April 11, 2012, 10:47 am
Justice Dept. Sues Apple and Publishers Over E-Book Pricing
By JULIE BOSMAN
Alex Wong/Getty ImagesAttorney General Eric H. Holder Jr.
The Justice Department filed a civil antitrust lawsuit against Apple and major book publishers on Wednesday, charging that the companies colluded to raise the price of e-books in 2010.
Several publishers have agreed to a proposed settlement, people close to the negotiations said.
The lawsuit alleges that Apple and the publishers conspired to limit e-book price competition, causing “e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid.”
The publishers named in the lawsuit are Hachette Book Group, HarperCollins, Macmillan, Penguin Group USA and Simon & Schuster.
Attorney General Eric H. Holder Jr. is to appear at a news conference at noon Eastern time to announce “a significant antitrust matter,” the Justice Department said on Wednesday.
The lawsuit capped an investigation that began last year into Apple and five of the biggest book publishers. The investigation was in response to what government investigators said was illegal action two years ago when the publishers adopted a pricing policy for e-books.
That policy, known as the agency model, allowed publishers to set their own prices on e-books, with the retailer taking a commission. It was a significant switch from the wholesale model that publishers had been using for print books, in which publishers charged retailers about half the cover price for a book and then allowed retailers to set their own sale price.
Many publishing executives have worried that without the agency model Amazon would gain a monopoly over e-books, because the wholesale model would allow the giant retailer to sell e-books for less than it paid publishers — a practice that smaller companies would not be able to imitate.
Elisabetta Villa/Getty ImagesScott Turow, president of the Authors Guild, has spoken out against the Justice Department investigation.
The Justice Department investigation has also set off worries among authors.
Scott Turow, the president of the Authors Guild, warned in an open letter last month that the Justice Department was “on the verge of killing real competition in order to save the appearance of competition,” he wrote. “This would be tragic for all of us who value books, and the culture they support.”
But antitrust lawyers have warned since 2010 that the pricing arrangements were likely to attract scrutiny at some point.
In December, Sharis A. Pozen, the acting director of the Justice Department’s antitrust decision, told a House subcommittee that the department was investigating pricing in the e-book industry.
For months, the Justice Department has sent publishers drafts of proposals, which they hoped would form the basis of a settlement.
The negotiations accelerated in the last several weeks as the department put more pressure on publishers to reach a settlement, according to people in the publishing industry with knowledge of the discussions. Ms. Pozen, who is expected to leave the department at the end of the month, was said to be determined to conclude the matter with either a settlement or a lawsuit by the time she left.
The lawsuit said that for at least one year beginning “no later than September 2008,” the chief executives of the publishing companies met once every several months, “in private dining rooms of upscale Manhattan restaurants” to “discuss confidential business and competitive matters, including Amazon’s e-book retailing practices.”
One of the meetings took place in the Chef’s Wine Cellar, a private room at Picholine, a Manhattan restaurant. One of the chief executives “reported that business matters were discussed,” the suit said.
“These private meetings,” the suit alleges, “provided the publisher defendants’ C.E.O.’s the opportunity to discuss how they collectively could solve ‘the $9.99 problem.’ ”
At the time, publishers were concerned about Amazon’s practice of charging $9.99 for most newly released and best-selling e-books.
In early 2010, Steve Jobs, then Apple’s chief executive, suggested to book publishers that they sell e-books using agency pricing; Apple would serve as the online agent and take a 30 percent commission.
The five publishers made agreements with Apple for selling e-books, and Apple, which was about to introduce its iPad to the market, insisted on what is known as a “most favored nation’’ clause, which prohibited publishers from allowing other retailers to sell e-books for less than Apple’s price.
It is that clause that came under scrutiny by the Justice Department.
After making a deal with Apple in 2010, the publishers targeted in the Justice Department investigation renegotiated their agreements with Amazon from wholesale to agency. Amazon had little choice but to consent, though it would have preferred to keep e-book prices low in order to convince consumers to buy its Kindle e-readers, then a relatively new device to the market.
Since the agency model was put in place in 2010, Amazon has steadily lost market share in e-books, going from close to 90 percent to about 60 percent. Barnes & Noble has gained a rising share of the market, more than 25 percent.
And the price of new books and bestsellers has settled between $12.99 and $14.99. In 2010, when agency pricing was first adopted, the sudden increase in e-book cost initially caused consumers to cry foul and accuse publishers of greedily raising prices.
A sixth major publisher, Random House, did not join the agency model until March 2011, and was not a focus of the investigation, signaling that investigators were zeroing in on the way agency pricing was adopted, not on the pricing model itself.
Macmillan, one of the publishers named in the lawsuit, released a statement on Wednesday confirming that it had not agreed to settle with the government.
While the publisher had engaged in settlement discussions, “the terms the D.O.J. demanded were too onerous,” said John Sargent, the chief executive of Macmillan.
“After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model,” he said. “We also felt the settlement the D.O.J. wanted to impose would have a very negative and long term impact on those who sell books for a living, from the largest chain stores to the smallest independents.” |
