DoJ Whacks “Self-Serving” Apple in Response to E-Book Settlement Comments

Despite criticism of its actions from high-profile political figures, the Department of Justice is standing firm on its settlement with three publishers in the DoJ’s lawsuit against Apple and five publishers accusing them of conspiring against common enemy Amazon.

Under the terms of the settlement, the settling publishers are required to end their agency agreements with Apple seven days after the settlement’s final approval. The publishers can then sign new contracts but are forbidden for two years from using clauses that limit retailers’ rights to discount.

Apple and publishers Macmillan and Penguin have not agreed to the settlement and are continuing to fight the suit in court. But Hachette Book Group, HarperCollins, and Simon & Schuster settled with the US in April.

Under the Tunney Act, the DoJ solicited public comments for the settlement, and it got them: “868 comments from individuals, publishers, booksellers, and even from Apple, a key conspirator in the underlying price-fixing scheme.”

That was the characterization of the public comments highlighted in the DoJ’s response to these comments released Monday. In that response, the DoJ took on many of the comments criticizing its efforts to prevent the alleged antitrust actions of Apple and the five publishers – and blasted Apple’s comments in particular as “self-serving and contrary to the public interest.”

Of the comments, only 70 favored the DoJ’s terms of settlement, while the rest argued against the terms, insisting (with variations on the theme) that the DoJ was enforcing one particular business model over another and was out-of-bounds to force settling publishers to end their “agency pricing” agreements with Apple.

What’s Up With “Agency Pricing”?

Agency pricing lets a publisher set the prices of an e-book, with the retailer getting a cut of the price as a commission. This differs from the wholesale model, where a book’s price is suggested, and retailers can discount books to their heart’s content. The wholesale model is what Amazon used.

According to the DoJ’s suit, the publishers entered into agency agreements with Apple – countering Amazon’s existing way of doing things. In response, Amazon blocked Macmillan’s books from being sold on its site, in a move that echoed the Cable TV wars seen in today’s headlines. Amazon eventually backed down, and the agency model became the norm across all e-commerce retailers. The other major publisher in the US, Random House, switched to agency pricing in 2011.

Many of the public comments about the settlement derided the DOJ as attacking the agency model, but that’s not actually the basis of the DoJ’s action. It has no problems with agency pricing, just the way that Apple and the five publishers named in the suit did it: they allegedly colluded to raise the prices on e-books with the express purpose of breaking Amazon’s deep discounting.

The DoJ takes great pains to insist repeatedly that agency pricing is not the problem – nor is discounting.

Conspiracy Theory

“Nothing in the proposed Final Judgment would force Apple or B&N to exercise discounting authority — they are free to carry out their own businesses exactly as before. What they may not do is continue to rely on a conspiracy to restrain their competitors,” the response read.

The response also slaps away any arguments by Apple that the settlement will reduce competition in the market.

“In fact, what the evidence does show, is to the contrary… Microsoft has made a significant investment in the industry. The investment is likely a boon to Apple’s largest brick-and-mortar retail competitor, [Barnes & Noble]. Google, too, rather than retiring from the e-book field, recently has announced a new investment in a tablet computer intended to promote its own ebook sales, through Google Play.”

Powerful Enemies

The comments for the settlement had drawn in some heavy caliber political opponents, such as Sen. Charles Schumer (D-NY), who made an impassioned plea on Apple’s behalf in the July 17 edition of the Wall Street Journal.

“While the claim sounds plausible on its face, the suit could wipe out the publishing industry as we know it, making it much harder for young authors to get published,” Schumer wrote. “The suit will restore Amazon to the dominant position atop the e-books market it occupied for years before competition arrived in the form of Apple. If that happens, consumers will be forced to accept whatever prices Amazon sets.” (For more, see Why Senator Schuman Wants the Apple E-Book Pricing Lawsuit to Disappear.)

The DoJ isn’t buying what Apple and its allies are selling, and it’s doubtful consumers will, either. “When Apple launched its iBookstore in April of 2010, virtually overnight the retail prices of many bestselling and newly released e-books published in this country jumped 30 to 50 percent — affecting millions of consumers,” the DoJ response stated. This was not due to agency pricing, the DoJ maintains, but to illegal conspiracies.

The DoJ reiterates that it is not out to kill agency pricing. And that’s good for book buyers. Agency pricing on its own is likely to keep prices more uniform than wholesale pricing, despite what Apple and its allies are claiming.