Wednesday, April 11, 2012

DOJ sues Apple over price-fixing scheme

The U.S. Department of Justice on Wednesday brought a lawsuit against Apple and several publishing companies over a scheme to fix e-book prices.

The suit stems from the 2010 release of the iPad, when Apple (AAPL, Fortune 500) reached an agreement with five publishers to release books on its then-new iBookstore. The DOJ said Apple colluded to raise the price of e-books with CBS's (CBS, Fortune 500) Simon & Schuster, News Corp.'s (NWS) HarperCollins; Hachette Book Group; Pearson's (PSO) Penguin unit and Macmillan.

European authorities are also probing Apple and the publishers for similar antitrust violations. Before the release of the iPad, Amazon's (AMZN, Fortune 500) Kindle was the preeminent e-book reader on the market. Amazon forced publishers to sell most books at $9.99 -- a price that came in below the cost of the books. The DOJ found that booksellers were unnerved by the discounted e-book price structure Amazon launched in 2007, and they went to Apple in late 2009 to find a way to force Amazon to raise its prices. The iPad proved to be the perfect tool to accomplish that.

The alleged conspiracy placed many books at so-called "agency pricing," putting them on the market for about $12.99 and giving Apple a 30% cut. Soon after that, Amazon allowed publishers to set their own prices, resulting in higher prices on the Kindle as well.

The DOJ pointed to Steve Jobs' biography to argue Apple knew that the scheme would result in higher costs for consumers and would remove pricing competition from Amazon. "We'll go to [an] 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," biographer Walter Isaacson quoted Steve Jobs as saying. As a result, e-book customers have paid tens of millions of dollars more than they otherwise would have, the DOJ alleged.

Apple and the publishers declined to comment.

Amazon still has regular skirmishes with publishers over rates it considers too high. In February, the company yanked distributor IPG's digital books from its Kindle store after a dispute over terms of their contract.

Apple's new iPad up close
Amazon, too, has come under fire for dancing on the legal lines around e-book pricing. Amazon and Apple both strike deals with publishers that forbid them from offering other retailers' deeper discounts. Those agreements, dubbed "most favored nation" clauses, aren't straight-out illegal under antitrust laws -- but they're also not always legal.

By David Goldman @CNNMoneyTech