Report: Justice Department Ready to Sue Apple, Major Book Publishers for Ebook Price Fixing

Posted on March 9, 2012

The Wall Street Journal reports that the Justice Department is getting ready to file a major antitrust lawsuit against Apple, Inc. and a number of major book publishers, including HarperCollins and Simon and Schuster.

Apple and the publishers are reportedly desperate to settle this suit with the government before the lawsuit is filed. This is about the ebook price fixing allegations related to the new agency model of ebook sales. Amazon.com began selling ebooks at a price less than it paid the publishers for the books under the traditional wholesale model of bookselling. The publishers and authors got paid, but Steve Jobs told the publishers they could make a lot more money by using the agency model, in which the publishers set the price of the ebook. Jobs told the publishers that Apple would take its 30% cut from ebooks sold through iTunes and the publisher would take the rest. He told them to change their contracts with Amazon.com to the new model which would give them a bigger profit. The publishers signed on, and threatened Amazon: if Amazon.com didn't sell ebooks at their higher prices, they would pull all books from Amazon. Barnes and Noble and Apple were terrified that Amazon was undercutting their sales for ebooks. It was, of course, but what it did was not illegal. The book publishers were misguided, in our opinion. Why should they care if Amazon sells a book for less than it paid for it? It still paid the wholesale price to the publisher.

A furious Jeff Bezos caved in to the agency model demands, but the chickens have now come home to roost. Experts in the European Union and the U.S. say this is the clearest form of price fixing they've ever seen. Apple and the book publishers colluded to raise the price of ebooks to consumers. It's pretty much a textbook case.

So what does this all mean if: a) the government wins its case, or b) the publishers settle on the government's terms? For readers this should mean cheaper ebook prices. For publishers, they will still get paid their wholesale price. Authors will still get paid the amount of royalties agreed to in their contracts: they should not lose out at all if the wholesale model is reintroduced.

Apple and Barnes and Noble are the biggest losers here. The WSJ got ahold of leaked deposition testimony of a top Barnes and Noble executive who reportedly said that if the agency model is revoked, Amazon will be given a de facto monopoly in bookselling. Barnes and Noble is reportedly begging the government to keep the agency model, and promising to discount ebooks a little bit.

Bottom line: Steve Jobs overreached on this one and Apple is getting slapped down hard. The recent authorized biography of Jobs by Walter Isaacson has detailed quotes from Jobs himself about how he talked the book publishers into going along with the agency model and how they'd make more money. It's pretty damning stuff, from a legal perspective. Everyone is going to have to write a really big check to make this one go away.