The DOJ Alleges a Conspiracy to Raise and Stabilize Prices

By Michelle Maisto  |  Posted 2012-04-14

Apple, Publishers Pushing Back Against DOJ Ebook Charges

Apple is calling the U.S. Department of Justice€™s accusation that it colluded with a number of publishers to keep ebook prices high and in check €œsimply not true.€ The company€™s statement comes days after federal prosecutors leveled charges against Apple and five book publishers concerning ebook pricing and whether these companies conspired to keep prices high at a cost to consumers.

Apple spokesperson Tom Neumayr said in a statement that the 2010 launch of Apple iBookstore €œfostered innovation and competition, breaking Amazon€™s monopolistic grip on the publishing industry.€

Since then, Neumayr added, €œcustomers have benefitted from ebooks that are more interactive and engaging. Just as we€™ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.€

The DOJ€™s Antitrust Division filed a lawsuit against Apple and five of the nation€™s largest book publishers, Hachette Book Group, Simon & Schuster, HarperCollins, Macmillan and Penguin. Attorney General Eric Holder, in an April 11 press statement, called it €œprogress in protecting American consumers from anti-competitive harm, ensuring fairness in the marketplace and making certain that cutting-edge technologies are available at the lowest possible price.€

The DOJ Alleges a Conspiracy to Raise and Stabilize Prices

Hachette, HarperCollins and Simon & Schuster immediately agreed to a proposed settlement.

Penguin CEO John Makinson, in a statement on the company€™s site the same day, said that no responsible company chooses the path of litigation without carefully weighing the implications of that course of action. Nonetheless, Penguin felt it was unable to settle for two reasons.

€œThe first is that we have done nothing wrong,€ wrote Makinson. He continued:

The second, and equally powerful, reason for our decision to place this matter in the hands of a court is that we believed then, as we do now, that the agency model is the one that offers consumers the prospect of an open and competitive market for ebooks. We understood that the shift to agency would be very costly to Penguin and its shareholders in the short-term, but we reasoned that the prevention of a monopoly in the supply of ebooks had to be in the best interests, not just of Penguin, but of consumers, authors and booksellers as well.

While Makinson added that Penguin has held no settlement discussions with the DOJ, Macmillan CEO John Sargent, in a blog post on the publisher€™s site, said it had been in discussions with the DOJ €œfor months.€ Ultimately, it decided the terms the DOJ was demanding were €œtoo onerous.€

Sargent explained:

When Macmillan changed to the agency model, we did so knowing we would make less money on our ebook business. 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.

It is also hard to settle a lawsuit when you know you have done no wrong. The government's charge is that Macmillan's CEO colluded with other CEOs in changing to the agency model. I am Macmillan's CEO and I made the decision to move Macmillan to the agency model. After days of thought and worry, I made the decision on January 22, 2010, a little after 4 a.m., on an exercise bike in my basement. It remains the loneliest decision I have ever made, and I see no reason to go back on it now.

Apple€™s €œagency model€ is central to the lawsuit. While traditionally publishers charged booksellers half a book€™s cover price, giving them flexibility to discount it at their discretion, the agency model lets the publishers agree on a price that none of them dips below. They then receive 70 percent of that, with the other 30 percent going to Apple.

According to a March 8 report from The Wall Street Journal, the late Steve Jobs told publishers, according to his biographer Walter Isaacson, €œYes, the customer pays a little more, but that€™s what you want, anyway.€

Once the publishers were on board with the new model, Jobs added, according to The Journal, they went to Amazon and said, €œYou€™re going to sign an [agency-model contract], or we€™re not going to give you the books.€

Part of the DOJ lawsuit alleges that the publishing company executives discussed confidential and competitive business matters€”including Amazon€™s low ebook prices€”in a conspiracy to raise and stabilize prices.

According to an April 13 report from Bloomberg, which cited people familiar with the matter, the lawsuit doesn€™t intend to €œnecessarily kill the agency model or prevent other publishers from continuing to set their own prices for ebooks.€

Random House, which isn't involved in the lawsuit, it noted, has agreements with Apple and Amazon that let it set prices for ebooks.


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