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E-Book Settlement and What It Means

A federal judge has approved the U.S. Justice Department's settlement with three publishers of electronic books accused of conspiring in a price-fixing scheme.  The ruling released on September 6, 2012 disregards the objections of Apple, other book publishers, book sellers, and authors who argued the settlement will empower Amazon.com to destroy the "literary ecosystem" with deep discounting that they say they cannot afford to match.

The agreement requires the publishers — Hachette, HarperCollins, and Simon & Schuster — to abandon the pricing system that they had conceived with Apple before it released the iPad in 2010.  Three publishers settled previously - News Corp.'s HarperCollins Publishers, Lagardere SCA's Hachette Book Group, and Simon & Schuster.  In April 2012, the Justice Department (DoJ) argued that the publishers and Apple had colluded in 2010 to hike the price of e-books — with the result that many volumes that had been available for $9.99 at Amazon saw their price rise by several dollars.  The approach, known as "the agency model," calls for book publishers, rather than retailers, to establish the prices of each title.  Under the agency model, merchants make their money through a commission.  For Apple, that translated into the standard 30 percent cut it collects on most products sold through its iTunes stores.  The settlement orders the publishers to end their contracts with Apple and allow retailers to set their own prices for e-books instead of having the publishers stipulate the prices in advance.

In her 45-page decision, Judge Denise Cote rejected the arguments made by the defendants.  Critics of the settlement claimed that the government got it wrong and that Amazon is the real threat to consumers because, they say, it is willing to discount and take a loss on book sales so it can kill off competition and control the e-book market.  In a legal brief, the Authors Guild recently asked the court to reject the DoJ's settlement because it would result in low-cost pricing for e-books that will "drive trade out of traditional bookstores and into the proprietary world of the Kindle."  The DOJ said that this is precisely the kind of behavior the Sherman Antitrust Act was designed to prevent.

The judge wrote:

The Complaint alleges that the defendants conspired to raise, fix, and stabilize the retail price for newly-released and bestselling trade e-books, to end retail price competition among trade e-books retailers, and to limit retail price competition.

Amazon's share of the e-book market has fallen from about 90 percent to 60 percent since the introduction of the iPad and the pricing system that it helped usher in, according to court papers. However, the judge concluded the introduction of more e-readers to compete against the Kindle was the main factor in Amazon.com's reduced market power.  She also noted the proposed settlement hadn't discouraged Microsoft from recently investing $300 million in Barnes & Noble or prevented Google from unveiling a tablet computer called the Nexus 7 to compete against Amazon's Kindle Fire.

The Justice Department said it is "pleased the court found the proposed settlement to be in the public interest and that consumers will start to benefit from the restored competition in this important industry."  The trial is set for June 2013.

EDUCAUSE will continue to monitor and report on this issue.

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