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U.S. Sues Apple For eBook Pricing as Three Firms Settle

April 12 (Bloomberg) -- Bloomberg's Stephanie Ruhle reports that Apple Inc. and two publishers, Macmillan and Penguin, were sued by the U.S. government over claims they conspired to fix prices of digital books to undermine discounter Amazon.com Inc.’s dominance. She speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

Apple Inc. (AAPL) and two publishers, Macmillan and Penguin, were sued by the U.S. government over claims they conspired to fix prices of digital books to undermine discounter Amazon.com Inc. (AMZN)’s dominance.

Three other publishers named in the government’s antitrust lawsuit, CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins, settled their cases after the government’s complaint was filed yesterday in federal court in Manhattan.

“We allege that executives at the highest levels of the companies included in today’s lawsuit -- concerned that e-book sellers had reduced prices -- worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers,” Attorney General Eric Holder said yesterday at a news conference in Washington.

U.S. antitrust officials have stepped up enforcement against anticompetitive price-fixing agreements in industries including health care and auto parts. Regulators have also increased scrutiny of Apple’s digital publishing, mobile computing and music retail businesses to make sure the iPad maker hasn’t thwarted competition on its way to becoming the world’s most valuable company.

Photographer: David Paul Morris/Bloomberg

iPads at an Apple store in San Francisco on March 16, 2012. Close

iPads at an Apple store in San Francisco on March 16, 2012.

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Photographer: David Paul Morris/Bloomberg

iPads at an Apple store in San Francisco on March 16, 2012.

Anti-Consumer

“It’s critical to nip this sort of anti-consumer and anti- competitive price fixing in the bud and to keep this space open,” said Mark Cooper, director of research for the Consumer Federation of America. “There are hundreds of millions of dollars of savings to be had as the sector grows, and making deals to set prices among competitors is anathema to American capitalism.”

Before the pricing agreements, Amazon had dominated the digital books market by offering titles at $9.99 each. Through the agreements, the publishers set prices for best-selling books at $12.99 and $14.99, giving Apple a 30 percent cut.

A group of 15 states and Puerto Rico, led by Texas and Connecticut, filed a similar lawsuit in federal court in Austin, Texas, yesterday against Apple, Pearson Plc (PSON)’s Penguin, Simon & Schuster and Macmillan, which is a unit of Verlagsgruppe Georg von Holtzbrinck GmbH.

Cost to Consumers

Apple’s digital book-pricing practice may have cost consumers more than $100 million, Connecticut Attorney General George Jepsen said at the Washington news conference. HarperCollins and Hachette have agreed to pay $51 million in restitution, Michael E. Cole, the chief of Connecticut’s antitrust department, told journalists. Talks are continuing with Simon & Schuster, he said.

Photographer: Scott Eells/Bloomberg

A digital book is displayed on an Apple Inc. iPad. Close

A digital book is displayed on an Apple Inc. iPad.

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Photographer: Scott Eells/Bloomberg

A digital book is displayed on an Apple Inc. iPad.

Separately, EU Competition Commissioner Joaquin Almunia said yesterday the Commission received preliminary settlement proposals from Apple and four publishers to end its investigation into the matter.

When Apple came out with the iPad in 2010, it let publishers set their own prices for e-books as long as it got its cut and publishers agreed to offer their lowest prices through Apple. This so-called agency model replaced the wholesale model by which Amazon, as a retailer, bought e-books from publishers and then set its own price, as retailers in the business had traditionally done with paper books.

“This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” Amazon said yesterday in a statement.

Steve Jobs Plan

The Justice Department’s complaint quoted Steve Jobs telling publishing executives how Apple’s iPad strategy would work.

“We’ll go to [an] agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway,” Jobs said, according to the complaint.

A group of chief executive officers of the publishers mapped out their collective actions during quarterly meetings “in private dining rooms of upscale Manhattan restaurants,” including at The Chef’s Wine Cellar at Picholine, according to the complaint, which also cites phone calls and e-mails.

“On January 24, 2010, Hachette signed an e-book distribution agreement with Apple,” according to the complaint. “Over the next two days, Simon & Schuster, Macmillan, Penguin, and HarperCollins all followed suit.” The Apple agency agreements took effect simultaneously with the iPad’s release on April 3 of that year.

Settlement Discussions

Apple, Macmillan and Penguin refused to discuss a settlement with the Justice Department, according to two people familiar with the matter who weren’t authorized to speak publicly. The three companies deny colluding to raise prices and will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, the people said.

“Macmillan did not act illegally,” Macmillan Chief Executive Officer John Sargent Macmillan said in an open letter on the publisher’s website. The Justice Department’s terms were “too onerous” to warrant a settlement and would have “allowed Amazon to recover the monopoly position” it was gaining before the switch to the agency model, he wrote.

Penguin Group Chairman John Makinson, in an e-mailed statement, said the complaint “contains a number of material misstatements and omissions, which we look forward to having the opportunity to correct in court.”

Under yesterday’s settlements, the three companies agreed to cancel contracts with Amazon, Google Inc. (GOOG) and other electronic booksellers that allowed publishers to set prices, according to the filing.

Simon & Schuster, Hachette and HarperCollins will hold off for two years from entering into contracts that would prevent retailers from discounting books, according to court papers.

Price-Fixing Conspiracy

Hachette said in an e-mailed statement it wasn’t involved in a price-fixing conspiracy and joined the settlement “reluctantly,” without admitting liability, to avoid costly litigation. HarperCollins, denying any antitrust breaches, said in an e-mailed statement that it settled to end a “potentially protracted legal battle.”

Richard Parker, an antitrust lawyer with O’Melveny & Myers LLP (1227L) in Washington who represents Apple, declined to comment, as did Apple spokesman Tom Neumayr.

Adam Rothberg, a spokesman at Simon & Schuster, declined to comment on the lawsuit and said the company is in “productive discussions” with European regulators regarding their e-book probe.

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

Apple shares fell 0.4 percent to $626.20 in New York trading yesterday, while Amazon climbed 0.5 percent to $187.97, bookseller Barnes & Noble (BKS) fell 1.6 percent to $11.73, CBS rose 1.1 percent to $31.64 and News Corp. rose 1 percent to $18.85. U.K.-based Pearson rose 1.2 percent to 1,132 pence in London while Paris-based Lagardere rose 2.1 percent to 21.78 euros.

The suit was filed in Manhattan, where U.S. District Judge Denise Cote is supervising pretrial proceedings in a group of at least 27 antitrust suits by private parties against Apple and the publishers.

The case is U.S. v. Apple, 12-cv-2826, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Sara Forden in Washington at sforden@bloomberg.net; Jeff Bliss in Washington at jbliss@bloomberg.net.

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Steven Komarow at skomarow1@bloomberg.net.

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