Europe Probing Apple And Publishers For E-book Price ‘Cartel’

After carrying out unannounced inspections at the companies back in March, the European Commission is now starting a formal antitrust investigation into whether Apple (NSDQ: AAPL) and book publishers are limiting e-book competition with their “agency” pricing model.

The EC will investigate whether Hachette Livre, Harper Collins, Simon & Schuster (NYSE: CBS), Penguin and Macmillan Germany owner Holtzbrinck “have, possibly with the help of Apple, engaged in anti-competitive practices affecting the sale of e-books in the European Economic Area (EEA)1, in breach of EU antitrust rules” (announcement).

“The Commission will in particular investigate whether these publishing groups and Apple have engaged in illegal agreements or practices that would have the object or the effect of restricting competition in the EU or in the EEA.

“The Commission is also examining the character and terms of the agency agreements entered into by the above named five publishers and retailers for the sale of e-books. The Commission has concerns, that these practices may breach EU antitrust rules that prohibit cartels and restrictive business practices (Article 101 of the Treaty on the Functioning of the European Union – TFEU).”

At issue is whether the “agency” model of pricing hurts consumers. Under that model, publishers maintain control over the prices of e-books throughout the supply chain and simply pay the retailer a commission, typically 30 percent.

The agency model eliminates book discounting by retailers. Under the agency model, publishers can put their e-books on sale, but the e-book’s price has to be the same everywhere it is sold. That’s different from the standard wholesale model, in which publishers set books’ suggested retail price (list price) and sell books to retailers at wholesale prices. The retailers then set the sale price and can choose which books to discount.

Amazon (NSDQ: AMZN) has made it clear that it’s opposed to the agency model for e-books. Apple, on the other hand, insists upon the model as a condition of entry to its iBookstore. Indeed, Random House U.S. this year adopted the model for its e-books, thereby gaining entry to Apple’s iBookstore right before the launch of the iPad 2. (In the UK, Random House still uses the wholesale model for e-books and is not included in the European Commission’s investigation.)

The UK’s Office of Fair Trading began looking in to the issue in February but has now closed its inquiry to let the European Commission’s continent-wide inquiry take precedence.

One reason prices may be relatively high — most European states apply value-added tax (VAT) to e-books, even though printed equivalents enjoy reduced rates or, as in the UK, are exempt for cultural reasons. More via NYT.