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Apple and UK firm appear ready to fight DOJ lawsuit on e-book collusion, despite other publishers settling

The U.S. Department of Justice has filed a formal antitrust lawsuit against gadgetmaker Apple, Inc. (AAPL) and several top book publishers, claiming they conspired to drive up profits at the expense of free competition.

I. Apple Profits From E-Book Price Bump

Controversial business mogul Rupert Murdoch, owner of News Corp. (NWS), sent shockwaves through the e-book industry when he brokered a deal with Apple to sell best-sellers for as much as $14.99 USD on the first generation iPad.

But the so-called "agency pricing" scheme didn't necessarily benefit the publishers.

Steve Jobs
The e-book price increase was the brain-child of late Apple CEO Steve Jobs.
[Image Source: The New York Times]

It all stemmed from a scheme spearheaded by late Apple CEO Steve Jobs.  He wrote one of the publishers in an email published by the DOJ, "Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99."

In the Walter Isaacson biography of the late chief executive, Mr. Jobs recalled his pitch as, "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."

Under the scheme, Apple would get 30 percent of the cost -- similar to its app revenue split.  That worked out to about $3.90 USD on a $12.99 book, or $4.50 on a $14.99 book.  While the publisher's total take might have been a bit higher than the cut of the $9.99 e-book pioneer, Inc. (AMZN) charged, it was clear Apple was pocketing the majority of the price increase.

II. Cornerstone of Deal was Apparent Collusion

But the publishers bought the deal, as it allowed them to push for similar terms with Amazon.  In fact, Apple's deal reportedly demanded that any publisher selling books in iTunes could not sell its books for a lower price at a rival outlet.  The publishers used the deal as ammo to broker more lopsided deals with Amazon in that they pocketed a higher rate and bumped the price.

Faced with threats of severed supply, Amazon begrudgingly caved in and raised its prices.  The publishers' gamble had paid off.

The price transition was widely viewed as more destructive to Amazon's sales than Apple's given that Amazon sold to budget-savvy customers, where as Apple peddled its product to consumers willing to pay steep markups for perceived quality.

pile of books
Apple's e-books deal offered little benefit to consumers. [Image Source: Getty Images]

Amazon already offered cross-platform e-books and unlike Google Inc.'s (GOOG) efforts, Apple's iPad e-book store did not look to offer out-of-print works.  In other words, while the iPad drove up e-book prices, it did little to put e-books in the hands of consumers that would not already have had them.  Thus the deal did not seem to benefit anyone but Apple and the publishers, at the expense of customers.

But just because Apple's deal wasn't good for customers, didn't necessarily mean it was illegal.  Or did it?

III. DOJ Takes Action

Antitrust laws in the U.S. and Europe prevent top competitors in a market from making joint pricing decision (colluding) to drive up prices on consumer goods.  By all appearances that was precisely what Apple and the publishers had just orchestrated.

Thus over a year after the iPad launch, pressure on Apple began to turn up:

Dec. 6, 2011: The European Commission opens a formal antitrust investigation in e-book price fixing.
Dec. 7, 2011: The U.S. Department of Justice opens up a sister investigation into the price fixing.
Mar. 1, 2012: Top e-book publisher Random House (owned by private German firm Bertelsmann AG) announced it is bumping prices for libraries by 300 percent.
Mar. 7, 2012: Apple's third generation iPad launches.
Mar. 8, 2012: Rumors break that the DOJ is preparing to sue Appleet al.
Apr. 11, 2012: Rumor had it that the suit would land today.

The U.S. DOJ today made good on rumors and filed a suit against Apple and five publishers -- News Corp.'s HarperCollins; CBS Corp.'s (CBS) Simon & Schuster; UK publisher Pearson plc's (LON:PSON) Penguin and MacMillan units; and The Hatchett Group, a subsidiary of French publisher Hatchette Livre, which in turn is a child of French conglomerate Lagardère (EPA:MMB).

Department of Justice
Only Apple and one publisher are fighting the suit.  Apple wouldn't even dignify the U.S. government with a public response. [Image Source: AP]

To recap, that's two U.S. media conglomerates, plus Apple, a UK media congomerate, and a French multi-industry conglomerate who have been targeted in the suit.

Sharis Pozen, head of the DOJ's antitrust division, told reporters, "This took place at the highest levels of these companies.  Executives knew full-well what they were doing.This action drove up e-book prices virtually overnight.  Let me be clear: When companies enter agreements that prevent price competition, that is illegal."

Similar litigation is expected to drop shortly in the EU.

IV. Publishers Rush to Settle, Apple and UK Publisher Alone Vow to Fight

While the EU tends to seek punitive damages, the primary goal of the DOJ appears to be to enable a market "reset" scrapping the price-fixing provisions of Apple's deal and forcing e-book makers to cooperate with Amazon on lower priced options.

The deal could be a big boost to Amazon's increasingly promising tablet efforts.  It could also boost Barnes & Noble, Inc. (BKS) whose budget e-readers and e-book market have proven a solid challenger to larger players like Amazon or Apple.
The settlement and reduced e-book pricing could add extra fuel to Amazon's Kindle Fire.

