U.S. Targets Apple, Publishers On E-Book Price Fixing

Justice Department sues Apple and alleged co-conspirators, including Hachette, HarperCollins, and Penguin, saying they conspired to undercut Amazon in e-book market. Could be one of biggest antitrust cases since Microsoft.
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The U.S. Department of Justice filed an antitrust suit against computer giant Apple and several major book publishers Wednesday, accusing them of conspiring to fix the prices of electronic books in order to undercut competition from Amazon, which they feared was destroying their profit margins by selling e-books for as little as $9.99.

"Publishers saw the rise in e-books, and particularly Amazon's price discounting, as a substantial challenge to their traditional business model," the DOJ said, in court papers filed Wednesday in U.S. District Court for Southern New York.

"By the end of 2009 ... the publisher defendants had concluded that unilateral efforts to move Amazon away from its practice of offering low retail prices would not work, and they thereafter conspired to raise retail e-book prices and otherwise limit competition in the sale of e-books. To effectuate their conspiracy, the publisher defendants teamed up with defendant Apple, which shared the same goal of restraining retail price competition in the sale of e-books," the DOJ alleged.

In addition to Apple, the lawsuit names publishers Hachette, HarperCollins, Penguin, Simon and Schuster, Macmillan, and Germany's Verlagsgruppe.

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The DOJ said that the conspiracy came together in 2009, as Apple was preparing to launch the first iPad, which the company saw as a platform for lucrative sales of electronic books and other media. The government alleges that Apple and the publishers teamed up in a campaign to move the publishing industry from a wholesale model, under which retailers, like Amazon, buy books from publishers and charge whatever they like, to a so-called agency model, under which publishers set prices and give the sellers a fixed commission.

The government contends that, by moving publishing to an agency model, the defendants could limit Amazon's ability to sell e-books at steep discounts.

"Together, Apple and the publisher defendants reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the publisher defendants desired), and Apple would be guaranteed a 30% 'commission' on each e-book it sold (which Apple desired)," the DOJ alleged.

The DOJ contends that then-Apple CEO Steve Jobs, who died last October and was replaced by Tim Cook, was fully supportive of the plan. "As Apple CEO Steve Jobs described his company's strategy for negotiating with the publisher defendants, 'We'll go to [an] agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway,'" the DOJ quotes Jobs as saying, in its complaint. The DOJ said Apple boasted that the plan was "an aikido move."

The DOJ says Apple and the publishers struck a deal under which the e-book versions of hardcover books priced between $25.01 and $35.00 would be sold for between $12.99 and $16.99. The government says the alleged conspirators then used their market clout to impose the price scheme on the wider publishing industry. "Millions of e-books that would have sold at retail for $9.99 or for other low prices instead sold for the prices indicated by the price schedules included in Apple's agency agreements," the DOJ charged.

The government is asking the court to declare Apple's alleged arrangement with the publishers to be illegal and to enjoin the group from continuing with the plan. It also wants unspecified monetary damages. Apple and the publishing defendants have yet to file a formal response to the government's charges.

If the case moves forward, it could be one of the biggest antitrust actions by the federal government against a major tech company since the DOJ sued Microsoft in 1998. Yet investors shrugged off the lawsuit's potential to crimp Apple's profits or to slow iPad sales. As of midday, Apple shares were actually up slightly, to $629.57.

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