thursday, 12 april of 2012

U.S. alleges e-book scheme

Conspiring to raise e-book prices

U.S. alleges e-book scheme

Lawsuit says Apple, publishers colluded to raise prices; three will settle.

The U.S. accused Apple Inc. and five of the nation's largest publishers Wednesday of conspiring to raise e-book prices, in a case that could radically reorder the fast-growing business.

In a civil antitrust lawsuit, the Justice Department alleged that CEOs of the publishing companies met regularly in private dining rooms of upscale Manhattan restaurants to discuss how to respond to steep discounting of their e-books by Inc., a practice they disliked. The executives also called and emailed each other to craft a solution to what one of them called "the wretched $9.99 price point," the suit said.

The five publishers and Apple hatched an arrangement that lifted the price of many best-selling e-books to $12.99 or $14.99, according to the suit. The publishers then banded together to impose that model on Amazon, the government alleged.

"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.

The publishers and Apple denied any wrongdoing. Some publishers said the government's action could harm consumers by giving Amazon excessive control of the industry.

The lawsuit upends an industry already undergoing wrenching change as printed books give way to electronic books that can be transmitted anywhere in seconds. Publishers want to keep their role as gatekeeper and ensure that e-books are profitable.

Three of the publishers settled with the Justice Department, agreeing to let Amazon and other retailers resume discounting of e-books. Settlement of a separate suit filed by 16 states and U.S. territories could lead to tens of millions of dollars in restitution to consumers who bought e-books at the higher prices.

Amazon called the settlement a victory for consumers and users of its Kindle e-reading device. It promised to renew discounting, which could put pressure on such rivals as Barnes & Noble Inc. "We look forward to being allowed to lower prices on more Kindle books," Amazon said.

Apple and two publishers didn't settle and are on track to face the government in court. Apple declined to comment but earlier denied acting in concert with the publishers.

Chief Executive John Sargent of Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, was one of the two CEOs to reject the government's offer. He said a settlement would help Amazon "recover the monopoly position it had been building" and "have a very negative and long-term impact on those who sell books for a living."

That said, Macmillan is among four publishers that are proposing to settle a parallel investigation in Europe. Europe's competition commissioner, Joaquín Almunia, said Apple also has proposed settling in Europe.

Unlike in Europe, the companies in the U.S. face a private class-action lawsuit pending in New York that could involve triple damages. Estimates of the alleged damages to U.S. consumers ranged from the tens of millions of dollars, by the Justice Department, to more than $200 million this year, according to the Consumer Federation of America.

The government's suit describes the shift from traditional wholesale pricing—where retailers set the price of both digital and physical books—to a so-called agency model that has publishers setting e-book prices and retailers paid by commission.

By 2009, the publishing industry was angered by Amazon's decision to price many newly released and best-selling e-books at $9.99, which was often below its cost. Publishers feared that $9.99 would cement consumer price expectations and make it difficult to charge more in the future. They also feared Amazon's growing clout in the market.

As it prepared to introduce its first iPad tablet computer in early 2010, Apple negotiated with publishers to offer their books in its new iBookstore. Matching Amazon's prices would have involved taking a loss on many titles.

The suit contends Apple seized on publishers' discontent and offered them a switch to agency pricing on the condition they imposed the same arrangement on Amazon and other retailers. The suit cited a passage in the biography of Apple's late chief executive, Steve Jobs, where he proudly called the offer his "aikido move." Describing Apple's strategy for negotiating with the publishers, Mr. Jobs said, "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."

According to the suit, none of the publishers could, individually, force Amazon to accept the new arrangement. A single publisher risked being dropped by Amazon and might lose sales if it was the only one to raise prices.

Aware of that problem, Apple executives worked with the publishers in late 2009 and early 2010 to give them "assurances of solidarity," the U.S. suit alleges. It says the publishing chief executives held quarterly gatherings at such Manhattan restaurants as Alto and the Chef's Wine Cellar private room in Picholine.

"Our goal is to force Amazon to return to acceptable sales practices," a publishing CEO wrote in a December 2009 email cited in the suit. "To succeed our colleagues must know that we entered the fray and follow us."

The government said publishing executives knew what they were doing was wrong and took "steps to conceal their communications with one another, including instructions to 'double delete' email."

After Amazon started reaching out directly to authors, one publishing executive said he was angry at the potential competition and expressed his desire "to screw Amazon," the suit said.

The three publishers that agreed to settle are Lagardère SCA's Hachette Book Group, CBS Corp.'s Simon & Schuster Inc. and News Corp.'s HarperCollins Publishers LLC. (News Corp. also owns The Wall Street Journal.)

They agreed to terminate their agreements with Apple and refrain from limiting any retailer's ability to set e-book prices for two years. That could help resume deep discounts on new e-books. Rival retailers, like Barnes & Noble, may choose to match them.

Despite settling, HarperCollins and Hachette both denied violating antitrust laws and defended the agency model. HarperCollins said it made a "business decision" to avoid a legal battle. Simon & Schuster confirmed settling but declined to comment.

Macmillan and Pearson PLC's Penguin Group (USA) declined to sign on to the settlement. John Makinson, chief executive of Penguin Group, denied wrongdoing and defended the agency model as "the one that offers consumers the prospect of an open and competitive market for e-books."

Mr. Makinson added that the U.S. complaint contains "a number of material misstatements and omissions."

A group of 16 states, led by Connecticut and Texas, filed their own suit Wednesday against Apple, Macmillan, Penguin and Simon & Schuster. The states said they have reached tentative settlement agreements with HarperCollins and Hachette. Those two publishers have agreed in principle to provide more than $51 million in restitution to e-book buyers, Connecticut Attorney General George Jepsen said.

Publishers have argued privately that the agency model helped save the book industry from suffering the same fate as the music recording industry did at the hands of Apple and preserved competition by allowing several booksellers to thrive.

In 2009, before the new pricing, Amazon was estimated to have around 90% of the e-book market. Its share has now slipped to around 60%, according to Mike Shatzkin, chief executive of the Idea Logical Co., a New York-based publishing consultancy. He estimated that Barnes & Noble has between 25% and 30%, and Apple has much of the remainder.

One question is whether Apple will remain in the bookselling business if it is forced to match Amazon's discounted prices. Apple's e-book market share is small and immaterial to its business, analysts say. But it may be unwilling to cede the entire category to Amazon.

"A more likely scenario is that they would switch their pricing policy," said Sarah Rotman Epps, an analyst with Forrester Research.

Whatever happens to Apple's bookstore, customers should still be able to read e-books on the company's devices. While Forrester says that slightly more than half of iPad owners say they use the device to read books, many do so on third-party iPad apps like the Kindle app.

The settlement allows publishers to negotiate limits on how much retailers can discount, ensuring retailers can't lose money overall on e-book sales. Moreover, Amazon may be cautious about across-the-board discounts because its profit margins are already thin.

(Published by WSJ - April 11, 2012)

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