Originally published March 8, 2012 at 10:17 PM | Page modified March 9, 2012 at 6:37 AM
Justice Dept. threatens to sue Apple over ebook pricing
The Justice Department has told Apple and five of the nation's biggest book publishers that it will sue them for their alleged price-fixing of electronic books unless the companies agree to change their business practices.
The Washington Post
WASHINGTON — The Justice Department has told Apple and five of the nation's biggest book publishers that it will sue them for their alleged price-fixing of electronic books unless the companies agree to change their business practices.
Federal officials found that Apple, Simon and Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins Publishers "engaged in a pattern of behavior that violates antitrust laws," according to a person familiar with the investigation.
Apple and the publishers are talking with Justice Department officials to try to avoid charges and a federal lawsuit, according to the person familiar with the case, who spoke on the condition of anonymity because the investigation and talks are private.
The charges, part of the latest Justice Department probe of the e-books market, come as consumers flock to e-book readers and tablets such as Amazon.com's Kindle and the iPad for digital versions of books, newspapers, magazines and movies.
But as consumers have switched to digital, they have also begun paying more for e-books released by the country's biggest publishers.
When the Kindle made its debut in 2007, Amazon set book prices at $9.99 to attract readers to the new format. This was in keeping with the traditional book-selling model, in which retailers such as Barnes and Noble buy books at wholesale prices from publishers and then set their own prices.
Then Apple entered the e-book picture with its iPad. At the time, publishers were unhappy with Amazon's strategy of pricing e-books at about $9.99, a discount from the cost of many hardback books. Apple offered a way out: It let publishers dictate prices and split the proceeds. Apple would get 30 percent of sales, and publishers would get the remainder. With this added leverage, publishers were able to change the terms of their deal with Amazon.
Now, the six biggest publishers are the ones deciding how much consumers will pay through both Apple and Amazon, choosing prices more in the range of $12.99 to $14.99.
Antitrust regulators charge Apple and the publishers with colluding to raise e-book prices on Apple's iPad and iPhone. The Wall Street Journal on Wednesday reported the Justice Department's threat to sue.
The country's big publishers argue, though, that Apple introduced more competition by preventing Amazon from dominating the entire e-book market.
Antitrust officials have been scrutinizing the digital-book world for months. At a December congressional hearing on antitrust issues, Sharis Pozen, acting head of the Justice Departments's antitrust division, said the agency was looking into the e-book industry. The European Commission is also examining book pricing.
Apple declined to comment on the case. Justice Department spokeswoman Gina Talamona confirmed that the agency is looking into e-books, but declined to comment further.
Meanwhile, the market is set to continue growing. U.S. consumers are expected to buy 381 million e-books by next year, four times what they bought in 2010, according to an estimate by research firm Yankee Group.
There is general agreement among the publishers, however, that it is vitally important to retain the current pricing model, which allows publishers to set their own prices for e-books.
One publishing executive with knowledge of the situation, who insisted on anonymity so as not to upset continuing negotiations, said that investigators had expressed interest in finding ways to augment the current system, known as the agency model, and not discard it entirely.
If that system were to disappear, it would be a boon to Amazon, said Mike Shatzkin, chief executive of the Idea Logical, which advises book publishers on digital change, adding that it would be "essentially bad news for just about everybody else in the book business."
"Ultimately, that would mean that the price of books is going to come down and the amount of money that authors can earn is going to come down," Shatzkin said.
Any new limits on agency pricing could also benefit the consumer, however, if it allowed Amazon to offer lower prices for e-books again.
Publishers contend that agency pricing helps level the playing field and prevents one company from gaining too great an advantage.
They say that a model that greatly undermined their profits would only make Amazon more dominant, thus reducing competition from Barnes & Noble and smaller retailers.
It is unclear how serious the impact on Apple would be from any legal action on books. The company's iBookstore remains a minor player in the electronic-books business by most estimates.
An overwhelming majority of Apple's revenue comes from the sale of devices like the iPhone and iPad, not from the content that the company sells online like music, books and apps.
Still, its tangles with the Justice Department underscore the difficulties Apple has had in establishing itself in a market that Amazon helped pioneer.
Apple was a latecomer to the electronic-books business, arriving with its iPad well after Amazon found success with the Kindle.
Material from The New York Times is included in this report.











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