Wednesday, April 11, 2012

Justice Department sues Apple and major publishers over agency model, but rumors of a settlement could keep the agency model alive

Is it a good thing that Apple let's publishers set their own eBook prices, or does this model, called the agency model, lead to price fixing and higher prices for consumers? Or are both things true at the same time?

The U.S. Justice Department today filed suit against Apple Inc. and major book publishers over the agency model, as well as clauses in Apple contracts that require publishers to price their books inside Apple's iBooks store at the same or lower levels than through other outlets.

The publishers involved include Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster, though Bloomberg is reporting that several publishers have already settled.

The whole episode may be much to do about nothing, if rumors that are flying prove to be true.

For instance, the agency model, which lets publishers set their own prices as long as Apple gets its cut, may survive the Justice Department's suit. The settlement might simply be a promise that these same publishers will return to selling their products through Amazon using the previously standard wholesale model (where publishers sell their products to a retailer or distributor at a discount and the retailer then sets the retail price).

The pricing clause, known as a most-favored-nation clause, will probably disappear, however.

Consumers are, no doubt, applauding the suit as it seeks to encourage publishers to let Amazon and others discount prices. But those discounted prices have led to many bookstores going out of business.

Publishers generally like the agency model because they can set the sales price, but the practice leads to fixed prices, something that the Justice Department will not look kindly on.

Neither the book publishers nor Apple appear to be looking for a fight unless the DOJ decides it wants the agency model to disappear completely. So a settlement that keeps this in place, while getting rid of the most-favored-nation clauses seems a legal no brainer.

But all this will involve lawyers, but thankfully no patents.

Note: Just to be clear why I think the agency model could survive the lawsuit. If the publishers agree to return to the wholesale model in places other than in the Apple iBooks store, the DOJ might say that this creates competition between the two outlets, which they would see as good. The thinking being that if books are over priced in iTunes consumers could turn to Kindle or Nook editions. We'll see if the settlements go in this direction.