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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

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Let's get this at least a bit correct...
By Shadowself on 4/11/2012 7:39:29 PM , Rating: -1
"Apple and UK firm appear ready to fight DOJ lawsuit on e-book collusion, despite other publishers settling"

This blatantly implies something that is false. It says Apple and one publisher won't settle and implies all others are settling.

I reality three (yes, 3) publishers have chosen to settle. Five (yes, 5) other publishers have chosen not to settle as well as Apple has chosen not to settle. So, in total twice as many business entities have chosen to fight this as have chosen to settle.

Additionally, what really matters is what the final arrangements were between the companies. The final contracts with Apple from these publishers boils down to "We [Apple] don't care what you charge for a book. If you give it away for free on Amazon. You need to give it away for free through Apple. If you charge $20.00 at Barnes & Noble (and that's the best price anywhere) then you have to char no more than $20.00 for that book through Apple. No matter what the price is you need to pay Apple 30% of the sale price to sell through Apple."

Apple is demanding that its customers get the best price anywhere the e-book is sold (no matter what that is: $0.00, $0.99, $10.00, $14.99, or whatever) and Apple gets a 30% cut of that price.

In the final analysis how is Apple colluding with the publishers when each and every one of those publishers can (and do) set their own prices for the books?

Additionally, before Apple opened their iBook store, there were many cases of the e-book price on Amazon's site being more expensive than the paperback version of the very same book. (I remember being shocked the first few times I personally saw this.) If Apple and the publishers were conspiring to raise book prices, how does the DOJ explain that? I would seem that Amazon's plan of selling the Kindle at a loss then making up for it in e-book prices (similar to SONY with the PS/2 & PS/3 and Microsoft with the Xbox) is now being explained away as "Amazon *HAD* to have high e-book prices because of that nasty Apple and those horrible publishers."

RE: Let's get this at least a bit correct...
By whoisnader on 4/11/12, Rating: -1
By StevoLincolnite on 4/12/2012 1:38:44 AM , Rating: 2
Common Jason, do some more research before bashing Apple.

What's there to research? Apple got together with book publishers to raise the prices. Steve Jobs said it himself.

It's the same situation which we had with DRAM years ago where companies got together to price fix. With that removed... Ram has never been cheaper.

LCD manufacturers did the same, suddenly they plummeted in price, although many manufacturers are now finding it hard to compete like Sony as their TV divisions became a loss maker, I'm not complaining, my bank account thanks me for it.

Lets face it, you're paying those extra prices to line the pockets of Apple, they have a Hundred Billion in cash which is doing *nothing*, the publishers don't get a larger cut, nor do the people who write.

Apple cares for no one, it cares only about profit.
It's not going to send you flowers or cake for buying it's iPhone or iPad, it's just another typical company.
So why the defense people put up for it I will never know.

But one thing I do believe in is ridiculing every company that does tread on the customers, Microsoft has had it, Sony has had it in spades (The faulty battery fiasco, PSN network hacks etc'.)
It just so happens to be Apples turn, which is a good thing, hopefully it wakes people up to the reality that "Hey, they aren't going to treat me like a queen on the disco floor, they just want my money!".

RE: Let's get this at least a bit correct...
By SonofaSteve on 4/12/2012 2:55:08 PM , Rating: 2
So what Apple gets together to compete against a competitor... and partnerships are a bad thing? Amazon could've done the same thing only the publishers said hell no we'll take our chances with Apple at least they know how to fight
When HD-DVD and bluray are dead and partnerships are created so that Amazon can't compete against online site like netflix will you whine about that too? oh no the only place I go must be in collusion with movie producers waaaaaaa

By StevoLincolnite on 4/13/2012 12:23:57 PM , Rating: 2
No, no. I whine about netflix because it is not available in my country.

Also, yes partnerships are a bad thing if it results in price increases across the board.

Essentially you are saying that it's fine to pay higher prices for the SAME product due to anti-competitive practices. - Remember, your words, not mine.

So while we are at it... I have 'ere in my possession some Kangaroo feathers. I'll sell them to you for $1000.

RE: Let's get this at least a bit correct...
By dark matter on 4/12/2012 4:11:39 AM , Rating: 2
Nice essay. But totally full of shit. Stockholm syndrome springs to mind.

What Apple did was say you that NO OTHER competitor can sell cheaper than Apple.

So if you were a book seller, you couldn't have a sale because you can never sell for less than Apple.

That is collusion.

You just must be really thick to defend that practice.

By messele on 4/12/2012 9:02:18 AM , Rating: 1
Dunno, sounds to me that what it actually means is that if an e-seller wants a sale then the publisher has to reduce their prices on the iBook store to match it. Can't see anything that actually prevents competitors from having sales.

Sounds good to me.

By SonofaSteve on 4/12/2012 3:06:38 PM , Rating: 2
What did Apple say now? Has the verdict been decided? You gotta be really thick to miss that Apple is fighting DOJ instead of settle
what collusion? Apple missed the brunch and so did Pearson. Guess that means DOJ is barking up the wrong tree

By Jeffk464 on 4/12/2012 5:38:19 PM , Rating: 2
Doesn't necessarily make him thick, he could be benefiting from Apple. Maybe he is a large stock holder, middle or above employee, or perhaps he gets payed by apple to defend the company online.

RE: Let's get this at least a bit correct...
By simsony on 4/12/2012 6:05:39 PM , Rating: 1
I really don't get how people think Apple is innocent and correct.

If Apple had asked for a 99% cut and the lowest price anywhere, what do you think will happen? The "lowest" price goes up to make up for the 99 %. The price goes up everywhere ELSE!

Anyone who has bought ebooks/emags has seen this happen. Even for those who don't want anything to do with Apple.

That is not free choice or free market. That is abuse of their iPad monopoly!

By messele on 4/13/2012 3:55:20 AM , Rating: 2
Ifs, buts and maybes.

Fact is Apple take a 30% cut on a price that's decided by the publisher. 30% is a sensible margin (gross, not net) for physical presence retailers.

The market has been distorted by Amazon's tactics of fire selling with ridiculously small margins, which along with selective loss-leading tactics in supermarkets is helping very nicely to kill traditional book stores. After all who's going to cover the overheads of a book store with their more expensive titles when you can get the stuff so cheap elsewhere?

I think the bigger picture is lost in all of this, I regret the slowly dwindling presence of proper book retailers, and that's coming from somebody who buys tons of stuff from Amazon.

"I'd be pissed too, but you didn't have to go all Minority Report on his ass!" -- Jon Stewart on police raiding Gizmodo editor Jason Chen's home

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