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Report: Texas Attorney General Probes Agency Model and Apple
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Is the Agency Model a Clear Case of Price-Fixing Collusion? A Closer Look at the Possibility of Antitrust Action in the Courts
By Stephen Windwalker – Copyright © 2010 Kindle Nation Daily
Just when most of the big book publishers may have convinced themselves that they were about to get away with their so-called “agency model” price-fixing scheme to raise retail ebook prices by 30 to 50 percent, along has come Connecticut state attorney general Richard Blumenthal to say “Not so fast.”
Blumenthal’s office released a statement today along with nearly identical letters to Apple and Amazon requesting that company counsel meet with him to discuss two related kinds of trade agreements that were implemented by those companies earlier this year with publishers MacMillan, Simon and Schuster, Penguin, Hachette, and HarperCollins:
- the agency model, under which publishers mandate a non-discountable fixed price that retailers must charge to sell their ebooks; and
- so-called “most favored nation” (MFN) clauses under which publishers agree, as a condition of being allowed to sell their ebooks through Apple or Amazon, not to allow any competing retailer (including the other of the two just named) to sell any of those ebooks at a lower price than that set for Apple or Amazon.
MFN is a clearly anti-competitive agreement that protects Apple and Amazon from each other as well as from less deep-pocketed retailers that might try to increase market share by discounting retail ebook prices, as Amazon itself was able to do throughout 2008 and 2009. However, removing MFN agreements from the marketplace would be unlikely to hurt either Amazon or Apple unless they were locked in mortal price competition with one another, since both companies have the wherewithal to win any price war against smaller competitors.
The agency model, on the other hand, appeared to grow out of discussions between the big publishers and Apple early in 2010 as they each had their own reasons for wanting to pare down Amazon’s share of the ebook content market. Amazon resisted the agency model initially but ultimately capitulated to publisher demands. Alone among the Big Six book publishers, Random House steered clear of the agency model and has refused to make its ebooks available in Apple’s iBooks store.
The Texas attorney general’s office was reported to be investigating some of these same issues this Spring, but avoided the kind of definitive public comment made today by Blumenthal’s office.
“These agreements among publishers, Amazon and Apple appear to have already resulted in uniform prices for many of the most popular e-books — potentially depriving consumers of competitive prices,” Blumenthal said. “The e-book market is set to explode — with analysts predicting that e-book readers will be among the holiday season’s biggest electronic gifts — warranting prompt review of the potential anti-consumer impacts.
“Amazon and Apple combined will likely command the greatest share of the retail e-book market, allowing their most-favored-nation clauses to effectively set the floor prices for the most popular e-books. Such agreements — especially when offered to two of the largest e-book retail competitors in the United States — threaten to encourage coordinated pricing and discourage discounting,” Blumenthal said.
“Amazon and Apple combined will likely command the greatest share of the retail e-book market, allowing their most-favored-nation clauses to effectively set the floor prices for the most popular e-books. Such agreements — especially when offered to two of the largest e-book retail competitors in the United States — threaten to encourage coordinated pricing and discourage discounting,” Blumenthal said.
Some readers and other bloggers have wondered why Blumenthal would be going after Amazon when we know that it was Apple and the publishers who initiated the agency model. My take is that an attorney general who just happens to be running for the U.S. Senate is trying to appear even-handed here, but it’s clearly Apple and the publishers who have something serious to lose — that something being an anti-competitive price-fixing scheme that props up ebook prices in order to (1) keep Apple in the game; (2) prop up hardcover sales; and (3) change public expectations about what constitutes a reasonable ebook price..
Stay tuned. From our vantage point here at Kindle Nation Daily, it seems as likely that the agency model will die a natural death as that it will be terminated through legal or regulatory action. Most of the contracts between Amazon or Apple and the large ebook publishers will expire early in 2011, and discussions to renew or revise those contracts may not necessarily begin with wide agreement that the agency model has been a success. Among the potentially related items we’ve noted with interest in the past few days:
- As Amazon opens its UK Kindle store, the company has made it clear that there will be no agency model for ebooks in the UK, and the same will probably apply in any other European-based in-country Kindle stores.
- Amazon vice-president for Kindle Ian Freed provided information in a CNET interview published today that may undercut publisher’s hopes that Apple’s iBooks store could drive a serious wedge into Amazon’s market share for ebook content. Freed stated firmly that Amazon’s ebook content market share remains between 70 and 80 percent and suggested that claims of 20 per cent market share by Apple and Barnes and Noble should be subjected to “some more research.”
For more background on ebook pricing, see my recent ebook How to Price eBooks for the Kindle: A Pocket Pricing Guide for Authors and Publishers to Maximize Sales and Royalties with the New 70 Percent Royalty Option
