Celebrating National Consumer Protection Week

As we’re sure you know, March 4-10 is officially National Consumer Protection Week. President Barack Obama asked that government officials, industry leaders, and advocates across the Nation to share information about consumer protection and provide our citizens with information about their rights as consumers.

The biggest consumer news of the week, obviously, was the revelation of a bright, new, shiny precious from Apple. Apparently, the iPad’s screen got a major upgrade, a new camera now enables the iPad to shoot video in 1080p full HD resolution, the device now connects to Verizon and AT&T LTE/4G networks and – despite the significant upgrades -- is still on sale at a starting price of $499 for the 16GB model, stretching up to $699 for the 64GB model -- the same price as it's always had.

Wow, what a victory for consumers. See you in line at the local Apple retail store and in the Headlines next week – that’s a wrap.

But – cue the sound for scratched vinyl – there is one iPad-related consumer issue. And it has to do with the content you might enjoy on it.

On the day after Apple unveiled the newest iPad, the Wall Street Journal reported that the Justice Department has warned Apple and five of the biggest US publishers that it plans to sue them for allegedly colluding to raise the price of electronic books. In just a few short years, e-books have gone from fringe product to mainstay of the publishing industry, exploding in popularity.

The dispute centers on a pricing policy that many in the publishing industry consider critical to its survival as e-books become an increasingly large share of the market. And because electronic books are so new, the cost structure is an emerging issue on which there is little history to provide guidance and many diverging interests.

The five publishers facing a potential suit are CBS Corp.'s Simon & Schuster Inc.; Lagardere SCA' s Hachette Book Group; Pearson PLC' s Penguin Group (USA); Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH; and HarperCollins Publishers Inc., a unit of News Corp. Apparently, several of the parties have held talks to settle the antitrust case and head off a potentially damaging court battle. Could the publishers be seeking a lenient settlement in return for offering damning evidence of the conspiracy? For Apple and the publishers to dig in for a fight poses another risk. Namely, the government will air more of the companies’ dirty laundry than if they choose to settle. That information can then, in turn, be scooped up by consumer class action lawyers looking to strengthen their own suits.

In any case, if there’s a settlement and, if successful, such a settlement could have wide-ranging repercussions for the industry, potentially leading to cheaper e-books for -- yes -- consumers.

There appears to be a general agreement among the publishers that it is vitally important to retain the current e-book pricing model, which allows publishers to set their own prices for e-books as they face an aggressive challenge from Amazon in the book market.

Back in the day (you know, 2010) as Apple prepared to launch the first iPad, the dominant model in the e-book publishing market (and print publishing, for that matter) was what publishers call the "wholesale model", which allows retailers — such as Amazon — to cut deals with publishers and then set the price on e-books at whatever level they want. This allowed Amazon to set prices at $9.99 or lower, which it said was necessary in order to stimulate demand (and thereby also boost sales for its Kindle e-reader). But for publishers, this meant a significant haircut from the cover prices they were used to charging for print books and, therefore, a threat to profit margins.

Some publishers tried to fight Amazon’s price-cutting moves, but the online retailer’s response was swift and merciless: When Macmillan balked at the $9.99 level, Amazon yanked all of the publisher’s books (including its printed books) from its online inventory, until Macmillan relented.

With the iPad, Apple offered to work with publishers in an "agency model." As Steve Jobs described it:

We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway…’ They went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books.’

Writing in paidContent.org, Jeff Roberts reports that a court filing provides new insight into Apple’s version of events concerning an incident in which Steve Jobs told a reporter that “unhappy” publishers might withhold e-books from Amazon. The Steve Jobs comments were made to the Wall Street Journal’s Walt Mossberg shortly before the launch of the iPad in January of 2010. Since then, class action lawyers have pointed to Jobs’ words as the smoking gun in a scheme in which Apple and the publishers allegedly conspired to force Amazon to raise e-book prices. In its filing, Apple argues that its business plan was to sell as many e-books as possible and that it had no incentive to raise prices. It also claims that is was a new and inexperienced player in a business in which Amazon dominated with 90 percent marketshare.

Apple’s lawyers write:

[I]f Amazon was a ‘threat’ that needed to be squelched by means of an illegal conspiracy, why would Apple offer Amazon’s Kindle app on the iPad? Why would Apple conclude that conspiring to force Amazon to no longer lose money on e-books would cripple Amazon’s competitive fortunes? And why would Apple perceive the need for an illegal solution to the “Kindle threat” when it had an obvious and lawful one which it implemented – namely, introducing a multipurpose device (the iPad) whose marketing and sales success was not centered on e-book sales?

If that current system were to disappear, it would be a boon to Amazon, said Mike Shatzkin, chief executive of the Idea Logical Company, which advises book publishers on digital change, adding that it would be “essentially bad news for just about everybody else in the book business.” “Ultimately, that would mean that the price of books is going to come down and the amount of money that authors can earn is going to come down,” Shatzkin said.

Any new limits on agency pricing could also benefit the consumer, however, if it allowed Amazon to offer lower prices for e-books again.

We’ll keep an eye on this story as it develops. Looking ahead to next week, a busy agenda includes Spectrum Efficiency, the Freedom of Information Act, the FCC’s Diversity Advisory Committee, Navigating a Framework for Consumer Privacy in a Digital Age, and Mobile Health.