Macmillan CEO John Sargent announced yesterday in a letter to authors and agents that Macmillan has reached a multiyear agreement with Amazon for the sale of both print books and e-books. Under the deal, e-books will be sold under the agency model, which allows the publisher to set its own prices and avoid Amazon’s strategic discounting of key titles. This will allow Macmillan to sell books above Amazon’s artificially deflated prices, potentially leading to more income for authors, but it leaves in place the inequitable 25% of net proceeds royalty rate that Macmillan regularly offers authors on e-book sales. The agreement will take effect of January 5, 2015.
The deal makes Macmillan the third major publisher to announce a new agreement with Amazon after the expiration of the publishers’ settlement agreements with the U.S. government, which banned the agency model and required each publisher to allow retailers to discount e-books for a defined period. These agreements, known as “consent decrees”—whose durations were staggered at six-month intervals (Macmillan’s ended December 18)—were settlements of the lawsuit brought by the U.S. Department of Justice accusing five major publishers and Apple of conspiring to fix e-book prices in the lead-up to Apple’s 2010 iPad launch. After the publishers each settled, the case continued as U.S. v. Apple.
The end of Macmillan’s consent decree ought to have marked its freedom from forced discounting. However, as Sargent observed in the letter, “irony prospers in the digital age”—especially in the publishing industry—and things aren’t quite as simple as anyone would like. Sargent explained:
Unfortunately, the court in the Apple case made matters more complex. In a judgment against Apple, the court determined that publishers would be required to allow Apple unlimited discounting, and for a period that extends beyond the court approved consent decrees. Different time periods were assigned to different publishers. This will ensure a muddled and inefficient market until October 5, 2017 when Macmillan’s term (the last publisher) expires.
The upshot of this is that Macmillan will “occasionally change the digital list price” of books “in what may seem to be random fashion,” which will certainly frustrate Macmillan authors.
Macmillan, along with Simon & Schuster, has appealed the Apple court’s extension of the discounting period, and they were in court on Monday, December 15, to present their arguments. The main event in that court session, however, was Apple’s stand against the government.
Silver Lining for Apple in Recent Court Appearance
In U.S. v. Apple, the DOJ brought a lawsuit maintaining that the publishers and Apple—by striking a coordinated deal to establish agency pricing for e-books—exhibited anticompetitive conduct by conspiring to fix prices. The publishers and Apple, on the other hand, maintained they were simply working to chip away at the e-book monopoly of Amazon, which held 90% of the market in 2010, and that Apple’s entry into the market actually increased competition, as demonstrated by the fall of Amazon’s market share to around 60% two years later.
After a 20-day trial in summer 2013, the trial court found that Apple colluded with the publishers to drive the price of e-books above the $9.99 favored by Amazon. (For a blow-by-blow account of the trial, see our series of blog posts from June 4 - June 21, 2013.)
Finally, it looks like the tide may be turning. At the argument on the appeal on Monday, Judge Dennis Jacobs—who is, however, only one of the three judges who will be deciding the case— suggested by his questions that he was sympathetic to the publishers for banding together to combat Amazon’s monopoly. “It’s like the mice getting together to put a bell on the cat,” he said.
That’s exactly how we have viewed it: the real issue is the fact that, at the time of the behavior in question, Amazon had a monopolist’s hold on the e-book market, a fact that the lower court chose to ignore.
The outcome of the appeal, which was heard by the Second Circuit Court of Appeals in Manhattan, will affect the $450 million settlement Apple agreed to pay after the lower court’s decision against it. If this panel takes issue with the lower court’s ruling, Apple’s payout will shrink to a mere $70 million—$50 million to consumers and $20 million to attorneys, as stipulated in Apple’s settlement with 33 U.S. states and a class of individual consumers.
But there’s more at stake than a few hundred million dollars. Apple has done a fine job of framing its entrance into the e-book market as an initial move toward dethroning a monopolist. The attention of Judge Jacobs focused on Amazon’s market share as much as it did on Apple’s behavior. When the government’s lawyer, Deputy Solicitor General Malcolm Stewart, repeatedly compared Apple’s actions to that of a driver knowingly shuttling drug dealers to and from a deal, Judge Jacobs was far from persuaded by the analogy. “The market for illegal drugs,” he quipped, “is one of the few markets in which the law does not favor new entrants.”
It could be months before the Second Circuit hands down an opinion, but after these arguments we’re encouraged by the fact that the court is at least questioning the wisdom of using antitrust laws to punish a business arrangement that actually served to increase competition in the publishing marketplace.