from Apple and four international publishers, Simon & Schuster, Harper Collins, Hachette Livre and [MacMillan]”, with the Commission now engaging in the process of discussing such settlement commitments with the parties and performing market testing “in order to establish whether they are sufficient to preserve competition for the benefit of consumers in this fast-growing market”.

As with all good thrillers, the final outcome is still far from clear. On the one hand, Amazon was quick to claim that the US settlement was “a big win for Kindle owners, and we look forward to being able to lower prices on more Kindle books.” On the other, Macmillan (and Apple) have characterised the DOJ’s investigation as potentially disastrous for competition, stating that it will allow Amazon to recapture its position as de facto monopoly provider of digital books. Indeed, Chicago attorney and president of the Author’s Guild, Scott Turow asserted that “Amazon was using e-book discounting to destroy bookselling, making it uneconomic for physical bookstores to keep their doors open. The irony bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition”.

The sequel…

What happens next even after the anti-trust cases have settled or otherwise concluded is far from clear. The US settlement may effectively put a two year hiatus on publisher-led pricing, but over the longer term would not prevent publishers unilaterally seeking to set prices under a genuine agency model. Crucially, absent collusion, there is nothing to suggest that publisher-led pricing should not itself be subject to competitive downwards pressure on price. At this stage, however, all that is certain is that the US and EU anti-trust cases have thus far shed no light on a long-term and sustainable solution.