DOJ threatens to sue Apple, publishers over e-book pricing collusion

The U.S. Department of Justice reportedly has warned Apple (NASDAQ:AAPL) and five of the largest U.S. publishing firms that it plans to sue them over alleged efforts to collude on e-book pricing.

Citing sources familiar with the matter, The Wall Street Journal reports Apple and publisher partners Simon & Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins are in the DOJ's crosshairs, adding several but not all of the parties have already held talks to settle the antitrust case and sidestep a potentially damaging court battle. Apple, the DOJ and spokespeople for all five publishers declined to comment.

The DOJ investigation targets the e-book pricing model introduced by Apple with the spring 2010 rollout of its first iPad tablet. The Journal notes that publishers historically sold physical titles to booksellers for roughly half of the recommended cover price, giving retailers the flexibility to offer books for less than cover if they wished. But when Amazon.com made its move into the e-book segment, it priced many new bestsellers at $9.99 to build a lead in the new market, a strategy that deeply alienated publishers who feared Amazon's approach could limit their ability to sell pricier titles. Publishers also expressed concern that rival retailers would be unable to match Amazon's deep discounts, effectively ceding control of the e-book market to Amazon in much the same way Apple's iTunes dominates the digital music space.

With the introduction of the iPad, the late Steve Jobs, then Apple's CEO, suggested adopting an "agency model" awarding publishers e-book pricing control, with Apple claiming a 30 percent cut of all sales. "We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30 percent and yes, the customer pays a little more, but that's what you want anyway,'" Jobs told his official biographer Walter Isaacson. "[Publishers] went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.'"

Sources tell the Journal that the DOJ believes Apple and the five publishers colluded to raise prices across the industry, and plans to sue them for violating federal antitrust laws. The publishers have denied acting jointly to raise prices, telling investigators that the shift to agency pricing fueled by allowing a larger number of e-booksellers to thrive. The report adds Barnes & Noble CEO William Lynch has testified that abandoning the agency pricing model would effectively create a situation giving a single player even greater market share than what it has today.

The argument that agency pricing increased competition has fallen on deaf ears at the DOJ, however--sources say government attorneys have questioned how competition could have grown when e-book prices increased. Negotiations continue and "have taken many turns" according to one publishing executive--another exec said "a settlement is being considered for pragmatic reasons, but by no means are we close." Those "pragmatic reasons" center on legal costs, the exec explained: "You have to consider a settlement, whether you think it's fair or not."

E-books represent the fastest growing revenue segment of the publishing industry. Sales of digital titles more than doubled in 2011 to $970 million per an Association of American Publishers survey.

For more:
- read this Wall Street Journal article

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