Apple Preparing to Defend Price Agreement With Publishers

Apple Inc. (AAPL) and two publishers are preparing to fight the U.S. Justice Department in court if necessary over pricing agreements for digital books, according to two people with knowledge of the matter.

Apple, Pearson Plc (PSON)’s Penguin Group, and Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, want to protect the so-called agency model that lets publishers -- not vendors --set e-book prices, said the people, who declined to be identified because they weren’t authorized to talk publicly.

The Justice Department is probing whether Apple’s interaction with publishers over pricing hampered competition in the market for electronic books. The government is seeking a settlement that would let Amazon.com Inc. (AMZN) and other retailers return to a wholesale model, where retailers decide what to charge customers, the people said.

CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA (MMB)’s Hachette Book Group, and News Corp.’s HarperCollins are seeking to avoid a costly legal battle and could reach a settlement next week, a person said this week. A settlement could also void so-called most-favored nation clauses in Apple’s contracts that require book sellers to provide the maker of the iPad with the lowest prices they offer competitors, the people said.

Upholding the agency model would give publishers more control over pricing and limit discounting, helping the industry avoiding sales losses as more consumers buy books online.

Apple e-Book Pricing

The Justice Department is probing how Cupertino, California-based Apple changed the way publishers charged for e- books on the iPad, a person familiar with the matter said last month. European antitrust regulators also have said they’re investigating whether Apple’s pricing deals with publishers restrict competition.

Sales of e-books rose 117 percent in 2011, generating $969.9 million, Publishers Weekly reported Feb. 27, citing data from the Association of American Publishers. By eliminating printing and shipping costs, digital versions generate higher profit margins than physical copies.

When Apple came out with the iPad in 2010, it let publishers set their own prices for e-books as long as it got a 30 percent cut and the publishers agreed to offer their lowest prices through Apple. This so-called agency model overtook Amazon.com’s practice of buying books at a discount from publishers and then setting its own price for e-reader devices.

Agency Model

The results of a settlement or lawsuit wouldn’t necessarily kill the agency model or prevent other publishers from continuing to set their own prices for e-books, one of the people said.

Random House Inc., based in New York, has agreements with Apple and Amazon that lets the book publisher set prices for e- books, the essence of the agency model. The company isn’t a part of the U.S. inquiry, Stuart Applebaum, a Random House spokesman, said in an interview.

Gina Talamona, a spokeswoman for the Justice Department’s antitrust division, declined to comment, as did representatives of Apple, Penguin, Macmillan, Hachette, Simon & Schuster and HarperCollins.

CBS, controlled by Sumner Redstone, climbed 1 percent to $33.33 yesterday, while News Corp. (NWSA), controlled by Rupert Murdoch, gained 0.4 percent to $19.49. Lagardere rose 0.5 percent to 21.73 euros in Paris yesterday and Pearson fell 0.1 percent to 1,135 pence at the close of London trading.

To contact the reporters on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Tom Giles at tgiles5@bloomberg.net.

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