Apple's E-Book Pricing Prompts Antitrust Inquiry

The pricing of electronic books is one of the biggest issues currently facing the publishing industry. The de facto $9.99 standard set by Amazon (AMZN) for books available on its Kindle device has had many big publishers up in arms, so when Apple (AAPL) came calling with the iPad -- and a totally different pricing model that raised e-book prices by a handful of dollars -- publishers bit.

Now the pricing model switch has book publishers and Apple in the crosshairs of the Texas Attorney General's Office. Though the investigation is still in preliminary stages, there's a good case for legal action -- and it's all about the current state of antitrust legislation.

According to industry newsletter Publishers Lunch, the Texas AG's inquiry "appears to focus on pricing practices for e-books and Apple's entrance into the [e-book] market in particular." At least two major publishers, Hachette (LGDDY) and HarperCollins (NWS) are under scrutiny, according to The Wall Street Journal because they're among the five "Big Six" houses that made e-books available on Apple's iBookstore through the new pricing model, known as the "agency model."

Publishers and the attorney general's Office didn't respond to requests for comment, but Publishers Lunch was told by parties familiar with the AG's inquiries that their requests for "marketing practices in the book industry" was overly broad and thus resembled a "fishing expedition" for information.

Does an Investigation Make Sense?

The Texas AG's inquiries are puzzling on a few levels. First, Apple entered a market already heavily dominated by Amazon (AMZN), which still holds anywhere from 70% to 90% of the e-book market share depending on whom you ask, though that share is obviously declining now that Apple is a serious player. Second, it's unclear why Texas in particular is conducting this investigation. The state is one of the largest textbook markets, and it has come under fire for how its school boards are enacting new, more conservative-minded curricula. But industry and legal experts DailyFinance spoke with dismissed the connection as tenuous at best. A third issue is why Apple's complying with a switch to the agency model would set off alarms when the company is facing other antitrust investigations on a federal level.

The likeliest answer is that Texas has a vested interest in overturning, or perhaps modifying, a 2007 decision by the Supreme Court (Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,) that fundamentally changed the way that manufacturers could set prices. "Traditionally, under antitrust manufacturers couldn't set and enforce a minimum sales price -- that's why it's called a manufacturer's suggested retail price," explains lawyer Abigail Field, who writes the "Legal Briefing" column for DailyFinance. "However, the courts are increasingly deciding that it is not intrinsically anticompetitive to have an enforced minimum price." What happens now, thanks to Leegin, is that minimum prices are now judged "according to the rule of reason," which is the usual way to judge if the Section 1 of the Sherman Anti-Trust act has been violated.

Price Fixing is Another Matter

Leegin, however, didn't allow for blanket price-setting by manufacturers. Price-fixing is still illegal, and the Surpreme Court identified two possible ways in which a minimum price might flout the law: If one dominant retailer requests a minimum price to "forestall innovation in distribution that decreases costs," giving the manufacturer little choice but to go along. Or if a dominant manufacturer uses a minimum price "to give retailers an incentive not to sell the products of smaller rivals or new entrants." Apple and publishers' agreed-upon agency model might well fall under either or both of these two situations, especially if rumors that Apple required publishers to sign a "most favored nation status" agreement prove true.

The larger picture is that a number of interested parties, including the Senate, the House of Representatives, and state AG offices in California and Maryland have a vested interest in seeing Leegin overturned, or at least heavily modified. It's all too possible that Texas's inquiry into book publishers' arrangements with Apple may not come to fruition, considering that Apple has dodged other antitrust-related matters thus far. But if the so-called "fishing expedition" does lead to legal action, the publishing industry's quest to bump up e-book prices by mere dollars will make them the newest poster children for American antitrust measures.