Apple, E-Book Publishers Threatened With Lawsuit

The U.S. Department of Justice has warned Apple (NASDAQ:AAPL) and five of the biggest publishers in the country that it plans to sue them for allegedly colluding to raise the price of e-books.

CBS Corp.’s (NYSE:CBS) Simon & Schuster Inc., Lagardere SCA’s Hachette Book Group, Pearson PLC’s (NYSE:PSO) Penguin Group USA, News Corp.’s (NASDAQ:NWSA) HarperCollins, and Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, are all facing a potential suit, alongside Apple.

Several of the accused parties have reportedly held talks to settle the antitrust case, according to people familiar with the matter. If the Justice Department is successful, a settlement with e-book publisher could have wide-ranging repercussions for the industry, and potentially lead to cheaper e-books for consumers. However, not every publisher plans to settle, according to sources, though none of the six publishers targeted by the Justice Department have commented.

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Most physical books are sold using the “wholesale model” in which booksellers purchase books from publishers for roughly half of the recommended cover price and then offer those books to customers for the cover price or perhaps at a discount. But when it came to e-books, Amazon (NASDAQ:AMZN) sold many new bestsellers at $9.99 to encourage consumers to buy its Kindle e-readers. While the strategy may have worked for Amazon, publishers feared consumers would grow accustomed to inexpensive e-books, limiting publishers’ ability to sell pricier titles, and effectively dictating market prices.

As Apple prepared to introduce its first iPad in 2010, the late Steve Jobs, then its chief executive, suggested moving to an “agency model” under which the publishers would set the price of the book and Apple would take a 30 percent cut. Apple also stipulated that publishers could not allow rival retailers to sell the same book at a lower price.

The Justice Department’s case centers on Apple, as publishers ultimately imposed Apple’s model across the industry, effectively raising prices for consumers. The Justice Department believes that Apple and the publishers acted in concert to raise prices across the industry, and is prepared to sue them for violating federal antitrust laws, according to people familiar with the matter.

But while abandoning the agency model would likely lower prices for consumers, it would effectively result in a single player gaining even more market share than it has today, said William Lynch, chief executive of Barnes & Noble (NYSE:BKS), who gave a deposition to the Justice Department. That single player would be Amazon, willing to accept losses on e-books in order to sell e-readers.

Before the agency pricing model, Amazon often sold e-books for less than it paid for them, which publishers argue made it less appealing for other potential retailers to enter the digital-books marketplace, as competing with Amazon on pricing meant losing money. Therefore, it is their contention that the agency model has actually increased competition, but the Justice Department is unlikely to see it that way.

Sources say negotiations are ongoing, and while a settlement is being considered, it isn’t yet clear whether any of the six companies, or in fact the Justice Department, would be willing to settle out of court. Several class-action lawsuits have been filed and consolidated in a New York federal court. The European Union has said it is also investigating the allegations.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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