The agency pricing model allows publishers to set the retail price for their ebooks and pay the seller, Apple in this case, a cut. Apple’s take with its iBooks ebook store is 30 percent, while publishers keep 70 percent.
Before the iPad and this deal with the major publishers, retailers like Barnes & Noble and Amazon paid publishers a fixed price and were then free to sell those books at whatever price they wanted. Amazon would frequently sell Kindle editions of those books below cost in an effort to promote its Kindle platform and take share away from brick and mortar retailers like Barnes & Noble and the now-defunct Borders.
Apple had no desire to lose money on ebooks and offered publishers the above-described agency model, but it include a n enforcement clause that has since been nicknamed the “most favored nation” clause, a takeoff on the international trade agreement term of the same name.
By including that clause, publishers agreed to not sell its books for less anywhere else. Armed with that agreement, publishers were able to force Amazon to renegotiate their deals with that retailer to fall in line with Apple’s, thus ending Amazon’s ability to dump books.
This was important for publishers, as well as Apple, because they were concerned that Amazon’s dumping strategy would make it impossible to continue selling high-margin hardback books and that Amazon was systematically devaluing the perceived value of their product.
In other words, Apple benefitted by not being forced to compete with Amazon on price, while publishers benefitted by retaking control of their product. The end result was that retail prices went up overnight on many best sellers, jumping from US$9.99 on Amazon to $12.99 and $14.99.
The DOJ grew concerned that there was collusion between Apple and the publishers, and announced an investigation in late 2011. The five publishers and Apple are reportedly near a settlement, but The Wall Street Journal reported that Apple, Penguin, and MacMillan have been resisting the settlement terms. The other three major publishers, Simon & Schuster, HarperCollins, and Hachette Book Group, have apparently agreed to those terms, while Random House isn’t a part of the investigation.
No one is speaking on the record about those settlement talks, but The Journal’s sources said that the settlement terms include scrapping the most favored nation clause, as well as a “cooling off” period before the publishers could resume their existing deals with retailers. The DOJ apparently believes this will eliminate any taint of collusion.