The curtains have barely drawn to a close after Apple’s new iPad keynote, but the spotlight is still shinning on Cupertino, only this time in a negative way. A new report by the Wall Street Journal claims that Apple’s E-Book pricing has come under scrutiny of the U.S. Justice Department who is threatening to sue Apple for allegedly colluding to raise the price of electronic books.
According to the report, the Justice Department views Apple’s iBooks strategies to be anti-competitive and is currently in legal discussions with Apple along with five other major book publishers – Simon & Schuster Inc.; Hachette Book Group; Penguin Group (USA); Macmillan; and HarperCollins Publishers Inc.
The controversy centers around Apple’s e-books pricing strategy that was negotiated with publishers in 2010, before the launch of the original iPad. Before Apple’s iBookstore entered the market, publishers usually sold their books to retailers for about half of the recommended cover price. That model gave wholesalers the ability to sell books at highly discounted prices. Amazon even sold best-sellers for less than what they originally paid for, which drew the ire of publishers who feared customers would grow accustomed to getting high quality titles at a modest price.
When Apple began to negotiate distribution deals with publishers they suggested moving to an “agency model,” which dictated that publishers could sell their e-books for whatever price they wanted as long as Apple gets a 30% cut and the publisher will not sell the book at a cheaper price via another distributer. This satisfied both parties as it gave Apple a significant cut of profits while also allowing publishers to set the bar on pricing. But in the eyes of the Justice Department this is a problem.
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 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..
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 competition.
One idea floated by publishers to settle the case is to preserve the agency model but allow some discounts by booksellers.
The Wall Street Journal’s sources claim that a number of the parties involved in the case are currently in talks to reach a settlement, so it’s possible that an antitrust case won’t ever materialize. Apple has declined to comment on the matter. The five publishing companies and the U.S. Justice Department were also asked to comment but declined as well.