Appeals upholds $450 million fine against Apple for fixing ebook prices

The US 2nd Court of Appeals upheld a decision against Apple yesterday, confirming that the company conspired with ebook publishers to raise prices and to break the back of Amazon’s pricing model. Apple has been ordered to pay $450 million to consumers as the result of a 2014 settlement agreement between attorneys for 33 states and the company. Apple still has the option to file another appeal, but it’s not clear if the company will actually do so.
Apple, in typical Apple fashion, continues to deny that it did anything wrong or that it acted against the best interests of consumers, but the documents in the case have been read as painting a different picture. Judge Ann Livingston found that Apple was instrumental in requiring publishers to shift to a so-called agency pricing model (which the publishers wanted to do anyway). Under the agency model, the publishers set book prices, not the retailer.

Charts like this were used to demonstrate the impact of Apple’s entry into the market

This broke Amazon’s previous practice of setting a $9.99 purchase price, even if the publisher wanted to sell a book for, say, $15 wholesale. To assuage publisher objections, Amazon had actually paid them the higher wholesale purchase price, but sold the book for less money on its own site. Publishers hated this model, even though they got the wholesale price they wanted, because they believed it taught consumers to devalue ebooks and pay less money for book copies than they might otherwise get.
As Livingston writes: “Apple created a second requirement: publishers must switch all of their other e-book retailers— including Amazon—to an agency pricing model. The result would be that Apple would not need to compete with Amazon on price and publishers would be able to eliminate Amazon’s $9.99 pricing.”
Apple is accused of conspiring with a number of publishers, including the Hachette Book Group Inc, News Corp’s HarperCollins Publishers LLC, Penguin Group Inc, CBS Corp’s Simon & Schuster Inc and MacMillan. The decision hasn’t been without some controversy, with dissenting judge Dennis Jacobs pointing out that prior to Apple’s entry into the market, Amazon controlled an estimated 90% of the ebook business. Disrupting an alleged monopoly with illegal collusion, however, is still illegal, and Apple’s actions unquestionably raised ebook prices. Livingston considered Jacobs argument but rejected it, writing that the theory: “endorses a concept of marketplace vigilantism that is wholly foreign to the antitrust laws.”
Since the initial ruling, ebook prices have generally returned to $9.99 and at least some of the publishers in question have been temporarily banned from using the agency model to set book pricing. The question of who should set the retail price of ebooks, the publisher or the bookseller, is likely to remain contentious, particularly once the current ban expires.