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The Apple ebook price-fixing suit: What it all means

Dan Moren | June 5, 2013
What you need to know about the case against Apple brought by the DOJ antitrust division.

Apple gets involved in a lot of lawsuits--such is the life of any large, prominent corporation. But the trial kicking off on Monday in the U.S. District Court for the Southern District of New York isn't your run-of-the-mill intellectual property infringement or class action suit: It's an action brought by the U.S. Department of Justice, alleging that Apple colluded with publishers to fix the prices of ebooks at a higher level.

As the trial gets under way, here's what you need to know about this case.

The case against Apple
The case is being brought by the Department of Justice's antitrust division--the section whose mission is "to promote economic competition through and enforcing and providing guidance on antitrust laws and principles." The division is perhaps most well known among tech-watchers for its 1990s antitrust suit against Microsoft over bundling Internet Explorer with its Windows operating system, which ultimately ended with a settlement between the company and the feds.

The DOJ alleges Apple convinced the major publishers to adopt an "agency pricing" model across the board, resulting in less competitive ebook pricing. Under the until-then traditional wholesale pricing, the retailer (Barnes & Noble, Walmart, Amazon, your local bookstore) bought copies of a book, at wholesale prices, from the publisher; the retailer could then sell that book to customers at a chosen retail price, thus determining its own level of profit.

The agency model put forth by Apple is patterned after the way the company does business on music and apps: Instead of the price being set by the retailer, the publisher (or music label or developer) chooses a price point. When an item is purchased, the publisher/music label/developer reaps 70 percent of the revenue, while the retailer takes a flat 30-percent cut.

In and of itself, there's nothing illegal about that manner of doing business. The DOJ's case depends on the fact that Apple convinced the publishers to all adopt the model at the same time; that, the government alleges, reduced competition among retailers, because the agency model made it harder for stores to differentiate themselves on price.

Another issue at the root of the case is what's often referred to as a "most favored nation" clause, which the government says, in this scenario, stipulated that publishers could not undercut with other retailers the prices being offered to Apple, guaranteeing that Cupertino's profits would remain stable.

Apple stands alone
Though Apple was not the Justice Department's sole target, it is the only company that is actually going to trial. The case brought by the DOJ says that Apple conspired with five major publishers—Hachette, Harpercollins, Macmillan, Penguin, and Simon & Schuster—to set prices for ebooks; Random House, the last of the major publishers, was not charged with price fixing (though it later merged with Penguin, potentially giving it some skin in the game).

 

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