Jan 21, 2012
In an amended complaint filed January 20, Hagens Berman, the law firm chosen in December to consolidate the class action lawsuits charging that Apple and major publishers conspired to fix e-book prices, argued that the adoption of the agency model has driven up the cost of e-books by as much as 50%, costing consumers millions of dollars. The new complaint does not include Amazon and Random House. Although some of the original suits had included those companies, Hagens Berman’s consolidated complaint limits the suit to Apple, HarperCollins, Penguin, Hachette, Simon & Schuster, and Macmillan, and dubs those publishers the “Agency 5.”
The crux of the new complaint is familiar–that the major publishers, worried that Amazon’s $9.99 price for e-books would quickly erode the market for print books–conspired with Apple to introduce the agency model to stabilize pricing. But the complaint details how it believes the alleged conspiracy unfolded. According to the complaint, after talking with other publishers about what an acceptable price point for e-books would be, Hachette Livre CEO Arnaud Nourry met with an Amazon executive on December 3, 2009 and told the executive that if Amazon raised its e-book prices by $2 or $3 the “problem” of Amazon’s e-book price would be alleviated. According to the complaint, “Nourry’s comments clearly indicate that the publishers were discussing price and were content to agree to a stable base price as opposed to prices being set by competition."
After Amazon said it had no intention of raising prices in the short-term, the publishers, beginning with Hachette, began contacting the company telling Amazon that it was adopting a windowing policy on certain frontlist titles. Thirteen days after Amazon rejected Nourry’s overture, Hachette, S&S, Harper, and Macmillan had contacted Amazon to inform the company of their own plans for windowing. None of the four publishers would have engaged in such a “radical departure” from traditional business practices unless they knew other houses would go along, the complaint states.
While windowing might slow Amazon’s hold of the e-book market, it wouldn’t raise prices; that wouldn’t occur until Apple got closer to launching the iPad, the lawsuit says. According to the complaint, as it was developing the iPad Apple did not want to enter the e-book market if it had to compete with Amazon’s $9.99 price point, a price, the complaint notes, that is below what Amazon was paying for the e-books. The complaint notes that Apple was familiar with Amazon’s strategy of using a product as a loss leader. “Apple knew that if Amazon could establish the Kindle as the dominant eReader by subsidizing the purchase of eBooks, Amazon could then use the Kindle platform (and its large installed user base) to distribute other digital media. Notably, Apple had successfully used a virtually identical strategy to gain a virtual monopoly on the distribution of digital music files through its iPod device and its associated iTunes Store. Apple then used this huge installed base to capture a large share of a second market, the nascent application market for mobile devices,” the complaint states.
According to the complaint, Apple’s desire to enter the e-book market on more favorable business terms aligned with the Agency 5’s goal of raising e-book prices, and a plan was set in motion in January 2010 with the announcement of the launch of the iPad. Simultaneous with the iPad announcement, the Agency 5 said they were switching from the wholesale model of selling e-books to the agency model. Given that Amazon controlled most of the e-book market at that point while Apple was just entering the field, the complaint says that no individual publisher would have risked angering its largest e-book customer unless they knew other publishers were prepared to follow suit.
With the iPad set to launch April 1, 2010, the five publishers told Amazon, individually, that if they didn’t move to the agency model each publisher would withhold its e-book titles. “Eventually Amazon, in order to compete and offer eBooks from the Agency 5, agreed to the Agency model. It did so despite its concern that the publishers ‘coordinated tactics’ to ‘force e-books prices higher’ in a way that threatens to ‘dampen the robust competition that currently exists among different book retailers and e-book platforms,’ ” the complaint states arguing that “the Agency 5 were willing to sacrifice revenue in the short-run in order to undermine Amazon’s market position and ability to maintain a low price points for consumers. But no individual publisher would dare incur short-run losses unless it knew its rivals were also willing to go along with the plan. Only by acting collectively could the Agency 5 block Amazon’s threat to drive down wholesale prices in the future.“
The lawsuit seeks damages for the purchasers of e-books, an injunction against pricing e-books with the agency model, and forfeiture of the illegal profits received by the defendants as a result of their anti-competitive conduct which could, according to Hagens Berman, “total tens of millions of dollars.”