Class Claims Apple Fixed eBook|Prices With Major Publishers

     SAN FRANCISCO (CN) – An antitrust class action claims Apple conspired with five major publishers to raise the price of eBooks, dominate the market and force Amazon to stop selling at a discount. The conspiracy worked so well that eBooks now cost as much or more than paperbacks, the class claims.

     Sued as coconspirators are the Hachette Book Group, HarperCollins, MacMillan, the Penguin Group and Simon & Schuster. The publisher defendants are five of the six largest publishing houses, according to the complaint.
     The class claims that Apple conspired with the publishers to prevent Amazon from leveraging its Kindle platform to distribute other digital media. Apple knew that could be done, as it had done that itself to gain “a virtual monopoly” on digital music sales.
     The class claims the conspiracy managed to push retail prices higher by January 2010 than they had been when Amazon released the Kindle eBook reader in 2007.
     Lead plaintiffs Anthony Petru and Marcus Mathis claim that before the conspiracy, Amazon sold eBooks at prices significantly lower than for physical books, setting the price of many popular new eBooks at $9.99 even though publishers charged Amazon equal or higher wholesale prices.
     The class claims: “The purpose and effect of this restructuring was to halt the discounting of eBook prices and uniformly raise prices on all first release fiction and nonfiction published by these publisher defendants. Under the publisher
     defendants’ new pricing model, known as the ‘Agency model’, the publisher defendants have restrained trade by coordinating their pricing to directly set retail prices higher than had existed in the previously competitive market.
     “The publisher defendants’ unlawful combination and pricing agreement would not
     have succeeded without the active participation of Apple. Apple facilitated changing the eBook pricing model and conspired with the publisher defendants to do so.”
     Under the agency model, publishers set prices for eBooks and Apple becomes the distributor. Apple gets 30 percent commission on sales, and the publishers use their 70 percent for their own profit and to pay the authors under whatever deal they have made with them.
     The class claims: “Apple had strong incentives to help the publisher defendants to restrain trade and increase the price of eBooks. If Amazon continued to solidify its dominant position in the sale of eBooks, strong network effects would make it difficult to dislodge Amazon. Moreover, Amazon’s pro-consumer pricing meant that to enter the eBooks market Apple would likely be forced to sell at least some eBooks near or below its wholesale costs for an extended period of time. Apple did not want to enter the eBooks market subject to this margin pressure caused by Amazon’s pricing. But at the same time, Apple believed that it had to enter the eBook market because the Kindle was (and is) a competitive threat to Apple’s business model. Apple is competing to be – and has become – a dominant manufacturer of mobile devices, such as Apple’s iPod, iPhone and iPad devices. These devices are designed to distribute, store, and access digital media through Apple’s iOS platform, including Apple’s App Store and iTunes Store.
     “Apple knew that if Amazon could establish the Kindle as the dominant eBook reader 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.
     “The publisher defendants and Apple implemented this unlawful agreement and combination on or before January 2010, when five of the six major book publishers of fiction and nonfiction works almost simultaneously announced that they were switching from a wholesale pricing model to an agency model for eBook sales. This was an unprecedented industry shift in pricing (and sales model) in the book industry in the United States. The announcements to shift to the agency model coincided with the release by Apple of the iPad tablet computer. In fact, when Apple announced the launch of the iPad on January 27, 2010, the publisher defendants agreed to allow Apple to use their trademarks in connection therewith.
     “The same day Apple announced launching the iPad, it was also announced that Apple already struck deals with Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster to switch to the agency model for Apple’s iBookstore – the application on Apple’s iPad that functions as an eBook reader (thus competing directly with the Amazon Kindle).
     “As part of the unlawful agreements, and seeking to leverage its installed user base and dominant position via the Apple iOS platform, Apple and the publisher defendants agreed that prices for publisher defendants’ eBooks that were offered through the iBookstore would be calculated by a formula tied to physical books. This eBook formula would cause current prices for eBooks to increase and, at the same time, would guarantee Apple that the publisher defendants would not sell eBooks at lower prices elsewhere, such as through other eBook distributors, including Amazon. The intended effect of this agreement was to force Amazon to abandon its discount pricing of eBooks and allow the publisher defendants to establish uniformly higher prices for new release eBooks.
     “The conspiracy and agreements worked as intended: (1) the defendants increased and stabilized eBook pricing; and (2) forced Amazon to stop the discounting eBook prices on publisher defendants’ titles.
     “As a direct result of this anticompetitive conduct as intended by the conspiracy, the price of eBooks has soared. The price of new bestselling eBooks increased to an average of $12-$15 – an increase of 33 to 50 percent. The price of an eBook in many cases now approaches – or even exceeds – the price of the same book in paper even though there are almost no incremental costs to produce each additional eBook unit. The price of the publisher defendants’ eBooks sold on the iBookstore, facing no pricing competition from Amazon or other e-distributors for the exact same eBook titles, has remained at supra-competitive levels.
     “Plaintiffs bring claims under federal and state antitrust laws to enjoin the illegal conduct and to obtain damages.”
     Plaintiffs seek restitution and class damages for state and federal antitrust violations, unfair competition and unjust enrichment.
     They are represented by Jeff Friedman with Hagens Berman Sobol Shapiro of Berkeley.

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