After a months-long investigation into pricing collusion between Apple (NASDAQ:AAPL) and five major publishers electronic books publishers — Penguin Group USA (NYSE:PSO), Hachette Book Group, HarperCollins (NASDAQ:NWS), Simon & Schuster (NYSE:CBS), and Macmillan — the Department of Justice has warned those involved about an impending antitrust lawsuit. Officials are threatening to sue the publishers on charges of conspiring together to raise the price of e-books, and are urging them to agree to a settlement.
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On Thursday, federal prosecutors sent out a letter to Apple and the publishers notifying them that a case would be pursued against them over collusion and price fixing. The issue centers on a pricing policy that many consider to be critical for the cost structure of e-books, which dates back to 2010 when Apple was preparing to launch the first iPad.
The e-book publishing market used to depend on a “wholesale model” that allowed retailers like Amazon (NASDAQ:AMZN) to cut deals with publishers and set the price on e-books. In order to stimulate demand for its Kindle e-reader, Amazon would set prices at $9.99 or lower, accepting losses on the books in order to rouse demand for Kindle in a process that hurt publishers’ profit margins.
Publishers were accustomed to much higher prices for print books and were unhappy with the price cuts. But when publishers tried to fight Amazon’s slash in prices, Amazon removed all of the publishers’ books, in digital and printed form, from its online inventory. Publishers had no choice but to relent to the world’s largest online retailer.
Then along came Apple, promising publishers a way out. With the release of iPad, Apple offered publishers the power to set their own prices for books, also known as the “agency model,” in exchange for a 30 percent cut. In turn, the publishers, backed by Apple, threatened to withhold books from Amazon unless the company also agreed to comply to an agency contract. Thus, the pricing of e-books was set at values that benefited publishers and retailers, but at the expense of consumers.
Whether publishers need tools like the agency model to protect themselves from Amazon’s dominance in the e-book business has been brought into question, but the the Justice Department is unlikely to support the kind of price control publishers have asserted over retailers. Antitrust investigators consider the agency model to be illegal. Publishers will most likely be forced to modify the agency-pricing model or do away with it altogether. Regardless of how everything ultimately plays out, it seems certain that e-book prices will be forced lower, whether publishers approve or not.
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