Apple and several major publishing houses are being sued by the United States Government over an eBook price fixing scheme, in a climax to the rumours that have been spreading through the industry for the past several months.
The action by the US Department of Justice comes after the European Commission flagged a similar investigation last year.
Both incidents highlight the growing importance of the eBook market.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
Federal attorney-general Eric Holder announced the lawsuit this morning, saying it had already reached a settlement with three major publishers – Hachette, HarperCollins and Simon & Shuster.
The DOJ even suggests Apple founder Steve Jobs was involved, with the suit citing a quote from Jobs where he described the tech giant’s strategy for dealing with publishers.
“We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway,” he said in the entrepreneur’s official biography released last year.
The suit also says one executive cited Amazon’s “wretched $9.99 price point”.
Apple, Macmillian and Penguin still face litigation. Macmillan has already released a statement saying it hasn’t done anything wrong and will fight the charges.
But the DOJ is adamant.
“In recent years, we have seen the rapid growth – and the many benefits – of electronic books; eBooks are transforming our daily lives, and improving how information and content is shared,” Holder said.
“For the growing number of Americans who want to take advantage of this new technology, the Department of Justice is committed to ensuring that eBooks are as affordable as possible.”
The DOJ alleges that in the summer of 2009, executives in these six companies were concerned over falling eBook prices and designed a plan to increase them.
Amazon had been cornering the market with its Kindle device, and eBooks priced at $US9.99.
The retail giant has already said that following this case, it looks forward to “being allowed to lower prices on more Kindle books”.
It couldn’t do so before because due to these alleged anticompetitive agreements, pricing power was placed in the hands of publishers, rather than resellers.
During regular meetings, the DOJ says these executives discussed confidential business and competitive matters, including Amazon’s eBook selling practices, as part of a conspiracy to raise and fix prices. They did this by agreeing to a new model that would allow them to control prices, rather than having them be set by bookstores, as the traditional model allows.
They entered into agreements to pay Apple a 30% commission on books sold through its iBookstore, the DOJ says, and they also promised that no other eBook retailer would set a lower price.
“Our investigation even revealed that one CEO allegedly went so far as to encourage an eBook retailer to punish another publisher for not engaging in these illegal practices,” Holder said.
The settlements are harsh. Hachette, HarperCollins and Simon & Schuster will be required to grant retailers the freedom to reduce prices of their eBook titles, and terminate their anticompetitive agreements.
But they will also be prohibited for two years from placing constraints on retailers’ ability to offer discounts, and will also be stopped from sharing competitively sensitive information with competitors. Each company will need to implement a “strong antitrust compliance program”.
None of the companies involved have admitted any wrong-doing.
Macmillan has disputed the charges, with chief executive John Sargent saying in a statement that despite the ongoing costs of the case, the settlement would have a “very negative and long-term impact on those who sell books for a living”.
“When Macmillan changed to the agency model we did so knowing we would make less money on our eBook business,” he said.
“We made the change to support an open and competitive market for the future, and it worked. We still believe in that future and we still believe the agency model is the only way to get there.”
He says the company will fight the charges in court.
“Since we are now in litigation, I may not be able to comment much going forward. We remain dedicated to finding the best long-term outcome for the book business, for Macmillan and for the work you have entrusted to our care.”
Publishers are concerned that Amazon is dominating too much of the market with lower prices.
But they have a much larger concern – that Amazon is dominating the publishing market in general. The retail giant has started its own publishing arm, headed by industry veteran Larry Kirshbaum, and authors are finding success by either signing up with the company or just self-publishing through Amazon’s platform.