On Wednesday, a federal judge ruled that Apple broke antitrust laws by conspiring with publishers to raise electronic book prices. Federal District Judge Denise Cote ruled that there was compelling evidence that Apple played a “central role” in a conspiracy to eliminate price competition and raise e-book prices. The court found that Apple’s conspiracy with five of the major publishers forced Amazon to relinquish their pricing freedom, allowing Apple to raise the retail price for e-books for all consumers.
When Apple began selling e-books in 2010, Amazon was the market’s 800 pound gorilla. Under the wholesale model, Amazon would purchase the e-book from the publisher at the wholesale price, usually half of the publisher’s listed price, and turn around and sell it to the customer at the price it wanted. Amazon was insistent on selling most new release books for $9.99, which was often less than it had paid wholesale. Amazon did this to increase its market share.
Top executives from many of the large publishers were unhappy with Amazon’s pricing policy. These executives met regularly to discuss how to combat Amazon’s pricing. They preferred the agency model. Under the agency model, the publisher set the retail price and the retailer would receive 30% of the retail price. According to Judge Cote, “Apple knew of the unlawful aims of the conspiracy and joined the conspiracy with the specific intent to help it succeed.”
Apple agreed to the agency model and suggested retail pricing of either $12.99 or $14.99 for new e-books. But according to the DOJ and the unlawful conspiracy between Apple and the publishers revolved around Apple’s most favored nations clause, which required that publishers would offer books for sale in its bookstore at the lowest price offered by any other retailer. In other words, if Amazon offered its e-books for $9.99, the highest price that the publishers would set for books in Apple’s store would also be $9.99.
The DOJ alleged held that this agreement had the effect of setting the price for all e-books at the price agreed to by Apple; the Court agreed finding that millions of consumers were forced to pay dollars more for most online books.
The five publishers alleged to have been in conspiracy with Apple were also sued but settled with the Department of Justice prior to this trial. Apple has maintained that it did nothing wrong and plans to appeal this ruling.