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Despite Denial, Apple Dictated E-Book Pricing at iBookstore

Apple's deal with e-book publishers contained a sweetheart clause to keep Apple's wares competitive.

Apple has finally broken its near-silence on the U.S. Department of Justice (DOJ) lawsuit against it and a half dozen publishers for conspiring to fix-prices on e-books.

In a statement issued Thursday, the company declares: "The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon's monopolistic grip on the publishing industry."

"Just as we have allowed developers to set prices on the App Store, publishers set prices on the iBookstore," it adds.

However, pricing at the iBookstore may not have been as laissez faire as Apple would like us to believe, at least according to the DOJ's complaint. It alleges that Apple's deal with iBookstore publishers contains an unusual twist in a common clause found in retail agreements.

Called a "most favored nation clause" (MFN), the language is designed to protect a retailer from price manipulation by a wholesaler. So if a publisher sells the retailer bestseller XYZ for $5, then turns around and sells XYZ to another retailer for $4.50, a most-favored-nation clause would require the publisher to start selling XYZ to the first publisher for $4.50, too.

Apple's deal with the publishers, though, went far beyond guaranteeing competitive prices at the iBookstore, according to the DOJ. It was structured to insulate Apple from any price competition whatsoever.

It did that by requiring the publishers to lower the price of any e-book sold in the iBookstore to match the lowest price of any retailer, even if a publisher didn't have any control over that retailer's price.

So Apple's suggestion that publishers had a free reign to set prices at the iBookstore is a bit disingenuous. Apple indirectly dictated the pricing of e-books at the iBookstore by requiring publishers to sell their wares there at the lowest price found on the Internet.

 "[I]nstead of an MFN designed to protect Apple's ability to compete, this MFN was designed to protect Apple from having to compete on price at all, while still maintaining Apple's 30 percent margin," the DOJ complaint says.

That the DOJ is making an issue of Apple's MFN with the publishers shouldn't surprise anyone, according to Geoffrey Manne, executive director of the International Center for Law and Economics, in Portland, Oregon, and a lecturer in law at the Northwestern School of Law at Lewis & Clark College.

"This DOJ has a sort of vendetta against the most-favored-nation clause," he asserts. "Actually, a big part of this story is the most-favored-nation clause." A lot of the remedy detailed in the settlement between the DOJ and three of the publishers named in the complaint involves constraints on most-favored-nation clauses, he adds, "including ones that weren't even at issue in this case."

While Apple was content on letting the publishers set their own prices in the iBookstore, it still had to watch its competitive back, Manne says. In order to do that, it required the publishers to sell e-books at the lowest price on the Net. "It makes perfect sense," he says. "Without it, Apple bears a lot of risk."

With it, however, the publishers don't have as much freedom to set their prices in the iBookstore as Apple would like us to believe.

Follow freelance technology writer John P. Mello Jr. and Today@PCWorld on Twitter.

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