Is Apple price-fixing? Does it matter?

The United States DoJ is investigating Apple and five major publishers for collusion.

Earlier this month, the Wall Street Journal reported that the United States Department of Justice was investigating Apple and the "big five" publishers (HarperCollins, Hachette, Macmillan, Penguin, and Simon & Schuster) for collusion to fix ebook prices.

At stake is the agency pricing model, where publishers have the power to set their own prices on ebook retailers; this is in contrast to the pricing model dominant in the industry before Apple's entrance, where retailers (at the time largely synonymous with Amazon, which held 80-90 per cent of the ebook market) were free to set their own prices while guaranteeing a certain cut to the publishers.

The concern of the Department of Justice seems to be that all the major publishers used the entry of Apple into the market to force Amazon to adopt the agency model, and then, it is alleged, all made the most of their newfound freedom over pricing to raise the prices of their ebooks.

Evidence on the issue is scarce, and some of the publishers have reportedly moved to settle already; but today, some new figures came to light which may strengthen their case.

The publisher Smashwords, which acts as an umbrella body for self-published authors looking to get their books on to digital storefronts, has released the data it submitted to the DoJ in the investigation. It shows that, all else being equal, the competition afforded by agency pricing seems to lower prices across the board:

In plain English, the average prices have dropped 25% from $4.55 in October 2010 to $3.41 today...

The $3.41 is a really interesting number, for a couple reasons:

1) It shows that authors and publishers, left to their own free will, are pricing their books lower in this highly competitive market. Sure, they could all try to fleece customers by pricing their books at $29.99, but customers won't let them.

2) $3.41 is remarkably close to the average price paid for Smashwords books purchased at Barnes & Noble during the last 30 days. The B&N number: $3.16. I looked at every Smashwords book sold at Barnes & Noble between February 28 and March 27, then calculated the average price. This means Smashwords authors are pricing their books close to what customers want to pay. The median price (represents the midpoint, where an equal number of books sold at lower prices and and equal number sold at higher prices) was $2.99.

But proving that agency pricing doesn't lead to artificially inflated price tags may not be enough to save the publishers and Apple from a lawsuit. Tim Carmody reports for Wired that the issues for the DoJ are "bigger than rising e-book prices or even collusion between publishers":

"Plenty of business practices raise prices that aren’t antitrust violations," says Donald Knebel, an IP and antitrust attorney affiliated with the Center for Intellectual Property Research. "Agency pricing is perfectly legal. But something isn’t an agency relationship just because you call it that."

Knebel says there are three major points of law at stake in both the class-action suit and the Justice Department investigation against Apple and the five publishers:

  1. Whether and how the agency model applies to virtual goods;
  2. Whether Apple and publishers engaged in a “hub-and-spoke” conspiracy or simply “conscious parallelism”;
  3. The status of the “most-favored nation” clause, common to many legal contracts today, which Apple used to ensure that books could not be sold elsewhere at a lower price than in the iBooks store.

The case is nowhere close to conclusion, but whatever the outcome, it will reverberate throughout the industry. In tech, it remains the case that where America goes, the rest of the world follows.

A Kindle is tested in Amazon France. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
Show Hide image

The buck doesn't stop with Grant Shapps - and probably shouldn't stop with Lord Feldman, either

The question of "who knew what, and when?" shouldn't stop with the Conservative peer.

If Grant Shapps’ enforced resignation as a minister was intended to draw a line under the Mark Clarke affair, it has had the reverse effect. Attention is now shifting to Lord Feldman, who was joint chair during Shapps’  tenure at the top of CCHQ.  It is not just the allegations of sexual harrassment, bullying, and extortion against Mark Clarke, but the question of who knew what, and when.

Although Shapps’ resignation letter says that “the buck” stops with him, his allies are privately furious at his de facto sacking, and they are pointing the finger at Feldman. They point out that not only was Feldman the senior partner on paper, but when the rewards for the unexpected election victory were handed out, it was Feldman who was held up as the key man, while Shapps was given what they see as a relatively lowly position in the Department for International Development.  Yet Feldman is still in post while Shapps was effectively forced out by David Cameron. Once again, says one, “the PM’s mates are protected, the rest of us shafted”.

As Simon Walters reports in this morning’s Mail on Sunday, the focus is turning onto Feldman, while Paul Goodman, the editor of the influential grassroots website ConservativeHome has piled further pressure on the peer by calling for him to go.

But even Feldman’s resignation is unlikely to be the end of the matter. Although the scope of the allegations against Clarke were unknown to many, questions about his behaviour were widespread, and fears about the conduct of elections in the party’s youth wing are also longstanding. Shortly after the 2010 election, Conservative student activists told me they’d cheered when Sadiq Khan defeated Clarke in Tooting, while a group of Conservative staffers were said to be part of the “Six per cent club” – they wanted a swing big enough for a Tory majority, but too small for Clarke to win his seat. The viciousness of Conservative Future’s internal elections is sufficiently well-known, meanwhile, to be a repeated refrain among defenders of the notoriously opaque democratic process in Labour Students, with supporters of a one member one vote system asked if they would risk elections as vicious as those in their Tory equivalent.

Just as it seems unlikely that Feldman remained ignorant of allegations against Clarke if Shapps knew, it feels untenable to argue that Clarke’s defeat could be cheered by both student Conservatives and Tory staffers and the unpleasantness of the party’s internal election sufficiently well-known by its opponents, without coming across the desk of Conservative politicians above even the chair of CCHQ’s paygrade.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.