Apple’s strategy to counter Amazon’s grip on the eBook market, based on contractual agreements with the major publishing houses, took two big hits last month from antitrust enforcers in the U.S. and Europe.  First, the U.S. Department of Justice (DOJ) notched a significant victory in its civil antitrust case against Apple and five major publishers when a federal judge in New York approved a settlement with three of the publishers that requires them to terminate their contracts with Apple.  See U.S. v. Apple, Inc., --- F.Supp.2d ---, 2012 WL 3865135 (S.D.N.Y. Sept. 5, 2012). The court earlier this year rejected defendants’ Twombly challenge to the pleadings, holding that the complaint plausibly alleged that Apple and the publisher defendants took part in a conspiracy to restrain trade, that the object of the conspiracy was to raise prices for eBooks and that this restraint was illegal per se.  In re: Electronic Books Antitrust Litigation, __ F.Supp.2d __, 2012 WL 1946759 (S.D.N.Y. May 15, 2012).

According to the DOJ’s complaint, the publisher defendants—Hatchette, HarperCollins, Macmillan, Penguin and Simon & Schuster—saw their business models seriously threatened by Amazon’s success in establishing a $9.99 price point for many of its eBooks.  Accordingly, when Apple introduced its new iPad in January 2010, the DOJ claimed that the publishers simultaneously agreed with Apple to change their eBook business model from a wholesale model, in which the publishers sold their books to a retailer for a set price, leaving the retailer free to set a retail price, to an “agency model” in which publishers sell to consumers through the retailer’s eBook platform at a price set by the publishers with the retailer receiving a percentage of each sale as a commission.  The alleged eBook conspirators also included “most-favored nation” clauses in their contracts with Apple that prevented the publishers from using different retail prices when selling eBooks through different retail outlets.  The net effect of these agency agreements was that the prices—and profit margins—for most newly released eBooks rose and retail price competition ceased.

While Apple and the publishers uniformly denied the DOJ’s allegations of collusion, three publishers (HarperCollins, Hachette and Simon & Schuster) nevertheless reached a proposed settlement with the DOJ.  This settlement requires termination of the publishers’ agency agreements with Apple (and any similar agreements with other retailers) and prevents them from agreeing to new contracts that either restrict a retailer’s ability to set eBook prices (for two years) or include a “most-favored nation” clause (for five years).  Apple objected strongly to the proposed settlement, claiming that the settlement’s requirement that the publishers terminate their agency agreements with Apple effectively punished Apple without any trial over whether any unlawful collusion had actually taken place.

Moreover, when the DOJ publicized this proposed settlement and requested comment, more than 90 percent of the 868 comments received were negative.  A number of authors, literary agents and booksellers, as well as groups such as the Authors Guild and the American Booksellers Association, argued vociferously that Amazon’s price-cutting efforts posed a clear and present danger to truth, justice, quality literature, independent bookshops and American democracy itself, and that only Apple’s agency model for eBooks stood in the way of these harms.

Presented with these objections, the trial court was unmoved.  The judge quoted Emily Dickinson to establish her pro-book credentials (“There is no Frigate like a Book/To take us Lands away”), but noted that claims of harm to existing stakeholders in the publishing industry, such as brick-and-mortar bookshops, misunderstood the purpose of the antitrust laws.  (Ironically, but predictably, the court’s citation to Dickinson’s poem noted where it could be found online—for free.)  The court found that the antitrust laws were intended to protect competition, not market competitors, and that the relevant injuries before the court were actually the injuries to consumers who had paid too much as a result of the alleged collusion.  In response to the frequently made objection that Apple’s agency model was needed to offset Amazon’s “predatory pricing” in the eBook market, the court explained that even if Amazon had engaged in predatory pricing—which it doubted—the court would be guided by the two-wrongs-don’t-make-a-right principle.  The court then approved the settlement.

More recently, and just weeks after the DOJ’s settlement was approved in the United States, the European Commission (EC), responsible for enforcing the European Union’s antitrust rules, released for comment its own proposed settlement with four publishers (Simon & Schuster, HarperCollins, Hachette and Macmillan) over eBook pricing arrangements.  The EC’s proposed settlement closely tracked the DOJ settlement, terminating the agency agreements with Apple and preventing new contracts that either restrict a retailer’s ability to set eBook prices (for two years) or include a “most-favored nation” clause (for five years).  The most significant development was that Apple joined the EC settlement instead of opposing it.  While Apple has not yet revealed whether it will continue to resist the DOJ’s antitrust claims, it is clear that the major publishers’ loyalty to Apple’s preferred agency model for eBooks is over.

Together, these settlements suggest that it will be difficult for traditional publishing stakeholders to defend their digital turf from aggressive newcomers like Amazon—and very unwise to attempt to band together to do so.  Whoever the immediate winners and losers were in this eBook pricing skirmish, eBook publishing will continue to evolve as new competitors emerge and existing companies adapt.  To pick just one example, Simon & Schuster recently announced that it would increase efforts to promote its books and authors by streaming “book videos” and has signed with partners like Roku, Blinkx and Taboola to do so.