U.S. Sues Apple, Publishers Over E-Book Pricing

Date: 11-04-2012
Source: The Wall Street Journal

NEW YORK—The U.S. filed an antitrust lawsuit Wednesday against Apple Inc. and five of the nation’s largest publishers, alleging they conspired to limit competition for the pricing of e-books.

The lawsuit, filed in Manhattan federal court by the U.S. Department of Justice’s Antitrust Division, alleges Apple and the publishers reached an agreement where retail price competition would cease, retail e-books prices would increase significantly and Apple would be guarantee a 30% “commission” on each e-book sold.

Three of the publishers have agreed to settle, according to court documents. Those are Hachette Book Group, Simon & Schuster and HarperCollins Publishers Inc. Under the settlement, those publishers will terminate any agreement they have with Apple regarding electronic books.

A press conference with U.S. Attorney General Eric Holder is scheduled for later Wednesday.

“Defendants’ ongoing conspiracy and agreement have caused e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid,” the lawsuit said.

The agreement between Apple and the publishers allegedly occurred ahead of the introduction of the iPad in 2010 and as Amazon.com Inc. had driven e-book pricing down to $9.99 for newly released and best-selling e-books, according to the lawsuit.

The publishers didn’t immediately respond to requests for comment. An Apple spokesman declined to comment.

The conspiracy to limit competition, the lawsuit says, aimed to limit Amazon’s ability to discount ebooks.

In achieve their goal, the publishers shifted from a “wholesale” model to sell books and e-books and replaced it with a so-called agency model, in which the publishers would set the retail price and give retailers no power to alter that price, the Justice Department said in the lawsuit.

The Justice Department didn’t immediately have a comment when reached on Wednesday.

The publishers named in the lawsuit are: CBS Corp.’s Simon & Schuster Inc., News Corp.’s HarperCollins, Lagardere SCA’s Hachette, Pearson PLC’s Penguin Group (USA) and Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH.

News Corp. also owns The Wall Street Journal.

The lawsuit included a quote from the late Steve Jobs, head of Apple, describing his company’s strategy for negotiating with the publishers: “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.”

The suit says that “starting no later than September of 2008 and continuing for at least one year, the Publisher Defendants’ CEOs (at times joined by one non-defendant publisher’s CEO) met privately as a group approximately once per quarter. These meetings took place in private dining rooms of upscale Manhattan restaurants and were used to discuss confidential business andcompetitive matters, including Amazon’s e-book retailing practices. No legal counsel was present at any of these meetings.”

In September 2008, the suit says, Penguin Group CEO John Makinson was joined by Macmillan CEO John Sargent and the CEOs of the other four large publishers at a dinner meeting in “The Chefs Wine Cellar,” a private room at Picholene. “One oft he CEOs reported that business matters were discussed,” the lawsuit says.

According to the suit, Apple executive Eddy Cue, telephoned each of the five publishers on or around Dec. 8, 2009, to schedule exploratory meetings in New York City on Dec. 15 and Dec. 16.

The suit said, “It appears that Hachette and HarperCollins communicated with each other about moving to an agency model during the brief window between Mr. Cue’s first telephone calls to the Publisher Defendants and his visit to meet with their CEOs.”

The suit also said, “the plan—what Apple proudly described as an “aikido move” —worked. Over three days in January 2010, each Publisher Defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010 and “chang[e] the industry permanently.”

In contending that there was a conspiracy behind the pricing effort, the Justice Department said in its suit that the publishers “regularly communicated with each other in private conversations, both in person and on the telephone, and in e-mails to each other to exchange sensitive information and assurances of solidarity to advance the ends of the conspiracy.” It also alleged that publishers “discussed, agreed to, and encouraged each other to collective action to force Amazon to raise its retail e-book prices.”

It also said in the suit that the publishers “took steps to conceal their communications with one another, including instructions to ‘double delete’ e-mail and taking other measures to avoid leaving a paper trail.”

 

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