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How Apple shook up the electronic book market

Joab Jackson | June 18, 2013
Apple didn't try to fix or raise the prices of electronic books when it entered into the market in 2010, according to Apple Senior Vice President Eddy Cue. Rather, he says, the company was only working to ensure a profit for itself.

Cue proposed different pricing tiers that publishers had to adhere to. Electronic versions of best-selling hardcover books, for example, could be sold at $12.99 or $14.99. At the publishers' insistence, he added $16.99 and $19.99 as well. The contracts also prohibited the publishers from "windowing," or delaying the electronic release of popular books on Apple's store. "If you run a store, you can't have windowing at all," Cue explained before the court. "Even though some prices would go up, in exchange, [there would be] no more windowing."

Cue quickly realized that, in order for the agency model to work, the same deal must be struck with all electronic book vendors, lest Apple's prices be undercut by other retailers. The problem, Cue recalled Apple's legal counsel telling him, was that Apple couldn't force publishers to change their contracts with other retailers.

Instead, Cue introduced what he called a "Most Favored Nation" clause, in which the book publishers would guarantee that they would offer their books to Apple at 30 percent less than any other e-book retailer's price. In this way, Cue explained, publishers would not have to sign over the rest of their clients to the agency selling model. "In a legal agreement, I couldn't force Amazon and Barnes & Noble to move to the agency model," he said. The DOJ has maintained that the MFN clause in effect forced book sellers to move to an agency model.

With the public launch of the iPad coming up on Jan. 27, Cue rushed to get all the publishers to sign contracts by a week before then. Book publisher Hatchett signed an agency-model deal on Jan. 24, and the other four publishers signed similar deals within the following two days. In the following months, the publishers struck agency deals with other electronic book retailers. The Apple contract took effect on April 3, and the prices of the best sellers quickly rose to the top $16.99 tier in the weeks after. (As part of their 2011 settlements with the DOJ, the book publishers ended all their agency-model contracts).

In antitrust cases, "Once there is a proof of conspiracy, it is up to the defendant to prove that the consumer wasn't harmed," Hylton said. In this case, the DOJ focused its questioning on the increase in book prices right after the new agreements were in place.

When Buterman asked if he knew book prices would jump after the agreement, Cue refused to acknowledge that electronic book prices increased overall. He replied that while some book prices increased, the prices for other books would be priced more "flexibly," and still other books were introduced to the market that previously weren't available in electronic form, thanks to Apple's insistence on not windowing or withholding book releases.

 

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