April 11, 2012, 12:43 PM

An e-book price suit targets Apple

The U.S. Justice Department takes action against Apple and several publishers.

Lead Photo

The U.S.  Justice Department today filed an antitrust suit that says Apple Inc. and a handful of major book publishers conspired to raise retail e-book prices and limit price competition for e-book sales. The suit says their moves violate antitrust laws and resulted in U.S. consumers paying millions of dollars more for e-books than they otherwise would have paid.

The Justice Department also announced proposed settlements with three of the publishers named in today’s suit:  Hachette Book Group Inc., HarperCollins Publishers LLC and Simon & Schuster Inc. If approved by the court, the settlement would require the publishers to let retailers reduce the prices of those publishers’ e-book titles. Amazon.com Inc. today applauded the settlement. “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” a spokesman says.

Under the terms of the agreement, the publishers would also have to terminate their “anti-competitive most-favored-nation agreements with Apple and other e-book retailers,” said U.S. Attorney General Eric Holder in announcing the suit today.

The suit, filed in U.S. District Court in New York’s Southern District, takes aim at the so-called agency model of pricing, which emerged in late 2009 and effectively put publishers in control of retail prices. Under the agency model, publishers set the retail price for e-books and pay the retailer a commission for each e-book sold. Under the previous model, publishers sold e-books to retailers under the same model they used for print books, with the retailer paying a wholesale price up front. The retailer could then sell the title for whatever price it chose to. This led Amazon.com to price many popular new titles at $9.99, a price often below the wholesale price it paid publishers.

The suit says Apple and the rest of the publisher defendants—The Penguin Group, Penguin Group (USA) Inc., and the parent companies of Macmillan, Verlagsgruppe Georg Von Holtzbrinck GmbH and Holtzbrinck Publishers LLC—shared the same goal of restraining retail price competition of e-books and worked out the agency pricing model ahead of Apple’s launch of the iPad tablet computer in spring 2010.

“Together, Apple and the publisher defendants reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the publisher defendants desired) and Apple would be guaranteed a 30% ‘commission’ on each e-book it sold (which Apple desired),” the suit says.

The suit says the companies then coordinated the transition to an agency model across all retailers. Amazon.com, No. 1 in Internet Retailer’s Top 500 Guide, initially stopped selling titles from publishers that demanded it comply with the agency model, but eventually capitulated.

The suit asks the court to declare Apple’s and the publishers’ actions illegal and to restore competition for e-book pricing. Apple is No. 3 in Internet Retailer’s Top 500 Guide. The United Kingdom and the European Union have previously announced their own investigations into e-book pricing.

The Justice Department's move to banish agency pricing and restore price competition for e-books is likely good news for Amazon and its e-book and tablet businesses, says Colin Sebastian, an investment analyst for Baird Equity Research. "While the shift back to a wholesale model could pressure Amazon’s growth and profit margins on book sales, overall we see the company benefiting from further market share gains, unit sales and possibly a boost to the Kindle/Fire business," Sebastian says in an investment note. "We believe Amazon’s top priority for e-books is to keep prices low, which should help to drive consumer adoption of Kindle readers and tablets, and fortify Amazon’s leadership position in its most successful digital segment."

Apple did not respond to a request for comment. HarperCollins and Hachette each said they had agreed to settle and denied taking part in any pricing conspiracy.

“Hachette was not involved in a conspiracy to illegally fix the price of e-books, and we have made no admission of liability,” the publisher says in a statement. “Hachette’s unilateral adoption of agency was designed to facilitate entry by a new retail competitor and to increase the diversity and health of retail booksellers, and we took these actions knowing that Hachette itself would make less money than before the adoption of agency."

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