Justice Department Threatens Apple, Publishers over E-Book Pricing

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Did you notice that e-books became a little more expensive after Apple entered the game with iBooks? So did the U.S. Department of Justice, which may be threatening to sue Apple and e-book publishers for allegedly colluding to raise prices.

The Wall Street Journal reports that along with Apple, five publishers are facing a potential government lawsuit: Simon & Schuster, Hachette Book Group, Penguin Group, Macmillan and HarperCollins. Some publishers are trying to settle before the Justice Department takes legal action, but not every publisher is involved in negotiations, the Journal reports.

(MORE: Please, Apple, Stay Out of the Book-Vetting Business)

At issue is a change in e-book business models that took hold when Apple opened its iBookstore in 2010. Before then, most major publishers were working with a “wholesale” model, in which an e-book seller such as Amazon pays roughly half the recommended cover price, and then sets its own pricing. If Amazon wanted to establish Kindle as the leading e-book seller, it could sell its books for cut-rate prices, or even at a loss.

When Apple entered the market, it offered a different model. Publishers could set their own selling prices and take 70 percent of the revenue. This so-called “agency” model is also how Apple’s App Store works, and publishers liked it because they could prevent a race to the bottom in e-book pricing. As the Journal notes, the agency model also allowed other e-book sellers to stay competitive with Amazon, preventing an iTunes-like situation where one retailer would dominate the competition.

So naturally, the agency model became a lot more popular after Apple entered the business. Apple also reportedly stipulated that publishers who used the agency model couldn’t sell their books for cheaper elsewhere.

Although the average price of e-books has fallen since 2009, that’s largely due to bargain pricing on certain books. For bestsellers, Amazon’s old practice of selling them for $10 apiece has largely gone away. Most New York Times Best Sellers now cost between $12 and $15 in Kindle format. In some cases, publishers have charged more for the e-book version than its print counterpart.

Still, there’s no easy answer on whether agency pricing has been good or bad for consumers. No one likes higher prices, but the level playing field means companies like Barnes & Noble, Apple and Kobo must compete on hardware and software features instead of e-book prices. In other words, consumers may be paying more, but getting a better reading experience.

The DOJ isn’t the only entity looking to ding Apple and publishers over e-book prices. They also face a class-action lawsuit and investigations by the European Union. By the time this is all over, chances are the e-book industry’s business model will change yet again.

(MORE: E-Books Are Saving the Classics)