Justice Department threatens to sue Apple, publishers over e-book prices

The Justice Department told Apple and five of the nation’s biggest book publishers that it will sue them for their alleged price-fixing of electronic books unless the companies agree to change their business practices.

Federal officials found that Apple, Simon and Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins Publishers “engaged in a pattern of behavior that violates antitrust laws,” according to a person familiar with the investigation.

Apple and the publishers are talking with Justice Department officials to try to avoid charges and a federal lawsuit, according to the person familiar with the case, who spoke on the condition of anonymity because the investigation and talks are private.

The charges, part of the latest Justice Department probe of the e-books market, come as consumers flood to e-book readers and tablets such as the Kindle and the iPad for digital versions of books, newspapers, magazines and movies.

But as consumers have switched to digital, they have also begun paying more for e-books released by the country’s biggest publishers.

When the Kindle made its debut in 2007, Amazon set book prices at $9.99 to attract readers to the new format. This was in keeping with the traditional bookselling model, in which retailers such as Barnes and Noble buy books at wholesale prices from publishers and then set their own prices.

Then Apple entered the e-book picture with its iPad. At the time, publishers were unhappy with Amazon’s strategy of pricing
e-books at about $9.99 — a discount from the cost of many hardback books. Apple offered a way out: It let publishers dictate prices and split the proceeds. Apple would get 30 percent of sales, and publishers would get the remainder. With this added leverage, publishers were able to change the terms of their deal with Amazon.

Now, the six biggest publishers are the ones deciding how much consumers will pay through both Apple and Amazon— choosing prices more in the range of $12.99 to $14.99.

Antitrust regulators charge Apple and the publishers with colluding to raise e-book prices on Apple’s iPad and iPhone. The Wall Street Journal on Wednesday reported the Justice Department’s threat to sue.

The country’s big publishers argue, though, that Apple introduced more competition by preventing Amazon from dominating the entire e-book market.

Antitrust officials have been scrutinizing the digital book world for months. At a December congressional hearing on antitrust issues, Sharis Pozen, acting head of the Justice Department’s antitrust division, said the agency was looking into the e-book industry. The European Commission is also examining book pricing.

Apple declined to comment on the case. Justice Department spokeswoman Gina Talamona confirmed that the agency is looking into e-books but declined to comment further.

Meanwhile, the market is set to continue growing. U.S. consumers are expected to buy 381 million e-books by next year, four times what they bought in 2010, according to an estimate by research firm Yankee Group.

Staff writer Hayley Tsukayama contributed to this report.

Cecilia Kang is a staff writer covering the business of media and entertainment.
Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
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