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Apple, publishers settle EU e-book investigation with no fines

The parties agreed to suspend "most favored nation" agreements for five years.

The American e-book market is less than half of the digital music market.
The American e-book market is less than half of the digital music market.

The European Commission announced on Thursday that it reached an agreement with Apple and four major book publishers that addresses concerns over possible e-book price-fixing. Simon & Schuster, Harper Collins, Hachette Livre, Macmillan, and Apple all agreed to modify existing agreements to allow retailers to discount e-books for two years and to eliminate "most-favored nation" clauses for five years. The Commission is satisfied that the changes address anti-competition issues and has suspended its investigation without levying fines or other sanctions.

The European Commission originally launched its investigation into e-book pricing in December 2011, amid claims that Apple and top publishers colluded to raise prices. When Apple launched the iBookstore, it used what is called the "agency model," wherein publishers set the retail price and Apple acts as a sales agent, collecting a 30 percent commission. Before that, e-books were still largely sold via the wholesale model, wherein publishers sell books to retailers for a wholesale price, and retailers are free to set whatever selling price they want.

Agency model

When people refer to the "agency model," it's usually in reference to the sale of electronic content online—in particular, e-books. The "old" way to sell e-books was to use what is known as the wholesale model. Under the wholesale model, book publishers sell a certain number of books to a reseller (such as Amazon or Barnes & Noble) for a set price, then the reseller sets its own price on each book. 

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Overall, publishers said they preferred Apple's model. Amazon, which was the largest e-book retailer by a large margin, had taken to selling e-books below wholesale cost in order to drive business for its Kindle e-readers. Publishers argued that doing so set consumer expectations for pricing below a sustainable level. As part of the contracts that publishers signed with Apple, though, certain clauses required that e-books sold via the iBookstore could not be sold at a cheaper price elsewhere.

Publishers later pressured Amazon to adopt the same agency model, and sure enough, e-book prices on Amazon went up. Amazon and consumers cried foul, prompting the EC to investigate Apple and the publishers for possible violations of EU anti-competition statutes.

In August, Apple and four of the five accused publishers (excepting Penguin) proposed to dissolve the existing agency agreements, agreeing to forego the contested "most-favored nation" clauses for a period of five years. Additionally, the companies agreed to allow retailers to offer discounts on e-books up to the annual amount of a retailer's commission on e-book sales for the next two years. (In other words, if Amazon sold $1 billion worth of e-books, it could offer discounts or even giveaways as long as the total amount doesn't exceed $300 million.)

The EC hinted in November that the proposed agreement would be accepted. After a "market test," the Commission was satisfied that the proposed changes would "remedy the identified competition concerns."

"While each separate publisher and each retailer of e-books are free to choose the type of business relationship they prefer, any form of collusion to restrict or eliminate competition is simply unacceptable," Joaquín Almunia, Commission vice president in charge of competition policy, said in a statement. "The commitments proposed by Apple and the four publishers will restore normal competitive conditions in this new and fast-moving market, to the benefit of the buyers and readers of e-books."

Penguin did not agree to the proposed changes, though the Commission said that it is still in discussions with the publisher to adopt similar remedies.

Meanwhile, the US Department of Justice is pursuing its own case against Apple and major publishers over e-book pricing. Three of the publishers, Hachette Book Group, HarperCollins, and Simon & Schuster, have reached a settlement with the DoJ and 16 state attorneys general over the matter, paying back $69 million to consumers.

Apple has contended that claims of collusion and pricing fixing are false, and that the DoJ has sided with the true monopolist, Amazon, in its accusations. Apple, Macmillian, and Penguin are preparing to go to trial with the DoJ in 2013, despite the fact that they may be willing to make similar concessions to those proposed in the EU.

"Our basic view is that we would like the case to be decided on the merits," Apple attorney Daniel Floyd said at a hearing in April. "We believe that this is not an appropriate case against us and we would like to validate that."

Channel Ars Technica