Apple Settlement Could Take a Cue from Amazon

Eileen Meng Lu  |

Apple (AAPL) has agreed to settle the class action brought against this industry magnate for colluding with publishers to falsely inflate e-book prices on its iBookstore, overcharging consumers by $280 million. Upon settling, Apple will avoid a trial in July where the plaintiffs sought $840 million damage reinstitution from Apple.

The settlement echoes one Amazon made by Amazon (AMZN) beginning in March, one that made a much more concerted effort to repay bilked customers.

Recap of Apple Lawsuit

The case’s origins can be traced back in April 2012, when the U.S. Justice Department and 33 states brought the antitrust action against Apple and five major publishers, NewsCorp's (NWSA) HarperCollins, Macmillan Publishers, Pearson's (PSO) Penguin Books, CBS's (CBS) Simon& Schuster, and Lagardere's ($LGDDF.PK) Hachette Book Group, Inc. Filed in the Southern District of New York, the U.S. Justice Department alleged Apple Inc. conspired with the five major book publishers to restrain retail price competition in the sale of e-book industry by falsely inflating e-book prices on the iBookstore. 

Apple denied the charges even though the five publishers agreed to reach out-of-court settlements. In 2013, District Judge Denise Cotes found Apple guilty in this anti-trust case.

Apple Still Wants to Win

A year later on June 16, Apple reached an out-of-court settlement to settle the alleged price-fixing scheme. Apple has appealed court's ruling, still maintaining that it was innocent. The court has asked Apple to pay the settlement if it does not win the appeal.  

“As set forth in the memorandum of understanding, any payment to be made by Apple under the settlement agreement will be contingent on the outcome of that appeal,” Steve Berman, the attorney representing consumers said.

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Why Customers Pay More with iBooks?

The main complaint was that Apple coordinated a transition to their "agency model" across retailers, which ultimately would result in higher prices in the market. In their agency-model, publishers decide prices instead of sellers, with Apple getting 30 percent of the profits. 

The pricing model of the e-book industry prior to the launch of iPad was "wholesale model.” This model allows resellers like Amazon to set prices and sell titles at or below cost when it's necessary. The model is largely used in many businesses, including traditional bookstores. 

In this antitrust lawsuit, prosecutors said that Apple utilized publishers' dissatisfaction with Amazon’s e-book promotion policies or strong discounts to get them sign contracts with them. For example, Amazon's discounts, such as $9.99 bestsellers for its Kindle reader, make publishers less profit. In comparison, Apple allowed them to set e-book prices by themselves, who increase those e-books up t0 $12.99 to $14.99. 

Amazon's Move to Give Back

Aside from Apple, the publishers also agree to pay out about $160 million compensation. 

For customers, whether they get compensated to not, damages resulted from Apple's inflating-price case started to lighten since injunctions against Apple and five publishers were entered. Market wise, the average price of the top 25 best selling e-books dropped from $11 to about $6.47, according to analysts. 

Compared to Apple, Amazon's move seems to be more sincere. Started in March, Amazon issued customers credit because when those publishers raised their e-book price in iBookstore, Amazon raised their prices as well. The move makes Amazon the first retailer to issue credits to customers as a part of settlement. Amazon customers who bought e-books between 2010 and 2012 have or are going to be reimbursed some money. 

Similarly, Barnes & Noble Nook customers expect rebates, if they bought an e-book from five major publishers between 2010 and 2012. 

Has Apple Lost A Good Thing? 

However, even if the "agency model" was under lawsuit, both "wholesale model" and "agency model" have been widely criticized, and widely defended.

For "wholesale model", customers are obviously happy when they see the price lower. The model copies the way adopted by real world bookstores. Taking the previous example, Amazon declared that the if the cost turned out higher than $9.99 price tag, it will still put that $9.99 and take care of the cost by itself. However, online retailer do not incur expenses like distributing and printing, thus the market cost for each e-book is mainly a moot point. 

"Agency model," by comparison, is widely criticized because it potentially leads to higher retail prices. But some points out that the price set by Amazon is not so called "market price," and actually a sort of online promotion to attract more consumers.  

One thing for sure, Apple's move to fix prices or collude with publishers to inflate prices was not a wise move, and their response was not as fair to customers as Amazon’s was. But at least the e-book market will remain a competitive duopoly. 

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