Government Suing Apple And Publishers Over E-Book Pricing Conspiracy
April 12, 2012

Government Suing Apple And Publishers Over E-Book Pricing Conspiracy

The Department of Justice is suing Apple and major book publishers like Macmillan and HarperCollins over the pricing of e-books.

The Justice Department is alleging that Apple worked with publishers to artificially raise e-book prices.

"Apple facilitated the publisher defendants' collective effort to end retail price competition by coordinating their transition to an agency model across all retailers," according to the complaint.

The companies have denied any wrongdoing and plan to argue that their agreement actually improved the competitive environment.

According to a report by Bloomberg, publishers Simon & Schuster, Hachette Book Group, and HarperCollins are planning to make a settlement with the U.S. government soon.

The accusations have come due to the changes made to how publishers charge for e-books when Apple released the first iPad two years ago.

Book publishers started to use an "agency model" in which publishers set their own e-book prices, rather than the traditional wholesale model in which publishers set a retail price and retailers create their own price.

Bloomberg reported that Apple, Penguin and Macmillan want to protect the agency model that allows publishers to set e-book prices.

However, the government hopes to seek a settlement that would allow Amazon and other retailers to return to a wholesale model, according to the report.

When Apple introduced its first iPad in 2010, it allowed publishers to set their own prices for e-books as long as it got a 30 percent cut.  This model overtook Amazon's practice of buying books at a discount and setting their own prices.

Publishers claim they have done nothing wrong, and the agency model has prevented Amazon from taking a dominant position in e-book retailing.

Chief Executive John Sargent of Macmillan told the Wall Street Journal that he rejected the government's settlement proposal because it could enable Amazon to "recover the monopoly position it had been building."

Amazon was in favor of the settlement, claiming that it is looking forward to "being allowed to lower prices on more Kindle books."

The government said in the suit that the publishers "took steps to conceal their communications with one another, including instructions to 'double delete' email and taking other measures to avoid leaving a paper trail."

The Justice Department claims the publishers' collaboration forced Amazon to accept the agency pricing model and stop selling best-sellers at $9.99.

The publishers feared that Amazon's pricing would set price expectations in many consumers' mind and make it difficult to charge more in the future.

A group of 16 states filed their own lawsuit on Wednesday against Apple, Macmillan, Penguin and Simon & Schuster, wanting to provide restitution for consumers who purchased e-books.

HarperCollins and Hachette, the two companies that have made settlements, defended the agency model, claiming it helped the e-book market take off.

HarperCollins said agency pricing gave consumers "choices of devices, formats and prices that would never have existed" otherwise.

Steve Jobs, the co-founder of Apple, said in his biography written by Walter Isaacson that Apple had to perform an "aikido move" to help defend itself.

"Given the situation that existed, what was best for us was to do this aikido move and end up with the agency model. And we pulled it off."