Justice Department sues Apple, publishers over e-book prices

The Justice Department on Wednesday accused five of the nation’s largest publishing houses and Apple of fixing prices on e-books, forcing consumers to pay tens of millions of dollars more for their favorite titles.

In a lawsuit filed in U.S. District Court in New York, the government painted a portrait of an industry desperately trying to turn a profit amid rapid changes in technology and aggressive competition from online retailers. In phone conversations, e-mails and dinners at exclusive New York restaurants, the companies’ top executives colluded to wrest control of the market from Amazon.com and raise prices on e-books, according to the complaint.

It was this coordinated effort that raised flags for federal investigators.

“We allege that these executives knew full well what they were doing,” Acting Assistant Attorney General Sharis Pozen said.

None of the firms have admitted wrongdoing, but three publishers — Hachette, HarperCollins and Simon & Schuster — have agreed to settle the case. Apple is contesting the charges, embarking on its most prominent fight with Washington. Macmillan and Penguin Group have declined to settle as well.

“It is also hard to settle a lawsuit when you know you have done no wrong,” Macmillan chief executive John Sargent said in a statement.

The scope of the Justice Department’s investigation — and the fact that several firms are not backing down — are testaments to the intensity of the battle for dominance in a billion-dollar market that is expected to triple by 2015. A recent survey by the Pew Research Center’s Internet and American Life Project found that one-fifth of American adults read an electronic version of a book in the past year.

The problem for publishers, however, is that consumers expect e-books to be priced substantially lower than printed ones because they are cheaper to produce and distribute. But publishers were outraged when Amazon pushed prices even lower when it sold e-books for $9.99 as a way to encourage consumers to buy its Kindle e-reader.

According to the Justice Department complaint, publishers worried that this would lead to lower wholesale prices for e-books and reduce the amount consumers would pay for any books. Ultimately, they feared that Amazon’s dominance in distribution would allow it to bypass publishers altogether and sell content directly from authors.

Even as it announced its settlement with the government on Wednesday, Hachette pointed to Amazon as the real industry predator.

“Amazon effectively had a monopoly on the sale of e-books and e-readers, and was selling products below cost in an effort to exclude competitors,” the company said in a statement. “We believe the DOJ and the state [attorneys general] have a responsibility to consumers to ensure that the market for e-books remains diverse and competitive, and that we don’t return to the days of monopoly.”

But Justice said the publishers’ response to Amazon’s threat crossed the line. Starting around fall 2008, the suit said, they began meeting to discuss what was called “the $9.99 problem” and decided to act together to try to force Amazon to raise its prices. The opportunity presented itself in 2009 as Apple prepared to launch its iPad, according to the complaint. It wanted to create an e-book marketplace similar to iTunes but was concerned that profit margins were too thin.

The suit alleges that Apple decided to work with publishers to establish a new model of doing business: Instead of buying books from them at one price and selling them to readers at another, Apple would allow publishers to set the prices up to $16.99. In exchange, Apple would receive 30 percent of the proceeds. The suit said the company called this the “aikido move” that would cripple Amazon.

“Yes, the customer pays a little more, but that’s what you want anyway,” the late Apple chief executive Steve Jobs said, according to the complaint.

All five publishers agreed to Apple’s plan within two days in January 2010, Justice said. By April 2010, they had all increased the price of e-books.

“We are sending a clear message that competitors, even in rapidly evolving technology industries, cannot conspire to raise prices,” said Pozen, the acting assistant attorney general.

Sargent, Macmillan’s chief executive, disputed the government’s characterization of the move. In a statement, he said he made the decision to accept Apple’s terms while riding an exercise bike in his basement by himself. He said his company is making less money on e-books since it switched to Apple’s model.

“It remains the loneliest decision I have ever made, and I see no reason to go back on it now,” he said.

Apple spokesman Tom Neumayr declined to comment Wednesday.

Justice’s proposed settlement with Hachette, HarperCollins and Simon & Schuster would end their agreements with Apple and allow retailers to set their own prices for e-books. Amazon welcomed the proposed deal as “a big win for Kindle owners.” Mark Cooper, director of research for the Consumer Federation of America, said consumers should look for savings soon.

“The price went up immediately when they did their deal, so there’s no reason not to expect the price will come down,” he said. “The cartel will unravel.”

But litigation for Apple, Macmillan and Penguin could take years. In addition, attorneys general from Connecticut, Texas and 14 other states and territories are seeking action against publishers, although they have settled with Hachette and HarperCollins. The states want restitution for consumers who bought e-book titles at higher prices.

Separately, Apple is facing a class-action lawsuit in New York from customers who accuse the company of overcharging for e-books and are demanding refunds.

Staff writer Sari Horwitz contributed to this report.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
Hayley Tsukayama covers consumer technology for The Washington Post.
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