Court Approves Justice Department’s E-Book Proposal, Restoring pre-2010 Status Quo Without an Economic Study

Judge Denise Cote approved the Justice Department’s controversial settlement with three major publishers — Hachette, HarperCollins, and Simon & Schuster — in a 45-page decision filed yesterday afternoon. The settlement requires the publishers to allow e-book retailers to sell their books at any price, even below cost, so long as the retailer does not lose money over a publisher’s entire e-book list over a 12-month period. The Justice Department had sued five publishers (the others are Penguin and Macmillan) and Apple this spring alleging that they had colluded to introduce “agency pricing” for e-books in 2010 with the launch of the iPad.

The Authors Guild opposed approval of the settlement, believing that the DOJ could address the alleged collusion without requiring three publishers to allow Amazon to resume predatory pricing. Amazon’s predatory pricing — selling bestselling frontlist e-book titles at a loss — had helped the online retailer gain a 90% share of the e-book market by January 2010.

The court’s ruling will likely deal a serious blow to bookstores. Selling goods at below cost is inherently anticompetitive — only those with deep pockets can stay in the game — and Amazon has made a practice of targeting the very titles that sell best in bookstores for its predatory pricing. (Amazon recoups these losses in many ways, including by profiting on the sales of backlist titles that bookstores are unlikely to stock.)

Because of the number of titles affected by the settlement and because it comes at a critical time for bookstores, the settlement may irreversibly reshape the literary marketplace. Even so, as the court acknowledges, the DOJ didn’t bother submitting a single economic study about the likely effects of the settlement on the market. An incredible result.

The court’s decision is here.

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