Penguin Settles With EU On Apple E-Book Pricing Case To “Clear The Decks” For Random House Merger

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Penguin has offered, and has confirmed to us that the European Commission has accepted, a settlement with the EC over the agency pricing model for e-books — a case the stretched back to last year and involved Penguin, along with Hachette, Macmillan, HarperCollins and Simon & Schuster, as well as Apple. The other four publishers and Apple settled with the EC in September 2012. The deal will mean that Penguin can proceed with its merger with Bertlesmann’s Random House, first announced in October 2012, and approved by Brussels earlier this month, so that the two publishers can better battle Amazon.

But in making the settlement, Penguin maintained “it has done nothing wrong,” and that that its position “remains unchanged…the company continues to believe that the agency pricing model operates in the best interests of consumers and authors.”

The full statement from Penguin:

“Penguin confirms that, subject to the market test currently underway, it has reached an agreement with the European Commission to settle its investigation into the establishment of agency pricing agreements for eBooks. Penguin’s position that it has done nothing wrong remains unchanged and the company continues to believe that the agency pricing model operates in the best interests of consumers and authors. While we disagree with some elements of the Commission’s analysis, we are settling as a procedural matter to clear the decks in anticipation of our proposed merger with Random House.”

This also means that the EC’s investigation into agency model pricing will now also close. The full run-down of that case, as it has been played out with the commissioners, is here.

In essence, the publishers and Apple were being investigated over agency agreements signed between them that the EC believed prevented others (namely Amazon, but also Barnes & Noble and other online booksellers) from inking wholesale agreements with the publishers. The publishers would have looked for deals with Apple that it considered more favorable to the publishers, in light of the fact that Amazon regularly prices books at wafer-thin margins — and often at a loss — in order to drive more business overall.

The agency model lets the publishers set the price for books and offer resellers a fixed cut of that price (30% is a typical cut). The wholesale model sees publishers selling their books to distributors, who then sell them at whatever price they want. The latter is the route Amazon has used to great effect to grow its business, sacrificing margin on cheaper books for scale.

Penguin’s concessions in the settlement reached today are essentially the same as those reached by the other four publishers. According to the EC document outlining the case, they are as follows:

1. To the extent that they have not yet been terminated, Penguin will terminate the relevant agency agreements for the sale of e-books in the EEA concluded with Apple.
2. Penguin will offer each retailer other than Apple the opportunity to terminate any agency agreements concluded for the sale of e-books that: (i) restrict, limit or impede the retailer’s ability to set, alter or reduce the retail price or to offer price discounts or promotions; or (ii) contain a price MFN clause as defined in Penguin’s commitments. In case a retailer decides not to make use of the oppor­tunity to terminate such an agreement, Penguin will terminate it in line with the conditions laid down therein.
3. For a period of two years from notification of the decision to Penguin, Penguin will not restrict, limit or impede the ability of e-book retailers to set, alter or reduce retail prices for e-books and/or to offer price discounts or promotions. However, as regards agency agreements, the aggregate value of the price discounts or promotions offered by any retailer shall not exceed the aggregate amount equal to the total commissions Penguin pays to that retailer over a period of at least one year in connection with the sale of its e-books to consumers.
4. For a period of five years from notification of the decision to Penguin, Penguin will not enter into any agreement relating to the sale of e-books within the EEA that contains a price MFN clause as defined in Penguin’s commitments.

The newly formed Penguin Random House will be 53% owned by Bertlesmann and 47% owned by Pearson, Penguin’s parent.