On September 5, federal judge Denise Cote approved a deal between the Department of Justice and three publishers (Hachette, HarperCollins, and Simon & Schuster) to settle claims of e-book price fixing. What happens now?
First and foremost, the clock has begun counting down. The publishers must terminate their existing agency agreements with Apple this week, and they have a 30-day window to initiate termination of their agency deals with other e-book retailers. Generally speaking, for the next two years they may not restrict retailers’ ability to set e-book prices to the consumer, and for five years, they may not employ price-related “most favored nation” clauses.
How will the settling publishers sell e-books going forward? A return to wholesale would be the simplest soution, and forgoing agency sales would not be terribly painful—publishers actually make more per unit under the wholesale model. The real pain of the settlement, however, is in compliance.
With the settlement approved, not only will new retail agreements have to be struck, the settling publishers may soon see some new faces around the office. Among the terms of the deal, the settling publishers must appoint an Antitrust Compliance Officer; have an attorney train relevant staff; engage in an annual compliance audit; and maintain and furnish to the DoJ a log of “oral and written communications” regarding e-book strategy. DoJ officials can also pop by and interview employees or agents of the company. The agreement also includes a provision forbidding “retaliation” against retailers, although it is not spelled out what constitutes retaliation. Could raising prices on e-book bestsellers to counter the effects of discounting be construed as retaliation? It’s possible.
The good news? If compliance goes smoothly, by fall of 2014 the settling publishers will be out from under federal scrutiny. While all three settling publishers maintain they did nothing wrong, the decision to settle, as Cote noted in her approval opinion, was calculated—settling offers a measure of “certainty,” avoids the cost of litigation, and gets them back to business in a relatively short period of time.
For the nonsettling parties, Penguin and Macmillan, as well as Apple, the future is far from certain. A trial is scheduled to begin next summer, and it is likely the litigation could extend beyond 2014. And they could lose. But even if they prevail, the cost will be significant and possibly greater than the cost of settling. There is uncertainty for Amazon, too. Apple and the publishers have made clear that they intend to use the proceedings to put Amazon on trial.
There is a slim chance, meanwhile, that the settlement will be stayed pending an appeal. Apple, in its August opposition brief, vowed to appeal, and late last week attorney and RoyaltyShare founder Bob Kohn filed motions to intervene for the purpose of an appeal, and asked for an immediate stay. “Consumers of e-books and the public generally will be substantially and irreparably injured in the absence of a stay,” Kohn argued. “Once the Final Judgment takes effect, the damage to the public will be irreversible.”
For consumers, the question is whether they’ll see a drop in e-book prices. Some media outlets have breathlessly speculated that a price war could be in the offing. That seems unlikely, at least as a direct result of this settlement, which involves just three (albeit major) publishers. Random House (which was not part of the alleged conspiracy), the nonsettling publishers, and many other independent publishers are all still using the agency model—the question is, will they keep their prices at current levels when Amazon begins to discount bestselling e-books from the settling publishers?
A state settlement, meanwhile, submitted at the end of August, would offer refunds to consumers ranging from $1.32 for bestsellers to 25 cents for backlist titles, if approved. That deal is now also pending before Cote. In addition, a consumer class action is still in the works.
The price issue, meanwhile, may be the least of the issues facing publishers in the e-book realm. As e-book sales surge, new competitors enter the field, and new devices plummet in price, other battles loom: digital royalty rates remain a bone of contention; DRM practices are under scrutiny; territoriality is challenged; and libraries remain frozen out of popular e-book lending. The DoJ action has become a rallying point for an industry in the throes of a historic transition, but it has in practice drained valuable resources from publishers, done nothing for readers, and distracted some key players from more fundamental issues facing the future of reading.
In approving the DoJ settlement, Judge Denise Cote offered this telling observation. “The birth of a new industry,” she wrote in her opinion, “is always unsettling.”
