Apple 2.0

Covering the business that Steve Jobs built

Why Europe's trustbusters targeted Apple's e-book 'cartel'

December 6, 2011: 8:13 AM ET

The antitrust probe dates back to a deal Steve Jobs cut with five publishers in Jan. 2010

iBookstore on an iPad

The language of the European Commission's press release Tuesday announcing the start of a formal antitrust investigation of Apple (AAPL) and five major book publishers doesn't address the obvious question: If Amazon (AMZN) is the 500-lbs. gorilla in the e-book trade, why has Apple's much smaller iBookstore been targeted?

The answer lies in a deal that Steve Jobs cut with the five publishers named in the probe shortly before the iPad press conference in January 2010, when he announced the formation of the iBookstore.

Apple was more that two years late to the e-book market. Amazon had launched the Kindle in November 2007 and was selling untold numbers of e-books for $9.99 apiece. According to a class action suit filed in the US District Court for the Northern District of California by the Hagens Berman litigation group, the booksellers were "terrified" by the heavily discounted e-book price structure -- which lowered the perceived value of printed books -- and were looking for a way to force Amazon to raise its prices.

Enter Steve Jobs.

"Fortunately for the publishers," according to Steve Berman, Hagens Berman's lawyer, "they had a co-conspirator as terrified as they were over Amazon's popularity and pricing structure, and that was Apple." (link)

Here's how the Hagens Berman complaint describes the alleged conspiracy:

Given Amazon's first-mover advantage and ever growing installed user base, publishers knew that no single publisher could slow down Amazon and unilaterally force an increase in eBook retail prices.

If one publisher acted alone to try and raise prices for its titles, that publisher would risk immediately losing a substantial (and growing) volume of sales.

Not wanting to risk a significant loss of sales in the fastest growing market (eBook sales), the publishers named as defendants ("Publisher Defendants") solved this problem through coordinating between themselves (and Apple) to force Amazon to abandon its pro-consumer pricing.

The Publisher Defendants worked together to force the eBook sales model to be entirely restructured. The purpose and effect of this restructuring was to halt the discounting of eBook prices and uniformly raise prices on all first release fiction and nonfiction published by these Publisher Defendants.

Under the Publisher Defendants' new pricing model, known as the "Agency model", the Publisher Defendants have restrained trade by coordinating their pricing to directly set retail prices higher than had existed in the previously competitive market.

This is the theory the EC seems to be pursuing. In preparation for the formal proceedings announced Tuesday the commission raided the offices of some or all of the five publishers named in the probe. They are:

  • Hachette Livre, owned by Lagardère Publishing
  • Harper Collins, owned by News Corp (NWS)
  • Simon & Schuster, owned by CBS (CBS)
  • Penguin, owned by Pearson Group (PSO)
  • Macmillan, owed by Verlagsgruppe Georg von Holzbrinck

Apple could not be reached for comment.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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