Consumer Federation of California

Last week, the Justice Dept. offered its first proposal of how Apple should be punished now that it’s been found to have colluded with publishers to fix e-book prices. Among those suggestions is that Apple cancel its existing pricing arrangement with the publishers in question and that it not enter into similar arrangements for another five years. But publishers claim that this ultimately hurts the content providers and not the retailer.

At the heart of the lawsuit and Apple’s arrangements with publishers is the so-called “agency pricing” model. Traditional pricing models for booksellers had retailers paying a discounted price (usually between 40-60% of the full price) and then setting their own retail price. Before Apple got into the e-book game, publishers complained that Amazon was using its size and its built-in Kindle user base to negotiate massive discounts and then selling e-books at prices far below retail prices for print editions of the same title.

So when Apple was prepping to launch its iPad tablet, it approached publishers about making the switch to agency pricing, in which the publisher determines the retail price and the seller gets a 30% commission. This would allow the publishers to determine their own margins on e-books, but it would only work if all major e-book sellers agreed to it. Otherwise, Amazon or BN.com could just lower their price to make it lower than the price set by the publisher.

And so the publishers renegotiated their deals with all major sellers, and for a few years many of the e-books sold on Amazon were priced with the note that “Price set by publisher.” Without the ability to set its own price, it often cost less to buy a paperback copy on Amazon and have it shipped to your door than it would to buy the e-book.

The publishers involved in the DOJ lawsuit all settled before going to trial, and each agreed to dissolve agency pricing agreements with Amazon. But the publishers have a big problem with the DOJ’s proposal that prohibits Apple “from entering into e-book agreements with Publisher Defendants that limit Apple’s ability to discount e-books.”

In a filing with the court on Wednesday, the publisher argued that they will be the ones who ultimately pay the price on that restriction.

“The provisions do not impose any limitation on Apple’s pricing behavior at all; rather, under the guise of punishing Apple, they effectively punish the settling defendants by prohibiting agreements with Apple using an agency model,” reads the filing.

Publishing industry insiders tell Consumerist that the big concern is that, thanks to agency pricing, Apple now has the foothold it sought to carve out in the e-book market. Apple could probably now hold its own in a pricing war with Amazon, at least on the most popular titles, which means that Apple, like Amazon, will begin demanding bottom-dollar wholesale pricing on e-books. Apple is already notorious for using the size of its iTunes user base to negotiate the most competitive prices in the music business.

The publishers’ protest may be just a burp in the wind right now, as Apple plans to appeal the trial verdict, meaning it could be quite some time before the DOJ’s penalties are ever enforced.