The nascent world of e-books may be about to get hit with charges about old-fashioned price-fixing. On Thursday, several reports indicated that the U.S. Justice Department has issued warnings to Apple and five major publishers that it will bring legal action against the companies for working together to raise the prices of e-books.
The reports, from Reuters news service, The Wall Street Journal and other media, cited people familiar with the story, and said that, in addition to Apple, the targets were Simon & Schuster, the Hachette Book Group, the Penguin Group, Macmillan, and HarperCollins. None of the companies commented on the reports.
The reports also said that several of the target companies have held talks with the Justice Department to discuss a possible settlement, which could lead to a major price shift downward for e-books.
The pending Justice Department action apparently centers on the "agency model" to which the publishers agreed, which established e-book prices. Apple agreed to take a 30 percent cut of the agreed-upon prices. A key driver of the arrangement was Amazon's move to sell e-books for its Kindle e-reader at discounted prices that alarmed some in the book industry.
Under agency pricing, publishers determine what prices retailers can charge. This is opposed to the more common wholesale pricing, where retailers pay a less-than-retail price and then charge whatever they prefer. Wholesale pricing for physical books is typically half the recommended retail price, but there is no obligation to sell the books at the recommended price.
Amazon, a leader in the e-book industry, had been selling many popular e-books, including best sellers, for $9.99. Reportedly, Amazon's prices were often below what they paid, in order to create a "loss-leader" that would stimulate sales of its new Kindle reader.
'Customer Pays a Little More'
Publishers made no secret about their dislike for this pricing level, as they feared customers might get used to such low prices for books, and that Barnes & Noble, the leading U.S. bookstore chain, would be unable to match Amazon's discounts and, if it went bankrupt, they would lose their most valuable bricks-and-mortar outlet.
The European Commission, which has been aggressive in addressing anti-competitive practices by technology companies, said late last year that it was also investigating the same publishers for e-book price fixing.
In addition, a class-action lawsuit filed in New York City has charged that Apple worked as a "hub" for publishers to move e-book prices from wholesale to agency pricing.
Interestingly, the issue of agency pricing is addressed in the recent best-selling biography of the late Apple co-founder Steve Jobs, written by journalist Walter Isaacson.
In it, Isaacson quotes Jobs as saying that Apple told publishers his company would go with the agency model, "where you set the price, and we get our 30 percent and yes, the customer pays a little more but that's what you want anyway."
In the book, Jobs continued that the publishers then went to Amazon and said, "You're going to sign an agency contract or we're not going to give you the books."