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European Commission

MEMO

Brussels, 13 December 2012

Antitrust: Commission accepts legally binding commitments from Simon & Schuster, Harper Collins, Hachette, Holtzbrinck and Apple for sale of e-books

What were the Commission's concerns?

In December 2011, the Commission opened proceedings against Apple and five international publishers: Simon & Schuster (CBS Corp.), Harper Collins (News Corp.) both headquartered in the US, Hachette Livre (Lagardère Publishing) headquartered in France, Verlagsgruppe Georg von Holtzbrinck (owner of inter alia Macmillan) headquartered in Germany and Penguin (Pearson group) headquartered in the United Kingdom (see IP/11/1509).

The Commission had concerns that these companies may have contrived to limit retail price competition for e-books in the European Economic Area (EEA), in breach of EU antitrust rules.

Prior to January 2010, e-books were sold by publishers to retailers mainly under the wholesale model, whereby retailers would buy e-books from publishers and then freely determine the retail prices for those e-books when sold to consumers.

In January 2010, Apple and the four publishers jointly switched to agency contracts that all contained the same key terms, with the result that retailers became sales agents for publishers who wanted to sell directly to consumers. Under this agency model, the publishers determined the retail prices for e-books according to pricing rules in the agency contracts.

Those pricing rules included an unusual retail price "most favoured nation" (MFN) clause, maximum retail price grids and the same 30% commission payable to Apple. They were designed in a way that resulted in higher retail prices than those offered by certain major retailers at the time. In some countries, they were designed in such a way as to exclude any possibility of lower prices being offered in the first place.

What is a retail price "most favoured nation" (MFN) clause? Why was the retail price MFN clause problematic in this case?

The agency agreements between Apple and each of the four publishers contained a retail price MFN clause. Under agency agreements, it is for the publishers to set the retail price in line with the conditions set out in the contracts. The retail price MFN clause provided that, in the event another retailer were to offer a lower price for a particular e-book - including in situations where that retailer was operating under a wholesale model and thus was free to set retail prices - each publisher would have to lower the retail price of that e-book in the iBookstore to match the lower retail price of this other retailer.

Combined with the other key pricing terms in the agency agreements with Apple, the retail price MFN clause would have resulted in substantially lower revenues for publishers if other retailers had continued to offer e-books at the prices then prevalent on the market. Therefore, the retail price MFN clause acted as a joint "commitment device" which ensured that the four publishers would have the same financial incentives to make Amazon and other retailers switch to the agency model during the same time period.

The Commission's preliminary investigation has indicated that retailers were told that they would have to accept the agency model or risk being denied access to e-books from these major international publishers. Amazon and other retailers subsequently agreed to switch to the agency model and follow the retail prices determined under the agency agreements.

The Commission suspects, following its preliminary investigation, that this was 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.

What was the parties' reaction?

To address the Commission's concerns, Apple and four publishers (Simon & Schuster, Harper Collins, Hachette and Holtzbrinck) offered commitments.

Penguin first chose not to offer commitments. However, the Commission is currently engaged in constructive discussions with Penguin on possible commitments. If these discussions bear fruit, they would allow an early closure of proceedings also against that publisher.

What are the main commitments?

1. Termination of agency agreements

Each of the four publishers and Apple shall terminate the agency agreements for the sale of e-books in the EEA concluded between each of the four settling publishers and Apple within fourteen days from the Commission's decision. Apple shall further terminate its agency agreement with Pearson/Penguin in line with the conditions laid down in the commitments.

2. Termination of agency agreements concluded with retailers other than Apple

The four publishers shall terminate all agency agreements in the EEA concluded for the sale of e-books that (i) restrict the retailer's ability to set the retail price, or to offer price discounts or promotions, or (ii) contain a price MFN clause, within seventy days from the notification of the Commission decision. In case a retailer decides not to make use of the opportunity to terminate such an agreement, the four settling publishers will terminate it in line with the termination conditions laid down in the agreement.

3. Two-year cooling-off period

For a period of two years, the four publishers shall not restrict the ability of e-book retailers to set retail prices for e-books and/or to offer discounts or promotions. If these four publishers choose to enter into new agency agreements, they will be able to limit the total discount that a given retailer is allowed to grant on sales of e-books to the aggregate amount of commissions that a given publisher has paid to that retailer over a 12 month period in connection with the sale of its e-books to consumers.

