If you're an Amazon Kindle customer who purchased an e-book between April 2010 and May 2012, you might receive a partial refund thanks to a 2012 court settlement. Recently, Amazon alerted its Kindle customers that a settlement between popular e-book publishers and 54 attorneys general will result in customers receiving a refund estimated at 30 cents to $1.32 for each eligible e-book purchased. Why is the refund happening and how can you make sure you get your fair share?
The Agency Five
The auto industry has the Big Three, and the book publishing industry has the Agency Five. The Agency Five is comprised of the five largest publishers in the book business: Hachette, HarperCollins, Simon & Schuster, Macmillan and Penguin. These traditional publishers feel the pressure of a changing business model where the demand for traditional books is declining.
Bloomberg reports that sales of e-books soared 117% in 2011 and generated almost $970 million in revenue. In February 2011, Borders, the second largest U.S. bookstore chain, filed for bankruptcy. The bookstore's sales fell 2.3% during the first quarter of 2012, according to the U.S. Census Bureau. With the popularity of traditional books declining, publishers are looking for pricing and distribution models that will assure their survival in the digital age.
In the past, the book business followed the same pricing model as most retail stores. This wholesale pricing model allowed a store to purchase a product at a wholesale price and discount from the suggested retail price, but Apple, along with the Agency Five, drafted an agency agreement. Agency agreements allow the publisher, not the vendor, to set the price of e-books by removing the vendor's ability to control profit margins. Whether this type of agreement is legal is the subject of controversy, but the U.S. Department of Justice believed that Apple, along with Agency Five, entered into an agreement to set e-book prices abnormally high. The suit alleges that the six parties shared secret competitive information in order to set prices.
This alleged price fixing not only removed nearly all competition from the market but also allowed for a most-favored-nation clause that guaranteed Apple would always receive the lowest price offered to competitors. This would make it difficult for smaller e-book retailers to compete since their profit margins are lower than companies like Apple that purchase the titles at a lower price. The government's goal is to allow retailers to return to a wholesale pricing model.
Shortly after the Department of Justice filed the lawsuit, three of the Agency Five publishers settled. The agreement between the attorney general and HarperCollins, Hachette and Simon & Schuster will result in payments of more than $69 million to customers who purchased an e-book.
The three publishers will also pay $7.5 million to states for fees and costs associated with litigation. For two years, settling publishers cannot draft new agency agreements or share sensitive information with their competitors. They're also prohibited from agreeing to any most-favored nation clauses. The Penguin Group, Macmillan and Apple did not agree to the settlement. A separate case against these three companies is set to go to trial in June 2013.
Amazon sent an email to its Kindle customers informing them that the settlement will come in the form of a credit applied to their accounts. Customers don't have to take any action to receive the refund. The credit may be used to purchase e-books or print books, or customers may request a check for the refund amount.
The Bottom Line
The settlement reached with the attorney general allows the three companies to pay damages without admitting guilt. In an e-mail to its customers, Amazon said that the settlement is a "big win" for customers and it will allow Amazon to lower the price on Kindle e-books in the future. Customers may see less than $1 out of the settlement, but free market advocates believe this is a big win for retailers and consumers.