In April of 2012, the United States of America’s Department of Justice filed a lawsuit against Apple Inc. This was a United States antitrust case in which Apple was accused of conspiring with the top six major publishing companies to raise the price of e-books. In order to understand why the United States filed suit on Apple, it is pertinent to understand the original and legal model by which publishing companies must abide.
The legal model starts with the book publisher’s ownership of the e-books. Book publishers will sell the e-book rights to distributors; meaning distributors like Amazon and Apple are legally permissible to distribute and sell the e-books bought. Book publishers sell their e-books to distributors like Apple at wholesale price. The wholesale price is less than the suggested selling price of the e-book. Through competitive market forces, distributors have to compete for business with the consumers. In order to be competitive, distributors will set their prices just above the price they paid for the rights of the e-book. Thus, distributors making marginal profits from e-books is a typical occurrence. What’s important here is that price of the e-books sold to consumers is set by the distributors, not by the book publishers. What is also important is the distributors are vying for business with each other, which in turns causes lower prices.
According to the United States Court for the Southern District of New York (Links to an external site.), “[Book Publishers] conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy”. The basis of the anti-trust lawsuit is a new and illegal model that Apple and the book publishers decided to indulge in. The book publishing industry is controlled by five major publishing companies. The five publishing companies consist of Hachette Book Group, Harper Collins, Macmillan Publishers, Penguin Random House, and Simon & Schuster.
Prior to Apple joining the e-book market, Amazon was by far the biggest e-book retailer. According to Fortune Magazine’s article Second Bite: Can Apple clear its name in the ebooks drama?, “Apple was breaking into a market then dominated by Amazon, which had an 80% to 90% market share—monopoly power in almost anyone’s book.” With Amazon being a monopoly power in the e-book market, they were able to set the prices of their e-books at whatever price they wanted without competition in the market. According to Fortune Magazine’s senior editor, Rodger Parloff (Links to an external site.), “publishers sold e-books to Amazon under this wholesale model for about $10. To their horror, however, Amazon resold the e-books to the public for $9.99.” There is nothing legally wrong with Amazon selling their e-books for $9.99, but the publishing companies were not okay with Amazon’s price choice.
The publishing companies were under the impression that Amazon’s lower e-book prices would in turn cause the value of physical books to go down. According to Rodger Parloff, “In response, some publishers chose to raise their wholesale e-book prices to $12 or even $15, but Amazon continued to sell even those e-books for $9.99 — now absorbing a $2 to $5 loss on every single book sold.” With the top five publishing companies being discontent with Amazon’s set retail prices, some of the publishers stopped wholesaling their books to Amazon. The book publishers started to collude in 2009 in order to fix their issue with Amazon.
Apple rolled out their first e-reader called the iPad in January of 2010. Prior to launching the iPad, Apple wanted to release the new i-bookstore app on the same day that they rolled out the iPad. At the same time of Apple’s release, Amazon already had their Kindle Fire e-reader out. The main difference between Amazon’s Kindle Fire and Apple’s iPad was the color display. The Kindle Fire had a back light that displayed in black and white, whereas the iPad had a colorful display. According to the U.S. Court for the Southeastern District of New York, “Apple did not want to compete with Amazon on price.”
Apple knew the big publishing companies were discontent with Amazon’s price of $9.99. Apple decided they would help the publishing companies with their problem, if the publishing company helped Apple enter into the e-book market. According to the U.S Court for the Southeastern District of New York, “Apple decided to offer the Publisher Defendants the opportunity to move from a wholesale model — where a publisher receives its designated wholesale price for each e-book and the retailer sets the retail price — to an agency model, where 12 publishers set the retail price and the retailer sells the e-book as its agent.” The wholesale to agency model change is not an illegal change, but it becomes illegal since Apple did this change with all five of the top publishers at the same time.
Horizontal competitors like these five publishers are not legally allowed to talk amongst each other about pricing. This collusion in order to change the market value of e-books is a direct violation of the Sherman Antitrust Act. According to the Legal Information Institute at Cornell Law School (Links to an external site.), “the Sherman Antitrust Act of 1890 is a federal statute which prohibits activities that restrict interstate commerce and competition in the marketplace.” This infringement of the law is where the lawsuit against Apple begins. The other publishing companies all took settlement deals, while Apple tried the case in court and was referred to as the “ringleader” of the “cartel”.
The Sherman Antitrust Act is set in place to not only maintain the integrity of the free market economy of the United States, but to also protect the consumer from being abused by big corporations. In the case of the top five publishing companies, they acted as an oligopoly with full control of the e-book market, and overstepped their boundaries with their price fixing. In June of 2015, the 2nd US Circuit Court of Appeals found that Apple was guilty of e-book price fixing. Consequently, Apple was required to pay a 450-million-dollar settlement. Major cases like this show the American people that no person or entity is above the law. It also shows the big entitles that they will not be allowed to take advantage of the people of United States in a court of law.