4. Five-year ban on retail price MFN clauses

For a five year period, starting from the notification of the decision, neither Apple nor the four publishers will enter into any agreement for e-books which contains a retail price MFN clause.

Does the Commission prohibit agency agreements?

The decision does not take a position on the compatibility of the parties' agency agreements with EU antitrust rules (Article 101 of the Treaty on the Functioning of the European Union - TFEU - and Article 53 of the EEA Agreement) as such. Rather, the decision focuses on the issue of the suspected concerted practices between the publishers, with the help of Apple. However, the commitments require the termination of agency agreements that were the result of the suspected collusion. The commitments further provide that the parties have to submit their new agreements to the Commission.

The compliance of any new agency agreement, generally speaking, with Article 101 TFEU is likely to require a case-by-case assessment. As for any other agreement or practice, the responsibility for assessing their compatibility with EU antitrust rules (Articles 101 and 102 TFEU) remains with the companies concerned.

The Commission does not take issue with the use of agency agreements as such or the use of a specific business model, if the relevant agreements and business practices comply with EU law.

How will consumers benefit from these commitments?

The commitments end the practices that were at the origin of the Commission's concerns and restore conditions that will allow the market to reset itself. Where permitted by national law, this has the potential to result in lower e-book prices for consumers in the European Economic Area (EEA). Competitive markets benefit all competitors, they encourage innovation, and the resulting benefits can be passed on to consumers.

What were the reactions to the market test of the commitments?

The Commission received observations from interested third parties, including e-book publishers, e-book retailers and trade associations.

The observations received mainly relate to the termination of existing agency agreements, the cooling-off period, the scope of the ban on price MFN clauses and non-circumvention and compliance terms. Some comments related to definitions set out in Apple's initial commitments. The Commission took its decision on the basis of all submissions received.

Why is the duration of the "cooling-off" period during which retailers can offer discounts set at 2 years?

The Commission considers that the 2 year duration offered by the companies is appropriate.

A duration of less than two years would not sufficiently unlock the trading conditions for e-books in the European Economic Area (EEA) to allow for an effective competitive reset of the market, and would therefore create a risk that the effects of the possible concerted practice could be replicated at the end of the "cooling-off" period. On the other hand, the Commission considers that a duration of more than two years could have amounted to over-regulation of a nascent and fast-moving sector.

Why is the duration of the overall commitments 5 years?

The Commission accepted a duration of 5 years for the overall commitments. A longer period would probably not have been suitable in the nascent and fast-moving e-books market, while a shorter period would have been insufficient to address the competition concerns identified by the Commission and remove the results of the suspected collusion.

Why has the Commission concluded its investigation by accepting commitments in this case even if it involved suspected collusion between competitors?

The Commission considers that in this specific case, in particular given the fact that the market for e-books is a nascent and fast-moving market, the Commission's priority should be to put an end to the potential infringement and restore the normal conditions of competition as quickly as possible. This enables European consumers and market participants to reap the benefits of competition sooner rather than later.

The Commission's decision does not find an infringement of EU competition rules but makes the commitments legally binding. The companies may face sanctions if these commitments are not complied with.

Is this case about national retail price setting laws or VAT regimes?

The investigation does not concern or have any bearing on either national retail price setting laws or national VAT regimes.

Do the commitments impact on cultural diversity?

The Commission's decision does not call into question the importance of cultural diversity nor the Commission's commitment to that goal.

There is no reason to assume that furthering or maintaining cultural diversity requires companies to collude on the retail prices of e-books. Hence, there is no reason why the Commission’s investigation should have any negative impact on cultural diversity or on authors, publishers, distributors and retailers. The commitments merely aim to restore normal competitive conditions after a suspected concerted practice between competitors. The Commission is not deciding on behalf of the industry which model they shall use to sell e-books.

It is also worth mentioning that this decision does not relate to national retail price maintenance laws.

In this case the Commission was concerned with suspected collusion. Collusion restricts competition and can therefore distort the functioning of an entire market, with negative effects on both prices and innovation. In the case of e-books, this would harm authors, publishers, distributors, retailers and ultimately European consumers.

See also IP/12/1367


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