On July 10, 2013, a federal judge found Apple guilty of conspiring with major book publishers to raise e-book prices, marking a huge win for Amazon and consumers. The judge’s opinion portrays Apple carefully executing a plot to rally book publishers into altering their contract terms with Amazon so the iPad would face a friendlier e-book marketplace at its 2010 release. Whereas the five major publishers settled with the Department of Justice (DOJ) earlier this year, Apple went to trial alone to defend their negotiations, which the judge found violated U.S. antitrust laws.

When Apple decided to enter the e-book market with its iPad bookstore in 2010, it did not plan to do so on Amazon’s terms. Amazon had been operating under a wholesale model, where the e-book giant set e-book prices below market value in an effort to drive Kindle e-reader sales. So long as Amazon continued to underprice e-books, Apple’s ability to profit from e-book sales was in jeopardy. “Luckily,” Apple found a friend in the publishing industry. Book publishers were eager to adopt the agency model proffered by Apple, whereby the publishers set e-book prices, and Apple would take a 30% cut. To charge publisher prices and remain competitive, however, Apple needed publishers to force Amazon to adopt the agency model too–which, with a little help from Apple, they did.

Apple sought to drive down Kindle sales with its e-book conspiracy

In her opinion, the judge emphasized the fact that Apple’s strong influence led publishers to threaten to pull their titles from Amazon unless the online retailer accepted the agency model. When Amazon relented, the almost overnight price jump in e-books–from an average $9.99 to $14.99–caught the attention of both consumers and the DOJ. Following the ruling, it is likely, though not certain, that e-book prices will return to their prior levels. However, in their settlement agreements with the government, the book publishers have agreed to end the agency price model for two years. Beyond Apple’s plans to file an appeal, its e-book future remains unwritten.

Kathryn Haywood

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3 Responses to Government Throws the Book at Apple in e-Book Price-Fixing Case

  1. Shannon Han says:

    Great Post! It will be interesting to see how far the DOJ decides to try to push this victory. They have already asked Apple to cancel its contracts with the major publishers as well as refrain from entering into new distribution contracts for the next five years. Additionally , the DOJ is likely to push for extensive monitoring of Apple’s activities for antitrust violations for years to come. It will interesting to see if Apple is successful at defeating or at least minimizing these measures.

  2. Caitlin Buckstaff says:

    Great post Kate! I am a recent convert to e-books, I will admit I was hesitant at first because I liked the idea of physically turning a page. While I love the ease in which I can buy a book, I will also admit that I am swayed by the price of e-books. It seems unlikely that as the market grows, Amazon will be able to keep the prices down. But I think Sonal makes a very interesting point about how this decision will affect the future of the e-book industry. Will negotiations between multiple companies automatically raise red flags?

  3. Sonal Patel says:

    Great topic and post! I’ve used both Apple’s iBooks and Amazon’s kindle books and was curious to see the outcome of this case. While I certainly appreciate the cheaper Amazon prices, I respect the factors at issue here. The ruling against Apple implies a risk of antitrust allegations for companies that provide a new service requiring negotiation among multiple parties in an attempt to get access to content such as books, music, or video. Such services are often beneficial, creative, and fun to use. Apple is fighting this issue because they can afford to do so, but I would rather them spend time building the innovative products that they give to us…