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Originally published April 15, 2012 at 9:01 PM | Page modified April 15, 2012 at 9:03 PM

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Speculation abounds that Amazon triggered e-book lawsuit

Amazon.com popped up throughout a lawsuit filed last week by the Justice Department against Apple and five major publishers, stoking speculation about its role, if any, in the proceedings.

Seattle Times business reporter

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While Amazon.com is neither a defendant nor a plaintiff in the Justice Department's antitrust lawsuit against Apple and major book publishers, the Seattle company figures prominently throughout the government's 36-page complaint.

So prominently, in fact, that whether or not Amazon instigated the lawsuit has become a matter of much speculation among publishers and booksellers.

Their suspicion derives from a widespread belief Amazon is a main beneficiary of the Justice Department's decision, and it reflects publishers' and booksellers' deteriorating relations with the world's largest Internet retailer, whose power over the book business is a grave concern to many.

Some point to a separate lawsuit filed against Apple and the publishers by a Seattle law firm on behalf of consumers as an indication Amazon is behind the litigation.

Whatever the case may be, Amazon's presence is undeniable.

In the federal complaint, announced Wednesday, the government mentions that Amazon's business practices threatened the publishing industry's "traditional position as gatekeepers of the publishing world."

And in his annual letter to shareholders Friday, Chief Executive Jeff Bezos offered publishers no break from the company's attempts to change the market. "Even well-meaning gatekeepers slow innovation," he said.

At the same time the government announced it was suing five major publishers and Apple on charges they worked together to raise e-book prices, it said it had reached a settlement with three of them to restore discounting authority to Amazon and other retailers.

Amazon called it a victory for buyers of its Kindle e-reading devices and announced plans to cut prices on Kindle e-books, the very thing publishers had hoped to prevent when they negotiated a new business model with Apple two years ago.

Big winner

"I couldn't imagine it going much better for Amazon than this decision," said publishing analyst Michael Norris, of Simba Information.

"I was joking that I'd like to see Jeff Bezos drink a glass of water while the Justice Department talks about the settlement. It was a lot of what Amazon would have wanted."

Amazon is mentioned about 90 times in the government's lawsuit against Apple and the five publishers: Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster. The government says they conspired with Apple to raise e-book prices and stop Amazon from selling their most popular new releases for $9.99, fearing the discounting would drive down hardcover-book prices and squeeze profit margins.

The Justice Department also asserts Amazon's entry into the digital-publishing business could mean years of investments in publishers' print-book businesses will become irrelevant as e-books gain popularity.

Breaking Amazon's hold

By 2010, two years after Bezos introduced the Kindle and its $9.99 price tag for new e-books, Amazon controlled 90 percent of the digital-book market.

Not until Apple prepared to launch its iPad tablet computer in early 2010 did publishers find a way to break Amazon's hold over the e-book market, according to the lawsuit.

Citing numerous emails and other evidence — including dinners at upscale Manhattan restaurants where the publishing CEOs met, inexplicably, without their lawyers — the government alleges the publishers worked together with Apple to devise a new pricing model for e-books.

Instead of the longstanding wholesale model, by which publishers sold books to retailers at a fixed cost, and retailers sold them to consumers at whatever price they wanted, Apple agreed to let the publishers set their own retail prices.

In return, Apple would take a 30 percent cut of the sales proceeds and not have to worry about being undercut on price, that last bit because of a "most-favored-nation" provision requiring publishers to reduce e-book prices in Apple's iBookstore to match the lowest prices offered by retailers.

Amazon, Barnes & Noble and other e-booksellers entered into similar agreements. And prices for new digital best-sellers soon rose from $9.99 to $12.99 and $14.99, causing consumers to "pay tens of millions of dollars more for e-books than they otherwise would have paid," the complaint states.

Today, Amazon accounts for between 55 and 60 percent of U.S. e-book sales, while Barnes & Noble controls 25 to 30 percent of the digital-book market, according to estimates. Apple's share is believed to be in the range of 10 to 15 percent.

More competition cited

Critics of the lawsuit point to more-robust competition among e-book sellers — coupled with the continued growth in e-book sales over the past two years — as evidence the new pricing model works. They say the Justice Department's decision merely swaps a perceived monopoly for a real one.

"Publishers are really, really angry over this, and not just because they've been sued," said digital-media consultant Bill Rosenblatt. "They're also angry because this gives a lot of power back to Amazon."

Steve Berman, managing partner of Seattle law firm Hagens Berman, lead counsel in the separate antitrust lawsuit on behalf of e-book buyers, said fears of an Amazon monopoly are overblown.

"If Amazon becomes more of a monopolist than it already is, and it tries to raise prices, then other people will enter the field," he said. "There are market checks out there."

Berman's law firm filed its initial complaint against Apple and the major publishers in August and amended it in January. It is seeking class-action status in federal court in New York.

The firm's 83-page complaint, which seems to have formed the basis for much of the government's lawsuit, cites emails and other evidence from Amazon suggesting price collusion among publishers. The firm has its offices in a downtown building where Amazon is a large tenant, stoking speculation among publishers that Amazon is behind all the litigation, a charge Berman denies.

"Before we filed the lawsuit, I tried numerous times and through numerous sources to meet with Amazon folks, and they would not talk with us," Berman said. Only after Amazon was named a defendant in other lawsuits did the company let the firm "review some documents to confirm our decision not to sue them," he said.

Berman described tensions in the book world as enormous and acknowledged "publishers are scared to death of Amazon."

Proposed settlement

Under its proposed settlement with three of the five publishers — Hachette, HarperCollins and Simon & Schuster — the government said they must give e-book sellers such as Amazon the freedom to cut prices for at least two years.

Paul Aiken, executive director of the Authors Guild, said the potential consequences for bricks-and-mortar retailers are "frightening." He said he supports new online sales channels but not at the expense of bookstores — the best places, he believes, to discover new authors.

"Amazon's history is to undermine bookstores by focusing its predatory pricing practices on titles that those stores are trying to sell," he said. "It's open season again."

Amazon did not comment beyond a short statement: "This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books." The Justice Department did not return a phone call and email seeking comment.

In his annual letter, Bezos gave publishers virtually no comfort. He included testimonials from a handful of authors who say they used Amazon's self-service platform, Kindle Direct Publishing, to find an audience for their works and make money.

"When a platform is self-service, even the improbable ideas can get tried," Bezos wrote, "because there's no expert gatekeeper ready to say 'that will never work!' "

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

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