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The “agency” model for ebooks goes on trial

News broke earlier today that the U.S. Department of Justice is pressing ahead with a lawsuit against Apple and the five original “agency” publishers for allegedly colluding to raise the price of ebooks. According to early reports, some of the publishers are choosing to settle the case, while others will fight the charges in court.

A little background: the antitrust lawsuit centres on early 2010, when Apple was preparing to enter the fast-growing ebook market with the launch of the iPad. Book publishers welcomed the news, viewing the entry of a deep-pocketed competitor like Apple as an opportunity to stand up to Amazon’s virtual monopoly of the ebook market.

One strategy for combating that perceived monopoly was to adopt the so-called agency pricing model, in which retailers act as commissioned sales agents who receive a cut of the publisher-determined retail price. (Under the previous “wholesale” terms, retailers were free to discount from the publisher’s list price.)

The question at the heart of the current lawsuit is whether publishers acted in concert to adopt the agency model en masse, or whether they were simply reacting in parallel to a situation they viewed as untenable.

According to The Wall Street Journal, the lawsuit alleges that publishers began meeting privately no later than September 2008 for a period of at least one year. These meetings are said to have taken place in “private dining rooms of upscale Manhattan restaurants,” including in “‘The Chefs Wine Cellar,’ a private room at Picholene [sic].”

The U.S. publishers named in the lawsuit are Macmillan, Simon & Schuster, Hachette Book Group, Penguin, and HarperCollins. Of the Big Six U.S. publishers, the only firm not implicated is Random House, which held off for a year before adopting the agency model.

Three of the publishers have agreed to settle the case, the WSJ reports: Hachette Book Group, Simon & Schuster, and HarperCollins.

John Sargent, CEO of Macmillan, explains why his firm has opted not to pursue a settlement, which would have avoided the expense (and unwanted public attention) of a drawn-out court case.

Sargent begins by noting that the charges against Macmillan are civil, not criminal, and that “Macmillan did not act illegally. Macmillan did not collude.” He goes on to note that “[i]t is … hard to settle a lawsuit when you know you have done no wrong.”

From Sargent’s response:

We have been in discussions with the Department of Justice for months. It is always better if possible to settle these matters before a case is brought. The costs of continuing – in time, distraction, and expense – are truly daunting.

But the terms the DOJ demanded were too onerous. After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model. We also felt the settlement the DOJ wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents.

A statement from Penguin is expected later today.

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