Department of Justice Sues Apple for E-book Collusion

Eric Holder announced that the Department of Justice would be suing Apple (AAPL) along with some of the nation’s biggest publishers for colluding to raise the prices of e-books. The lawsuit could cost the publishers millions in settlements, and might expose a seedy underbelly to the industry that few have seen before.

Shady Meetings in Back Rooms

Apple and the major publishers, if the collusion alleged in the lawsuit is accurate, clearly weren’t interested in competing with Amazon (AMZN) on the open market.  The five publishers named were CBS Corporation’s (CBSA) Simon & Schuster, News Corp’s (NWSA) HarperCollins, Lagardere SCA’s (MMP.EPA) Hachette Book Group,  Pearson’s (PSO) Penguin Group, and MacMillan. The lawsuit describes a conspiracy between the five publishers and Apple to keep the price of eBooks high, with top titles selling at $12.99 or $14.99 rather than the $9.99 that Amazon once sold top titles for.

“As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles,”said Attorney General Eric Holder. “We allege that executives at the highest levels of these companies–concerned that e-book sellers had reduced prices–worked together to eliminate competition.”

Jobs Wanted Agency Model

The lawsuit alleges that meetings between the CEOs of these companies were held in Manhattan restaurants with no legal counsel present beginning in September of 2008. There, they publishers agreed to shift from the previous wholesale format of sales to an agency model preferred by Apple. Apple would get a 30 percent commission on sales while allowing publishers to set their own price.

The suit utilizes a quote from then Apple CEO Steve Jobs to his biographer about the negotiations with publishers: “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.”

In the lead-up to the launch to the iPad in 2010, Apple executives allegedly worked with the five publishers to simultaneously enter into agency contracts with Apple with the intent of forcing Amazon to accept the new model. The conspiracy, as described in the suit, involved secret communications between the publishers in order to coordinate their articles.

The Day’s Big Winner Could be Amazon

Regardless of outcome, the lawsuit could easily be viewed as a major victory for Amazon and its Kindle tablets. Amazon’s Kindle is being used as a loss leader to sell more books, and bringing the price of ebooks down again could mean big things for Amazon.

“We look forward to being allowed to lower prices on more Kindle books,” the company said in a statement.

Three publishers, Hachette, Simon & Schuster, and HarperCollins, have already chosen to settle, agreeing to prevent publishers from setting prices for retailers and end their agreement with Apple. The settling companies will also stagger their new contracts so that future negotiations will involve only one publisher at a time.

Wednesday also saw 16 states filing their own suit, led by Connecticut and Texas, against Apple, Macmillan, Penguin, and Simon & Schuster. The same states are working out settlements with HarperCollins and Hachette that will have those two companies paying $51 million in restitution to customers in all 16 states.