The U.S. Department of Justice sued Apple and five publishing companies on Wednesday over alleged price fixing of e-books across the industry, causing “consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid.”
The antitrust lawsuit, filed in the Southern District Court of New York, accuses Apple and five separate publishing companies — Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster — of colluding to fix the price of e-books in violation of federal antitrust law.
As of Tuesday afternoon, three defendants — Hachette (owned by Lagardère SCA), HarperCollins (owned by News Corp.) and Simon & Schuster (owned by CBS) — had settled with the Justice Department, but the DOJ said it will continue its suit against Apple, Macmillan and Penguin.
Although lawsuit filings aren’t typically the most riveting reads, the government’s case against Apple is more engaging than most, chronicling in page-turning detail the rise of the American e-book industry and the alleged crimes of Apple and publishers. It’s, dare we say it, novel-esque.
To begin with, the Justice Department credits Amazon with nearly single-handedly launching the e-book industry in the U.S. in 2007 with the debut of the Kindle. As the DOJ puts it:
“E-book sales have been increasing rapidly ever since Amazon released its first Kindle device in November 2007. In developing then mass marketing its Kindle e-reader and associated e-book content, Amazon substantially increased the retail market for e-books.”
The lawsuit highlights Amazon’s success with its default $9.99 e-book pricing model and explains that publishers viewed the rise fearfully, “as a substantial challenge to their business model,” which could lead to overall lower priced volumes in print as well as electronically across the industry.
The alleged price-fixing scheme apparently began in late 2009, a few months before Apple released the first iPad in April 2010. Prior to that, publishers had already begun discussing the possibility of price collusion amongst themselves.
As the lawsuit states:
“The Publisher Defendants regularly communicated with each other in private conversations, both in person and on the telephone, and in emails to each other to exchange sensitive information and assurances of solidarity to advance the ends of the conspiracy….Publisher Defendants took steps to conceal their communications with one another, including instructions to “double delete” e-mail and taking other measures to avoid leaving a paper trail…”
The lawsuit goes onto detail some of these meetings, including a pre-conspiracy September 2008 meeting with publisher CEOs at “‘The Chef’s Wine Celler,’ a private room at Picholene,” a high-priced New York restaurant.
Apple allegedly didn’t get involved the conspiracy until 2009. Apple VP Eddy Cue’s emails to late CEO Steve Jobs are cited as evidence of Apple’s role, including one in which Cue wrote: “[a]t this point, it would be very easy for us to compete and I think trounce Amazon by opening up our own ebook store.”
Cue also reportedly met with the publishers in New York City in December 2009 and later emailed Jobs to say three publishers “saw the ‘plus’ of Apple’s position.”
At the same time, Apple is said to have internally debated colluding with Amazon to carve up digital content across different mediums: audio/video would be controlled by Apple and ebooks by Amazon.
But the publishers and Apple ended up entering into an agreement. Jobs’ own email to a publisher proves to be quite damning with Jobs stating that the publishers could work with Apple or pursue one of two other choices: “Keep going with Amazon at $9.99” or “hold back your books from Amazon.”
The suit explains:
“As a result of discussions with the Publisher Defendants, Apple learned that Publisher Defendants shared a common objective with Apple to limit e-book retail price competition, and the Publisher Defendants also desired to have popular e-book retail prices stabilize at level significantly higher than $9.99.”
As such, the publishers later began charging $12.99, $14.99 or $16.99 for e-book versions of new hardcover titles when the iPad was released in April 2010.
Previously, the DOJ points out, e-book pricing occurred in a “wholesale model,” wherein publishers sold their books to retailers at varying prices, then retailers were free to charge whatever they wanted for them.
The “agency model” that Apple and the five publishers implemented involved agreeing to fixed prices prior to selling the books through Apple’s iBookstore, according to the DOJ.
The DOJ also notes that Apple described the move to the “wholesale model” as an “Aikido move,” after the flowing martial art.
The Justice Department cites the now-infamous quote late CEO Jobs gave to his authorized biographer Walter Isaacson, describing Apple’s dealings with publishers thusly: “We told the 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.’”
The Justice Department is seeking to tear up the Apple Agency Agreements and have Apple and publishers pay relief, likely to be in the millions, for the violations.
Regarding the settlement reached with three publishers, Attorney General Eric Holder said in a statement Tuesday: ” If approved by the court, this settlement would resolve the Department’s antitrust concerns with these companies, and would require them to grant retailers — such as Amazon and Barnes & Noble — the freedom to reduce the prices of their e-book titles. The settlement also requires the companies to terminate their anticompetitive most-favored-nation agreements with Apple and other e-books retailers.”
Ed’s note: This article originally incorrectly said that the Justice Department was likely to make Apple pay “hundreds of millions of dollars in relief,” when it fact, experts told TPM that the relief, which is standard for suits of this kind and only covers the cost of the DOJ’s preparation of the case, is likely to be much less, in the “millions.” Additionally, this article originally compared Aikido to a “dance-like” martial art, but this reference was changed to “flowing” to more accurately reflect the sport. We apologize for the errors.