DoJ Lawsuit Against Apple; It’s On

This morning, we reported that the Department of Justice was planning to sue Apple and several book publishers: Simon & Schuster, HarperCollins, Hachette Book Group, Penguin, and Macmillan.

The reason? Alleged price fixing. According to the DoJ, Apple and its eBook publishing partners have colluded to raise the price of electronic books for iPad and iPhone. That lawsuit has now become a reality, and as of this afternoon, the DoJ announced that it filed an antitrust lawsuit against Apple, Macmillan, and Penguin.

According to U.S. Department of Justice and Attorney General Eric Holder, the DoJ settled with three of the publishers – Hachette, HarperCollins, and Simon & Schuster. Apple, Macmillan, and Penguin refused to settle, and have been targeted with the lawsuit.

Why did Apple, Macmillan, and Penguin refuse to settle? Macmillan CEO John Sargent shed some light on the issue with an open letter in which he stated that settling with the Department of Justice would have “allowed Amazon to recover the monopoly position it had built before our switch to the agency model.”

If you’re unaware of this issue, before Apple came out with the iBookstore, publishers were forced to sell to Amazon at rock bottom prices, which is what allowed the retail giant to sell ebooks (often at a loss to edge out competition) for just $9.99. Apple’s agency model allows publishers to set their own prices (rather than allowing vendors to set prices), but stipulates that they must sell their books at the same price through all online retailers.

So publishers were able to set a price at $14.99 in the iBookstore, and force Amazon to sell ebooks at the same $14.99 price, giving the publishers a greater profit share and fixing the price across all ebook stores, effectively eliminating the deep discounts that Amazon was able to give to consumers. It also eliminated the monopoly that Amazon had over other booksellers, who could not sell their books at Amazon’s low prices.

According to Sargent, Penguin, Macmillan, and Apple have not done anything wrong, and the agency model is necessary. “When Macmillan changed to the agency model we did so knowing we would make less money on our ebook business,” Sargent wrote. “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.”

What’s interesting in the Department of Justice’s filing is the accusation that Apple considered a partnership with Apple that would have divided content between audio and video and ebooks, allowing Apple to own the former and Amazon to own the latter. Such a division would have been illegal, and the filing doesn’t go into more detail on the situation.

According to Peter Kafka, of All Things D, “It’s not uncommon for lawsuits to contain big helpings of theatrics, with accusations and context that won’t end up having any bearing in court.” Apple’s potential deal with Amazon may or may not resurface as the lawsuit proceeds.

Ultimately, the government is after a settlement from Apple and the two remaining publishers, allowing Amazon and other retailers to return to the original wholesale model that allowed them to buy books at a discount from publishers and set their own prices.

16 states have also filed lawsuits against Apple and book publishers, claiming that agreements between the publishers and Apple have cost consumers more than $100 million and seeking damages. Settlements with Hachette and HarperCollins will pay $52 million in consumer restitution to Alaska, Arizona, Colorado, Illinois, Iowa, Maryland, Missouri, Ohio, Pennsylvania, South Dakota, Tennessee, Texas, Vermont, and West Virginia. The three settlers will also be unable to continue to set their own pricing, and have agreed to terminate their agreements with Apple.

Both Apple and the two remaining book publishers stand to lose a big chunk of change and the entire agency pricing model, so there’s quite a bit at stake. Apple and all publishers involved have thus far denied colluding on ebook prices, and Apple has yet to comment on the newly filed lawsuits.

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