Just like that, Apple is officially on the receiving end of a major antitrust lawsuit filed this morning by the U.S. Justice Department for alleged e-book price-fixing. The suit, filed in New York district court, includes publishers Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster, reports Bloomberg.
Bloomberg and Reuters had reported earlier that this was set to happen per the DOJ’s ongoing investigation of Apple as well as major publishers Simon & Schuster, HarperCollins, the Hachette Book Group, Pearson and Macmillan for alleged collusion to fix e-book prices.
The reason a lawsuit seemed likely is that where the DOJ was in negotiations with some of the parties to reach a settlement, Apple wasn’t one of them. The Wall Street Journal reported last week that three of the international publishers were “inclined to settle the matter,” but two — along with Apple — were apparently “reluctant” to cede on the DOJ’s terms.
Price-fixing occurs when two or more people agree to “fix” pricing for products or services for mutual benefit. Imagine, for instance, if the foremost retailers of a given product, say a new book, agreed to set the price at suggested list, foregoing discounts and effectively eliminating price-based competition. The retailers would enjoy high margins on the book, while consumers would be forced to pay the same price everywhere. Thus, with controversial exceptions made for cartels like OPEC, price fixing is illegal in several countries, including the U.S. under antitrust law.
The DOJ has been investigating whether Apple’s deals with the five publishers when it launched the iPad in 2010 amount to price-fixing. In an interview with his biographer, Walter Isaacson, Steve Jobs said Apple would switch to an “agency model,” where publishers would set book pricing and prevent rivals from selling at a lower price — Apple would then take a sizable cut of the profits. According to Jobs (as quoted by Isaacson):
“We told the publishers, ‘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’.”
“They [the publishers] went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books’.”
The part about publishers preventing competitors from selling books at a lower price is what’s sometimes referred to as a “Most Favored Nation” clause. In Apple’s case, it’s basically a way of ensuring publishers can’t sell to competitors for less than they do Apple. That means publishers can’t sell e-books at lower prices to Apple’s rivals like Amazon or Barnes & Noble. Apple uses the 30/70 models for several of its e-tail stores, including the App Store, iBookstore and its Newsstand applications for downloading newspapers and magazines.
The government reportedly hoped to reach settlement terms that would let retailers decide what to charge customers and possibly nullify Apple’s “Most Favored Nation” clause, thus eliminating Cupertino’s iron grip on retail pricing. The settlement was also said to include a “cooling-off period” before publishers could sign a new deal.
The reason Apple wasn’t interested in settling, as Fortune‘s Philip Elmer-DeWitt notes, was that:
An extended cooling-off period — in which Amazon goes back to selling bestselling e-books for $9.99 and Apple is still adding its 30% surcharge to the publishers’ prices — could seriously damage Apple’s e-book business.
Worse still, it could keep the books off the iBookstore altogether.
While the “agency” model itself remains controversial, it’s not what the DOJ’s ultimately after, say sources. And according to an earlier Journal story, the DOJ’s top antitrust official, Sharis Pozen, said “we don’t pick the business model.”