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8/15/2011
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Apple, Publishers Sued Over Ebook Price Conspiracy

The lawsuit contends that Apple and five major publishers colluded to boost ebook prices to counter the revenue and platform threat posted by Amazon and its Kindle ebook reader.

Apple last week was sued in California for allegedly conspiring with publishing companies Hachette, Harper-Collins, Macmillan, Penguin, and Simon & Schuster to fix ebook prices.

The lawsuit, filed on behalf of plaintiff Patsy Diamond of Los Angeles, Calif., by Ram, Olson, Cereghino & Kopczynski, LLP, seeks: to be certified as a class action; a declaration that the agency model used by Apple and its publishing partners for ebook pricing is illegal; and unspecified damages.

Under the "agency model," the publisher sells to the consumer and the agent--Apple in this case--collects a commission--30% in Apple's iBookstore--for making the sale. Under the "wholesale model," the publisher sells to the wholesaler--Amazon, for example--at a wholesale price and then Amazon can resell the title at a retail price, which could be either higher or lower than the wholesale price. The complaint says that Amazon sometimes priced its ebooks below its cost to grow its market share.

According to the complaint, Amazon's decision to price ebooks at $9.99 represented a threat to publisher revenues. The publishers allegedly colluded with Apple by abandoning the wholesale model to participate in Apple's iTunes ecosystem, following the launch of Apple's iPad in January 2010.

Prices of ebooks rose as a result of the arrangement, the complaint claims, and forced Amazon to abandon its discounted pricing of ebooks.

"The price of new bestselling ebooks increased to an average of $12 to $15--an increase of 33% to 50%," the complaint states. "The price of an ebook now in many cases approaches--or even exceeds--the price of the same book in paper even through there are almost no incremental costs to produce each additional ebook unit."

As a point of comparison, the average price of an app in Apple's iTunes App Store is $2.22. The average game price is even lower, $1.05, though the low price point in many cases reflects alternative monetization schemes that aren't used in ebooks, like in-app purchasing of virtual goods or advertising.

The complaint goes on to allege that the publishers were able to force Amazon to switch from the wholesale model to the agency model because each knew other publishers had also agreed to adopt the agency model to work with Apple.

What's more, the complaint says, if the publishers had not conspired to set prices, consumers would have voted with their wallets and bought books elsewhere. And that's apparently what happened: Random House, the only large U.S. publisher that didn't switch to the agency pricing model last year, saw its ebook sales surge 250% in the U.S. in 2010 and 800% in the U.K.

But in March 2011, Random House switched to the agency model because, the complaint states, Apple refused to carry its titles in its iBookstore.

Apple, the complaint asserts, conspired with its publishing partners to "cut into Amazon's substantial share of the market for ebooks and to prevent Amazon from emerging as a serious competitor to its mobile platforms for distribution, storage, and access of digital media."

Not mention in the complaint, but salient to the discussion is Apple's decision in February to amend its App Store Review Guidelines to disallow publishers from selling content like ebooks or subscriptions through mechanisms other than Apple's in-app purchase system unless they also sold the content through Apple at a price that's the same or lower. Apple subsequently relaxed its rules, but its rules still required Amazon to remove the link to its Kindle Store in its iOS Kindle app.

Amazon has responded by releasing an HTML5-based Kindle reading app, which falls outside Apple's platform purview. The company is also expected to release an Android-based tablet later this year.

Apple and Penguin did not respond to requests for comment.

Simon & Schuster declined to comment.

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