US sues Apple, publishers in e-book price scheme


Posted at Apr 12 2012 06:56 AM | Updated as of Apr 13 2012 02:53 PM

WASHINGTON/SAN FRANCISCO - Apple Inc and publishers Penguin and Macmillan have decided to fight U.S. government charges that they conspired to fix the prices of e-books, even as three other publishers agreed to a settlement aimed at lowering prices for consumers.

The Justice Department accused Apple of colluding with the five publishers, as the Silicon Valley giant was launching its iPad in early 2010 and was seeking to break up Amazon's low-cost dominance in the digital book market.

The settlement reached with three of the publishers will allow Amazon.Com Inc and Barnes & Noble Inc to resume discounting books, and will terminate the "most favored nation" contracts with Apple.

Amazon said in response to the settlement that it plans to lower prices on books associated with its Kindle e-reader.

The pact also requires the publishers to wait two years before entering into any agreements that require an "agency model" that prevent retailers from offering discounts on electronic books.

The publishers who agreed to settle are News Corp's HarperCollins Publishers Inc, CBS Corp's Simon & Schuster Inc and Lagardere SCA's Hachette Book Group.

Hachette and HarperCollins also settled with a group of U.S. states, agreeing to pay $51 million in restitution to consumers who bought e-books.

James McQuivey, a media analyst at Forrester Research, said e-book prices were destined to come down, even without a Justice Department settlement, because publishers have still been experimenting with drastic deep discounting to stimulate sales.

"It essentially will accelerate the reversion back to the sub-$10 prices that Amazon had already established as the standard," McQuivey said.

Defiant Macmillan

U.S. Attorney General Eric Holder told a news conference in Washington that executives at the highest levels of Apple and the publishers worked together to eliminate competition among sellers of e-books.

"As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles," Holder said.

The Justice Department said it will vigorously pursue the suit against Apple and the publishers that did not settle. The federal lawsuit was filed in the U.S. District Court for the Southern District of New York.

Apple declined to comment. A person familiar with the matter said Apple has not been part of the settlement negotiations.

Macmillan Chief Executive John Sargent released a defiant letter to the book industry on Wednesday saying the publisher did not act illegally and did not collude.

Sargent said Macmillan had been in discussions with the Justice Department for months, but the settlement terms were "too onerous".

"After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model," Sargent said.

Hachette said in a statement that it reluctantly agreed to join the federal and state settlements, and that it "was not involved in a conspiracy to illegally fix the price of eBooks."

The three other publishers, including Pearson Plc's Penguin Group, could not be reached for comment.

The European Commission is also probing Apple and publishers in a similar antitrust probe. It said on Wednesday that it had received settlement proposals from Apple and four publishers - Simon & Schuster, Harper Collins, Hachette Livre and Macmillan parent Verlagsgruppe Georg von Holtzbrinck.

Jobs' role

The U.S. government alleged that Apple and the publishers had a common interest in fighting Amazon's practice of selling e-books for as little as $9.99 as it was building market share and trying to drive sales of its Kindle reader.

Apple's late co-founder and technology legend Steve Jobs figures prominently in the Justice Department's lawsuit with many instances of his personal involvement in negotiations with publishing executives about deal terms.

"Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99," Jobs wrote to one of the publishers, according to the Justice Department's complaint.

Apple successfully persuaded the publishers to adopt an agency model that allowed publishers to set the price of e-books and in turn, Apple would take a 30 percent cut. The Apple agreements with publishers effectively barred them from allowing rival retailers to sell the same books at lower prices.

The strategy upended the "wholesale model" in which retailers pay for the product and charge what they like.

In one instance during the summer of 2010, Jobs spoke by telephone to the chief executive of a publishing firm that was holding out, according to the lawsuit.

"Apple flatly refused to sell the holdout publisher's e-books unless and until it agreed to an agency relationship substantially similar to the arrangement between Apple and the Publisher Defendants defined by the Apple Agency Agreements," the government's lawsuit said.

The e-book industry has continued to explode, despite the increase in prices that occurred after Apple reached its deals with the publishers.

The market has grown from $78 million in sales in 2008 to $1.7 billion in 2011, according to Albert Greco, a book-industry expert at the business school of Fordham University.

Greco has estimated e-book sales will be $3.55 billion in 2012.