Ms. Pozen discusses the potential of settlement, stating, "The settlement will begin to undo harm and restore price-competition.  It will result in lower e-book prices and provide a more open and fair marketplace."

So far, HarperCollins [source], the Hatchette Group [source], and Simon & Schuster [source] -- also the target of lawsuits from state attorney generals -- agreed to settle.

Apple and the Pearson plc subsidiaries refused to settle.  This could put them in a pretty bad spot.  While the other publishers refused to admit guilt in their settlements (as is typically the case), their decision to opt to quickly settle looks rather damning.

The Cupertino gadgetmaker did not even dignify the U.S. government with a public response, yet.  But soon it may have to respond in court.

Sources: DOJ [press release], [case], CNN

Comments     Threshold

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RE: I heard a great comment that reminds me...
By Tony Swash on 4/11/2012 5:52:30 PM , Rating: -1
...for what possible reason would Apple worry about "getting along" with others? It's doing just fine being a douchebag.

You right about it doing fine, leaving aside it's actual business performance which is second to none, Apple seem to be very popular with the general public with a 74% approval rating.

The actual results of the detailed survey can be found here

By lagomorpha on 4/11/2012 6:00:13 PM , Rating: 5
The world loves a bastard

By MechanicalTechie on 4/11/2012 7:20:25 PM , Rating: 4
OMG again you defend Apple?

What must they do in order to pull your lips from their a$re?

RE: I heard a great comment that reminds me...
By Tony Swash on 4/11/12, Rating: -1
RE: I heard a great comment that reminds me...
By Tony Swash on 4/11/12, Rating: -1
By MechanicalTechie on 4/11/2012 7:59:37 PM , Rating: 5
So its good that conglomerates to work together to push prices up and dictate conditions to 3rd party pricing in order to line their own pockets?

I guess anyone stupid enough to buy an iPad deserves all the arse raping Apple can dish out... but to artificially jack up prices is nothing more than pure greed!

But lets face facts as if you care..

RE: I heard a great comment that reminds me...
By The Raven on 4/12/12, Rating: -1
By The Raven on 4/12/2012 9:33:39 AM , Rating: 2
But I should be clear that I agree with the OP here. Nevertheless, even @HoLes have rights and people have the rights to hang out with @HoLes if they want.

By hiscross on 4/18/2012 4:00:46 PM , Rating: 1
So true about the govt. Go work for them, go on paid trips, just remember to pay the hooker in advance.

By xti on 4/12/2012 10:06:42 AM , Rating: 2
stop being poor.

RE: I heard a great comment that reminds me...
By Jeffk464 on 4/12/2012 5:08:19 PM , Rating: 2
Unfortunately this effects more than just ipad owners, it effects everybody that reads electronic books. I'm not sure its entirely apples fault though they probably took a lot of convincing to do to get publishers on board with ebooks they were afraid of piracy and devaluing the price of books. It also to apple to convince the music industry that they should sell mp3's online.

By Jeffk464 on 4/12/2012 5:15:49 PM , Rating: 2
Why should a book written by one person cost me $10 to read when a movie involving a small army to make only costs me $1.30 to rent from redbox?

By Cheesew1z69 on 4/11/2012 8:29:45 PM , Rating: 2
Again? That's all he does.

By damianrobertjones on 4/12/2012 3:34:33 AM , Rating: 3
Tony... if you've ever worked at PC World, Currys, Dixons or Comet (I worked at Dixons) you'll understand how silly people can be. It makes ZERO difference if the product is poor or the company bad, as usual, customers will buy as their friend has one.

RE: I heard a great comment that reminds me...
By Tony Swash on 4/12/12, Rating: -1
RE: I heard a great comment that reminds me...
By vol7ron on 4/12/12, Rating: 0
By The Raven on 4/12/2012 9:53:29 AM , Rating: 4
I think the reason you enjoy his posts is kind of like why some people watch reality shows filled with crazy people..."We'll at least I'm not as crazy as that person! I feel so much better about myself!"

By The Raven on 4/12/2012 9:55:20 AM , Rating: 1
Apple's competitors mostly cannot match

Wow you have really softened your stance!

RE: I heard a great comment that reminds me...
By bupkus on 4/12/12, Rating: 0
RE: I heard a great comment that reminds me...
By The Raven on 4/12/2012 10:15:46 AM , Rating: 2
Praising a business's performance as one's only metric is like gauging the performance of our financial markets by the number of new billionaires in the U.S.
Oh boy here I go again defending Tony :-O~=~=~ (If you are wondering...bacon strips)

He said that they are rich and highly popular. As opposed to Exxon or what have you.

By bupkus on 4/12/2012 10:58:00 AM , Rating: 2
My point is if there is a violation of existing laws in the process of making profit an enterprise should not be praised. The other metric is our laws that restrict activities where one or a group can create a contrived choke point on a vital product resulting in an increase in cost punitive to the end recipient and benefiting only those involved in collusion.

If this were the food industry its effects would be more obvious. The availability of the written word is just as vital to the public good.

"Can anyone tell me what MobileMe is supposed to do?... So why the f*** doesn't it do that?" -- Steve Jobs

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