E-books and Competition Compromise

December 13, 2012

The European Commission has adopted a decision that renders legally binding commitments offered by Apple and four international publishers – Simon & Schuster (CBS Corp., USA), Harper Collins (News Corp., USA), Hachette Livre (Lagardère Publishing, France), Verlagsgruppe Georg von Holtzbrinck (Germany; owner of inter alia Macmillan). The Commission had concerns that these companies may have contrived to limit retail price competition for e-books in the EEA, in breach of EU antitrust rules. To address these concerns, the companies offered in particular to terminate on-going agency agreements and to exclude certain clauses in their agency agreements during the next five years. The publishers have also offered to give retailers freedom to discount e-books, subject to certain conditions, during a two-year period. After a market test (see IP/12/986), the Commission is satisfied that the final commitments remedy the identified competition concerns it had identified (see also MEMO/12/983).

Joaquín Almunia, Commission Vice-President in charge of competition policy, said: ‘While each separate publisher and each retailer of e-books is free to choose the type of business relationship it prefers, any form of collusion to restrict or eliminate competition is simply unacceptable. 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’.

The Commission opened proceedings in December 2011 against these companies as well as a fifth international publisher, Penguin (Pearson group, United Kingdom). The Commission had doubts concerning the joint switch by these companies from a wholesale model, where the retail price of e-books is determined by the retailer, to agency contracts that contained the same key terms for retail prices – including an unusual retail price Most Favoured Nation (MFN) clause, maximum retail price grids and the same 30% commission payable to Apple. The Commission was concerned that the switch to these agency contracts may have been coordinated between the publishers and Apple, as part of a common strategy aimed at raising retail prices for e-books or preventing the introduction of lower retail prices for e-books on a global scale.

Four publishers and Apple offered commitments to address these concerns. In particular, the publishers agreed to terminate all existing agency agreements that include retail price restrictions and a retail price MFN. The publishers further commit not to enter into new agreements that include price MFN clauses for five years. They also commit to a two-year ‘cooling-off period’, during which retailers will be free to offer retail price discounts for e-books up to an amount equal to the commission the retailer receives from the publisher over a one year period.

Apple commits to terminate its agency agreements with these four publishers as well as with Penguin. Apple further commits not to enter into or enforce any retail price MFN clauses they may have in any new or existing agency agreements for a period of five years.

The Commission has concluded that these commitments are suitable to restore and maintain retail price competition for the sale of e-books in the EEA.

The Commission’s decision is not addressed to Penguin as this publisher chose not to offer commitments to the Commission. However, the Commission is currently engaged in ‘constructive discussions’ with Penguin on commitments that would allow an early closure of proceedings also against that publisher.

A non-confidential version of the decision will be available on the competition web site, in the Commission’s public case register under the case number 39847

Background on Most Favoured Nation (MFN) clauses

A retail price ‘most-favoured-nation’ (MFN) clause means that a contracting retailer/agent is entitled to apply any lower retail price offered for a particular e-book by another retailer, regardless of whether that other retailer is operating on a wholesale or agency model.

This clause, combined with other pricing terms in the agency agreements with Apple, would have resulted in lower revenues for the publishers if other retailers had continued to offer e-books at the prices that prevailed at the time. However, according to the Commission’s preliminary investigation this clause was meant to ensure that the publishers would compel other retailers to switch to the agency model on similar terms as those agreed with Apple, and this switch would occur at approximately the same time. Retailers were told they might no longer be supplied with e-books from these major international publishers if they did not agree to this change.

Background on the investigation

Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits cartels and restrictive business practices.

After unannounced inspections in March 2011 (see MEMO/11/126), the Commission opened antitrust proceedings in December 2011 against five international publishers (Simon & Schuster, Harper Collins, Hachette, Holtzbrinck, and Penguin) and Apple (see IP/11/1509). Following discussions on possible commitments between all publishers but Penguin as well as Apple, the Commission informed in August 2012 the four publishers and Apple of its preliminary competition concerns. In September 2012, the Commission consulted stakeholders on draft commitments offered by these four publishers and Apple to remedy the Commission’s preliminary concerns (see IP/12/986).

The Commission has worked closely with the US Department of Justice (DOJ) in this case in order to seek a global solution to the identified horizontal concerns. On this basis, the DOJ settled the case with Simon & Schuster, Hachette and Harper Collins. It also sued Apple, Holtzbrinck/Macmillan and Pearson/Penguin. That litigation is on-going.

The Commission’s decision is based on Article 9 of the EU’s Antitrust Regulation (Regulation 1/2003). It makes the commitments offered by Simon & Schuster, Harper Collins, Hachette, Holtzbrinck and Apple, revised in light of the market test results, legally binding and ends the Commission’s proceedings against these companies. It does not conclude on whether EU antitrust rules have been infringed but legally binds the companies concerned to respect the commitments they have offered. If a company were to break commitments made binding on them, the Commission can impose a fine of up to 10% of its annual worldwide turnover, without having to find an infringement of the antitrust rules.