What the DOJ settlement means for ebook prices now

On Thursday, U.S. District Judge Denise Cote approved a proposed settlement put forth by the Department of Justice to resolve allegations that three publishers had colluded with Apple (s AAPL) to fix ebook prices. Here’s what will happen next.

Now that the settlement is approved, when will we see changes?

According to the terms of the settlement, the settling publishers — HarperCollins, Hachette and Simon & Schuster — have seven days to terminate their agency contracts with Apple. They also must terminate agreements with other retailers, like Amazon (s AMZN), “as soon as each contract permits,” i.e., when the contract expires, or the retailers can terminate the contracts on 30 days’ notice. Then the settling publishers and retailers can enter into new contracts. If appeals are denied, we could see new agreements with Apple by this Friday, September 14 and new agreements with other retailers in mid-October. Update, 5:30 PM: HarperCollins has already entered into new agreements with ebook retailers and Amazon is already discounting its titles. The approaching holidays provide publishers and retailers with extra impetus to reach new agreements quickly so that they don’t miss out on sales.

Entertainment industry attorney Bob Kohn, who also filed an amicus brief, has asked Judge Cote to suspend the proceedings until an appeals court weighs in. Apple is also likely to appeal. However, Judge Cote is likely to reject the request for stay.

How low will prices go?

Retailers will be free of almost all restrictions on pricing. As I wrote in April, we are likely see deep discounts on bestselling titles from HarperCollins, Hachette and Simon & Schuster — and while those discounts are especially likely at Amazon, retailers like Barnes & Noble and Kobo will want to match at least some of the prices in order to compete.

Apple is a bit of a wildcard: Because of the MFNs in its contracts for all types of content, it hasn’t had to think about matching discounts before. “Without that protection, how will Apple compete? They’ve never had to do competitive pricing of commodity products before,” writes publishing industry consultant Mike Shatzkin on his blog. “I will be very impressed if Apple can get through the price fights about to take place without an obvious black eye. They haven’t been training for this.”

As I noted in April, the settlement also allows for new types of pricing promotions like bundling, buy-one-get-one-free or subscriptions. In her approval of the settlement, Judge Cote agrees with the DOJ that agency agreements “eliminated potential pricing innovations, such as ‘all-you-can-read’ subscription services, book club pricing specials, and rewards programs.” Those are back on the table now.

Amazon could also begin including Hachette, HarperCollins and Simon & Schuster titles in the Kindle Owners’ Lending Library for Amazon Prime members. It doesn’t have to have their permission; as it has already done with some titles from some other publishers, it could just pay the wholesale price each time an ebook is borrowed.

What are the restrictions or exceptions?

Macmillan and Penguin, the two publishers fighting the Department of Justice in court (along with Apple) don’t have to enter into new contracts, nor does the final big-six publisher, Random House, which wasn’t named in the DOJ lawsuit. Those publishers may have to drop their own prices, though, in order to compete.

Agency pricing has been declared legal, and it doesn’t go away now. The settling publishers can still sell their ebooks to retailers under agency contracts, where they set a book’s list price and the pay the retailer a commission. The difference now is that retailers can discount the ebooks however they want.

However, there are limited exceptions: The settlement allows HarperCollins, Hachette and Simon & Schuster to negotiate new contracts that include “a commitment from an e-book retailer that a retailer’s aggregate expenditure on discounts and promotions of the Settling Defendant’s ebooks will not exceed the retailer’s aggregate commission under an agency agreement in which the publisher sets the ebook price and the retailer is compensated through a commission.” The settling publishers can also negotiate one-year contracts that “prevent e-book retailers from cumulatively selling that Settling Defendant’s e-books at a loss over the period of the contract.”

It’s not clear, though, how those “commitments” will be enforced or what kind of reporting the retailers would have to do to show publishers that they’re not selling all of their books at a loss. “If you were a publisher wanting to make sure that a retailer had not exceeded their allowed discounting, you would want to know precise data about how many units were sold at which price points,” Michael Cader writes in a really excellent explainer post at Publishers Lunch (paywall). “But retailers have never provided that kind of the data in the past, and are expected to resist strongly on that point.”

Will ebook prices actually go up?

Publishers Lunch’s Cader raises the seemingly counterintuitive point that settling publishers may actually raise their ebooks’ list prices. Nothing in the settlement prevents them from doing so, and “higher list prices could ‘use up’ a retailer’s annual discount pool more quickly and provide some protection against devaluation in the marketplace of a publisher’s biggest properties.” In other words, HarperCollins, Hachette and Simon & Schuster could raise the list prices on bestselling ebooks from $12.99 to, say, $18.99. A retailer like Amazon would then have to pay those publishers a higher commission and discount their ebooks even more steeply, if the retailer wants to offer the greatest discounts.

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