Apple’s E-Book Pricing Model on Trial

June 24, 2013

Apple on TrialThe Department of Justice’s antitrust challenge to Apple’s pricing model for electronic books is now in the hands of U.S. federal district court judge, Denise L. Cote in New York.  The trial, which ended last week, carries significant implications for consumers and for the electronic content pricing model Apple seeks to apply for a wide range of digital content.

The Justice Department alleged that Apple colluded with several of the world’s leading print publishing companies to set e-book prices at an unreasonably high level.  The Department also claimed that Apple engaged in the collusion with the intention of harming its competitor in the e-book market, Amazon.

Cooperating with the publishers, Apple instigated a significant change in the pricing model for electronic books.  Traditionally, retailers set prices for the products they sell.  In the e-book market, Apple negotiated an arrangement with publishers in which the publishers set the e-book prices.  This pricing model has been described as the “agency” model.

In the early days of the e-book market, the leading retailer in that market, Amazon, set the prices.  In that environment, the prevailing e-book price was generally $9.99.  Under Apple’s agency pricing system, average e-book prices rose to the range of $12.99 to $16.99.

Apple argued that there was no collusion involved in setting e-book prices.  Instead, the company contended that the pricing arrangement represented a reasonable exercise of business judgment.

Apple suggested that even its competitor, Amazon, accepted the agency pricing model.  The Department of Justice and Amazon indicated, however, that Amazon’s move to the agency pricing model was not by choice but was instead made necessary as a result of the collusion of the publishers with Apple.

All of the publishers that were originally defendants in this case with Apple have reached negotiated settlements with the Justice Department.  Under the terms of those settlements, the publishers have agreed to abandon the agency model and to let retailers set e-book prices.

Apple has refused to settle the case.  It is widely believed that Apple’s refusal to settle is motivated in large part by its desire to continue to use the agency pricing model.  It is likely that the Justice Department would insist that Apple admit guilt on the antitrust charges and abandon agency pricing as part of any settlement.  Some believe that Apple would like to apply that model for pricing of a range of digital products, including music and television content.

By persuading the publishers to abandon agency pricing through the negotiated settlements, the Department of Justice has provided at least a partial victory for e-book consumers.  The terms of the settlement should help to reduce e-book prices.

The remaining issue is the extent to which Apple and other electronic content providers will be able to use agency pricing for their products in the future.  Conceptually, agency pricing appears to fit an important aspect of the electronic marketplace, empowerment of digital content providers.

That model seems most appropriate, however, when the content providers are individual people.  It appears to be far less useful when the providers of the digital content are large enterprises that control a substantial volume of popular products.

Judge Cote’s decision in this case is expected in the next few months.  That decision is likely to have significant impact on the future of the electronic marketplace.