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US government sues Apple in e-book scandal

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The US Justice Department has sued Apple Inc and five publishing houses alleging a "conspiracy" to raise prices and limit competition for e-books, and immediately reached a partial settlement in the case.

As the antitrust suit was announced, officials said three of the publishers agreed to end the scheme to force retailers such as Amazon to accept a new pricing plan that limited their ability to offer discounts for electronic books.

Hachette Book Group, HarperCollins and Simon & Schuster reached the settlement but the case will proceed against Apple and the other two, Macmillan and Penguin Group, "for conspiring to end e-book retailers' freedom to compete on price," the Justice Department said.

"As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles," Attorney General Eric Holder said in announcing the lawsuit and partial settlement.

"We allege that executives at the highest levels of these companies, concerned that e-book sellers had reduced prices, worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers."

'They knew what they were doing'

Sharis Pozen, head of the Justice Department's antitrust division, said the conspiracy was aimed at ending a discounting effort by Amazon, which sold e-books at $9.99 until the publishers forced the new pricing plan on them.

She said the executives in the conspiracy "knew full well what they were doing. That is, taking steps to make sure the prices consumers paid for e-books were higher".

The move almost instantly raised the prices consumers paid for e-books, the official said.

"When assertions came to light that over a three-day period prices increased dramatically among publishers, you can imagine it took our notice and we investigated," Pozen told the news conference.

The settlement with the three, she added, "will begin to undo the harm caused by the companies' anticompetitive conduct, and will restore price competition so that consumers can pay lower prices for their e-books".

The lawsuit comes amid probes on both sides of the Atlantic over the efforts to limit discounting on electronic books, which had been dominated by Amazon until Apple launched its iPad in 2010.

In Brussels, EU competition chief Joaquin Alumnia said an offer to settle the probe had come from Apple and four publishers.

"We are currently engaged in fruitful discussions with them, without prejudice to the outcome of these talks," he said, adding that EU officials would assess the office in a bid "to preserve competition for the benefit of consumers in this fast-growing market."

The suit filed in US District Court in New York said the conspiracy dating back to 2009 involved "schemes to limit Amazon's ability to discount e-books," hurting consumers by pushing up prices for electronic books.

The US lawsuit said the publishers "shared a common objective with Apple to limit e-book retail price competition".

Named in the suit along with Apple were CBS Corp.'s Simon & Schuster; Hachette Book Group, part of France's Lagardere; Pearson's Penguin Group; Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck; and HarperCollins, a unit of News Corp., which owns The Wall Street Journal.

The lawsuit said the publishers conspired with Apple to end the longstanding "wholesale model" in which e-books were sold to retailers, which had the power to establish their own prices.

They replaced this with a so-called "agency model" where publishers would have the power to set the prices retailers charge for the e-books. Under this arrangement, Apple was guaranteed a 30 percent commission on each e-book sold.

iPad versus Kindle

Prior to the introduction of Apple's iPad in April 2010, online retail giant Amazon, maker of the Kindle e-book reader, sold electronic versions of many new best sellers for $9.99.

After the agency model was adopted, the prices rose to between $12.99 and $16.99, the suit said, and price competition among retailers was "unlawfully eliminated." Retailers including Amazon were forced to accept the new model in order to sell the e-books.

The suit seeks an injunction ordering a halt to the practices.

Macmillan chief executive John Sargent said his firm refused the settlement because "the terms the DOJ demanded were too onerous."

"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.

He added that the settlement "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."


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