Connecticut Attorney General Targets Amazon, Apple in E-Book Antitrust Probe

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Connecticut Attorney General Targets Amazon, Apple in E-Book Antitrust ProbeE-readers like the Kindle and Nook may be on a rapid descent toward rock-bottom prices, but what about the prices of e-books? According to Connecticut Attorney General Richard Blumenthal, they are too high, too uniform, and the method by which they are set is too much like a violation of antitrust practices.

Specifically, Blumenthal is going after the pricing agreements inked between Apple (AAPL), Amazon (AMZN) and all of the Big Six publishing houses save Random House (part of Bertelsmann AG) around April's launch of the iPad. That device, and Apple's terms, shifted pricing away from a "wholesale" model, under which e-book prices are set by retailers, and moved towards an "agency" model, under which publishers set a fixed price and retailers get a 30% cut.

In a press release issued Monday afternoon, the Connecticut AG's office said its concerns stemmed from "both Amazon and Apple [reaching] agreements with the largest e-book publishers that ensure both will receive the best prices for e-books over any competitors." As a result, per the AG, "these agreements appear to deter certain publishers from offering discounts to Amazon and Apple's competitors -- because they must offer the same to Amazon and Apple. This restriction blocks cheaper and competitive prices for consumers."

Blumenthal's action mirrors a similar bid taken by the Texas AG's office two months ago, though that inquiry focused primarily on Apple, not Amazon. As DailyFinance pointed out then, it seemed puzzling that Amazon wasn't in Texas's cross hairs, since the company had -- and still has -- anywhere between 70% to 80% of the digital book market, a position pointed out by Ian Freed, the Amazon vice president in charge of the Kindle, in an interview with CNET.

Impairing Competition

Such boasts now seem like red flags to the bull that is Blumenthal, as well as any to other attorneys general potentially looking to jump on the e-book pricing antitrust bandwagon. Blumenthal notes that both Amazon and Apple include "most favored nations" (MFN) clauses in their contracts with book publishers. Such clauses mean that no retailer can undercut Apple or Amazon's e-book prices, and Blumenthal found that accordingly, e-book prices offered by those two retailers as well as by Barnes & Noble (BKS) and Borders (BGP) were "almost uniformly ... identical across all four sellers."

In a July 29 letter to Apple (more or less mirrored by a similar missive to Amazon), Blumenthal outlined his reasoning more specifically: "I fully understand that MFNs are not per se illegal under our antitrust laws. Yet, as I am sure you are aware, MFNs are not per se legal either. ... Especially when they are offered to two of the largest e-book competitors [they] have the potential to impair horizontal competition by encouraging coordinated pricing and discouraging discounting." As such, Blumenthal is concerned that "the agency pricing model, coupled with the MFN, has already resulted in achieving or maintaining uniform prices for e-books, to the ultimate detriment of the consumer."

A bona fide inquiry may well spell trouble for book publishers, who likely never gave much thought to the idea that, in their attempts to keep Amazon from lowering e-book prices, and their maneuvers to survive the digital market's erosion of the still much-larger print business, they might run afoul of antitrust laws. But it remains to be seen if Blumenthal is, in fact, conducting a bona fide inquiry. He's currently running for the U.S. Senate seat being vacated by Christopher Dodd, and as Publishers Lunch points out, may be "looking for some easy press at the hands of Apple and Amazon" that paints him as a crusader against the big, bad corporations while deflecting attention away from his erroneous statements about serving in Vietnam and his military service in general.

The Connecticut AG's office is also leading the way on shaping coverage of this story, issuing a press release for media outlets (like this one) to react to accordingly, and from its letters issued to Amazon and Apple, seems to be taking its cues from media reports of the e-book pricing model switch, rather than discussing the matter with the affected retailers and publishing parties first. In contrast, the Texas attorney general's office has never commented on the record about its antitrust inquiry, which is ongoing and has evidently grown more comprehensive over time.

Even if Blumenthal's inquiry is propelled more by political self-interest than genuine disapproval over the agency model, what has become increasingly clear is that the fissures of doubt surrounding the way e-books are priced are going to crack wide open, and if a particular state or federal office is determined enough, they could make publishers and e-retailers very unhappy -- and affect what so far has only been explosive growth in the digital book market.
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