The European Commission (EC) has settled its investigation into the potential e-book price fixing practices of Apple and four of the world’s largest publishers following commitments from Apple and each of the publishers to cease participation in the activities of concern.  The four publishers are Hachette Livre, HarperCollins, Simon & Schuster and Macmillan.  A fifth publisher, Penguin, is still in discussions with the EC.

According to the EC, in January 2010, the four publishers agreed to jointly transition from a wholesale to an agency model for the sale of e-books, thereby transferring the ability to set e-book retail prices from the retailer to themselves.  The transition was undertaken by each publisher globally, and on the same primary provisions.

In December 2011, the EC commenced its investigation, focusing on the agency agreements between the publishers and Apple and, in particular, the most favoured nation clause in each of those agreements.  This clause provided that if any retailer sold an e-book at a price that was lower than that offered on Apple’s iBookstore, the publishers were required to match that lower price on Apple’s iBookstore store.

The EC suspected the publishers of colluding to limit retail competition and raise retail e-book prices.  According to EC Vice President Joaquin Almunia, although the most favoured nation clause “may seem benign at first… it effectively made it very costly for publishers to allow other retailers to sell at lower prices than Apple since that low price would then have to be extended to Apple’s store”.  This had the effect of aligning the incentives of the publishers, who joined forces to pressure other retailers, such as Amazon, to switch to the agency model of distribution.  “Retailers had little option but to surrender their discretion in setting retail prices if they wanted to avoid a serious disruption of their business.”

As part of the settlement reached with the EC, Apple and the four publishers have agreed to terminate their relevant agency agreements and, for a period of five years, are restricted from entering into e-book agreements with retail-price restrictions or most favoured nation clauses.  In addition, for a period of two years (and subject to certain conditions), the publishers cannot prevent e-book retailers from setting their own e-book prices, or from offering e-book discounts or other promotions.

The EC has commented that the settlement “means removing immediately the results of the collusion and restoring normal competitive conditions… to the benefit of all consumers who buy e-books in Europe”.

The EC is one of a number of competition regulators whose suspicions have been raised by Apple’s agency arrangements with e-book publishers.  In early 2012, the US Department of Justice brought charges against Apple and the same five publishers (including Penguin), alleging the restraint of competition in the sale of e-books.  The Department of Justice has since reached a settlement with Hachette, HarperCollins, Simon & Schuster and, most recently, Penguin; however, Macmillan continues to oppose the allegations.  Closer to home, the Financial Review has reported that the ACCC is considering its options following the US lawsuit.