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US sues Apple, publishers over ebook pricing strategy

Alleges conspiracy to fix prices and stick it to Amazon

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The US Department of Justice has filed a lawsuit against Apple and five major publishers, alleging a conspiracy to fix the prices of ebooks.

The DoJ had been investigating Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster to see whether they had conspired together to stop competition in the price of ebooks, mainly as a way to hamper Amazon.

The department's filing in a New York district court claims that the publishers regularly communicated with each other in person, over the phone and in emails "to advance the ends of the conspiracy"; that they talked about the pricing problem they were having with Amazon; that they agreed to raise prices; and that they later attempted to hide their conversations.

The filing said:

Publisher Defendants took steps to conceal their communications with one another, including instructions to "double delete" email and taking other measures to avoid leaving a paper trail.

According to the claims, before the advent of Apple's iPad, publishers were worried about the pricing strategy of Amazon, which was buying ebooks at a percentage of the recommended retail price, but selling them on at a a lower or even less-than-cost price to push sales of its Kindle ereaders and establish a strong market share.

This method of reselling books, the wholesale pricing model, is the same way that paper books are sold.

But publishers didn't want to keep this up with ebooks, because they were afraid that the new "normal" price for any book would become $9.99, the common Amazon price, and that both ebook and paper book sales would suffer because of it.

As a result, the publishers wanted to find a way to stop Amazon from pricing so aggressively. Enter Apple, which was about to launch the iPad and wondering whether it should have an ebook store for the fondleslab.

It allegedly hit upon the agency pricing model as a way to do this, where the publishers get to decide the prices and Apple would take a percentage, in this case 30 per cent.

The filing said:

Apple had long believed it would be able to "trounce Amazon by opening up its own ebook store", but the intense price competition that prevailed among ebook retailers in late 2009 had... reduced retailer margins on ebooks to levels that Apple found unattractive. As a result of discussions with the Publisher Defendants, Apple learned that the Publisher Defendants shared a common objective with Apple to omit ebook retail price competition...

Together, Apple and the Publisher Defendants reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail ebook prices would increase significantly (which the Publisher Defendants desired), and Apple would due guaranteed a 30 per cent commission on each ebook it sold (which Apple desired).

As well as getting the publishers onto the agency pricing model, Apple also got the publishers to put a so-called "most favoured nation" clause into the contracts, which stopped them from giving a cheaper price to anyone else.

The publishers then took this new model to all other ebook resellers and made them adopt the model too, with the result that all ebooks were now pretty much the same price everywhere – and that price was higher than what it used to be.

The department wants the court to declare any Apple Agency Agreements null and void and make sure further agreements have no most-favoured nation clause. It also wants the cost of the court proceedings back, along with "such other and further relief as may be appropriate".

The DoJ and the EC have both been investigating allegations of price-fixing between Apple and the publishers for the last few months, with both signalling they would settle if the parties made sacrifices, generally taken to mean that they should rip up their existing contracts.

Last week, it was reported that three of the publishers were willing to settle the case but Apple and two other publishers were holding out.

Today, people familiar with the matter backed this up to Bloomberg, saying that Simon & Schuster, Hachette and HarperCollins had settled with the suit immediately.

Neither Apple nor the publishing houses have made any public statements on the investigations, but Apple did defend itself in a court filing in a US class action suit over the same issue.

The fruity firm said that it didn't make sense that Apple would coordinate with the publishers to protect book sales because it was new to the market and had nothing to do with paper books.

Apple also rubbished the idea that Amazon was a threat to it:

If Amazon was a “threat” that needed to be squelched by means of an illegal conspiracy, why would Apple offer Amazon’s Kindle app on the iPad? Why would Apple conclude that conspiring to force Amazon to no longer lose money on eBooks would cripple Amazon’s competitive fortunes? And why would Apple perceive the need for an illegal solution to the “Kindle threat” when it had an obvious and lawful one which it implemented – namely, introducing a multipurpose device (the iPad) whose marketing and sales success was not centred on eBook sales?

A guilty finding in the DoJ's lawsuit would support the class action case, exposing Apple to the possibility of triple damages for ebook buyers.

It would also be unlikely to help the company and the publishers in the EC antitrust probe, where they could be fined 10 per cent of their worldwide turnover. ®

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