[A2k] Wall Street Journal: U.S. Warns Apple, Publishers

thiru at keionline.org thiru at keionline.org
Thu Mar 8 02:37:36 PST 2012

    Updated March 8, 2012, 5:27 a.m. ET

U.S. Warns Apple, Publishers
Justice Department Threatens Lawsuits, Alleging Collusion Over E-Book Pricing

The Justice Department has warned Apple Inc. and five of the biggest U.S.
publishers that it plans to sue them for allegedly colluding to raise the
price of electronic books, according to people familiar with the matter.

Several of the parties have held talks to settle the antitrust case and
head off a potentially damaging court battle, these people said. If
successful, such a settlement could have wide-ranging repercussions for
the industry, potentially leading to cheaper e-books for consumers.
However, not every publisher is in settlement discussions.

The five publishers facing a potential suit are CBS Corp.'s Simon &
Schuster Inc.; Lagardere SCA's Hachette Book Group; Pearson PLC's Penguin
Group (USA); Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck
GmbH; and HarperCollins Publishers Inc., a unit of News Corp. , which also
owns The Wall Street Journal.

Spokespeople for the five publishers and the Justice Department declined
to comment. Apple, which introduced a new version of its iPad tablet
Wednesday, declined to comment.

The case centers on Apple's move to change the way that publishers charged
for e-books as it prepared to introduce its first iPad in early 2010.
Traditionally, publishers sold books to retailers for roughly half of the
recommended cover price. Under that "wholesale model," booksellers were
then free to offer those books to customers for less than the cover price
if they wished. Most physical books are sold using this model.

To build its early lead in e-books, Amazon Inc. sold many new best sellers
at $9.99 to encourage consumers to buy its Kindle electronic readers. But
publishers deeply disliked the strategy, fearing consumers would grow
accustomed to inexpensive e-books and limit publishers' ability to sell
pricier titles.

Publishers also worried that retailers such as Barnes & Noble Inc. would
be unable to compete with Amazon's steep discounting, leaving just one big
buyer able to dictate prices in the industry. In essence, they feared
suffering the same fate as record companies at Apple's hands, when the
computer maker's iTunes service became the dominant player by selling
songs for 99 cents.

As Apple prepared to introduce its first iPad, the late Steve Jobs, then
its chief executive, suggested moving to an "agency model," under which
the publishers would set the price of the book and Apple would take a 30%
cut. Apple also stipulated that publishers couldn't let rival retailers
sell the same book at a lower price.

"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,'" Mr. Jobs was quoted as saying by his
biographer, Walter Isaacson.

The publishers were then able to impose the same model across the
industry, Mr. Jobs told Mr. Isaacson. "They went to Amazon and said,
'You're going to sign an agency contract or we're not going to give you
the books,' " Mr. Jobs said.

The Justice Department believes that Apple and the publishers acted in
concert to raise prices across the industry, and is prepared to sue them
for violating federal antitrust laws, the people familiar with the matter

The publishers have denied acting jointly to raise prices. They have told
investigators that the shift to agency pricing enhanced competition in the
industry by allowing more electronic booksellers to thrive.

William Lynch, chief executive of Barnes & Noble, gave a deposition to the
Justice Department in which he testified that abandoning the agency
pricing model would effectively result in a single player gaining even
more market share than it has today, according to people familiar with the
testimony. A spokeswoman for Barnes & Noble declined to comment.

Prior to agency pricing, Amazon often sold best-selling digital books for
less than it paid for them, a marketing stance that some publishers
worried would make the emerging digital-books marketplace less appealing
for other potential retailers. The publishers' argument that agency
pricing increased competition hasn't persuaded the Justice Department, a
person familiar with the matter said. Government lawyers have questioned
how competition could have increased when prices went up. Amazon declined
to comment.

It isn't clear if the talks will lead to a settlement or how many of the
parties would sign on. One publishing executive familiar with the
situation said that the talks have been going on for some time and
"negotiations have taken many turns."

A second publishing executive said that "a settlement is being considered
for pragmatic reasons but by no means are we close." This person said that
there are significant legal costs associated with the probe. "You have to
consider a settlement, whether you think it's fair or not," the person

Contracts such as Apple's prevent publishers from selling books to other
buyers at a cheaper rate. Such terms, known as "most favored nation"
clauses, have drawn the scrutiny of the Justice Department in recent years
in the health-care industry because they can sometimes be used to hamper

One idea floated by publishers to settle the case is to preserve the
agency model but allow some discounts by booksellers, according to the
people familiar with the matter.

Among the issues that the Justice Department has examined is the effort by
three publishers involved in the probe to "window" e-books in late 2009,
according to people familiar with the matter. That December, Simon &
Schuster, HarperCollins and Hachette said they would delay the electronic
publication of a certain number of titles for a limited time after the
publication of the hardcover edition.

At the time, the publishers expressed concern that $9.99 digital best
sellers represented a long-term threat to the future of the publishing
business. The windowing efforts, however, gradually faded away.

The European Union has said it is also investigating the allegations.
Several class-action lawsuits have been filed and consolidated in a New
York federal court. Apple moved to dismiss the case this month, arguing it
didn't coordinate with any publishers. "Apple's entry created new
competition in eBook distribution and a vastly larger pool of eBook
consumers," it wrote in its motion.

For publishers, digital-book revenue is still the fastest-growing segment
of the business at a time when the sale of physical books is in decline.
E-book sales more than doubled to $970 million in 2011, according to a
survey of 77 publishers conducted by the Association of American
Publishers. As more consumers migrate to dedicated e-readers and tablet
reading devices, the number of consumers reading digitally will likely

At the same time, there are fewer bookstores in which to sell physical
books, highlighted by the liquidation last year of Borders Group Inc.,
once the country's second-largest book chain. In addition, the nation's
largest bookstore chain, Barnes & Noble, has increasingly dedicated more
of its space to nonbook-related items such as its popular line of
educational toys and games.

It isn't the first time the Justice Department has taken action against
Apple for allegedly colluding with other companies. In 2010, several
technology companies agreed to settle Justice Department allegations that
they colluded to hold down wages by improperly agreeing not to poach each
other's employees.

The evidence that surfaced in that case, as well as an ongoing private
class-action lawsuit that followed, showed Mr. Jobs as a prime mover
behind that antipoaching agreement. Apple didn't admit to any wrongdoing.

Write to Thomas Catan at thomas.catan at wsj.com and Jeffrey A. Trachtenberg
at jeffrey.trachtenberg at wsj.com


Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)

thiru at keionline.org

Tel: +41 22 791 6727
Mobile: +41 76 508 0997

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