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Apple, Publishers Facing Antitrust Lawsuit from Justice Dept

For book readers who have taken a hit in the wallet thanks to overinflated ebook prices, justice is about to be served.

The Wall Street Journal reports that after a thorough investigation over complaints regarding the dramatic increase in ebook pricing, the Justice Department is now threatening to sue in an antitrust case against Apple and five publishers including Simon & Schuster Inc., Hachette Book Group, Penguin Group (USA), Macmillan and HarperCollins Publishers Inc.

The report states unnamed sources who say several parties have held talks to settle the antitrust case and head off a potentially damaging court battle. Not all publishers are in the discussions, but if participating parties reach a settlement, then numerous ebooks could return back to their cheaper price point. As it stands now, most cost more than an actual physical paperback sold in stores.

As reported back in December, once Amazon's Kindle ereader devices began to grow popular, publishers didn't want the online retailer to control the ebook market by selling virtual books at a $9.99 or less price point. For some reason, publishers believed ebooks to be worth more than $9.99 despite paperback prices. So as a collective, they agreed to a model proposed by Apple's late CEO Steve Jobs called the "agency model" which would go live once the iPad hit stores. This model essentially pulled ebook pricing away from online retailers like Amazon and Barnes & Noble.

Prior to the "agency model" plan agreement, publishers typically sold books to retailers for roughly half of the recommended cover price. Called the "wholesale model," retailers had the freedom of setting their own price, even less than the cover price if desired. To get readers into purchasing a Kindle device, Amazon thus stocked its virtual warehouse full of ebook best sellers priced at $9.99 or less, selling them for less that it paid for each to publishers.

But the publishers reportedly didn't like that strategy, and once they agreed to Apple's "agency model" proposal, the publishers set their own price while Apple took in a 30-percent cut. Apple even required that publishers couldn't let rival retailers sell the same book at a lower price.

Thus as ebook prices began to rise, customers and retailers began to complain. The EU was first to react, raiding a handful of publishers back in March 2011 and seizing computers, contracts and executive smartphones. Eventually the U.S. Justice Department's antitrust arm smelled foul play and began its own investigation. The government seemingly didn't have to go far however, as Steve Jobs admitted to some of the ebook pricing drama to his biographer, Walter Isaacson, in late 2011.

"We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30-percent, and yes, the customer pays a little more, but that's what you want anyway,'" Jobs reportedly stated. "They went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books,' "

That said, insiders close to the Justice Department's investigation claim that the agency believes Apple and publishers "worked in concert" to raise prices across the industry, and has enough evidence to sue them all for violating federal antitrust laws. Several publishers believe they aren't guilty of foul play, but will settle anyway because it's the cheaper way out. Others plan to stand firm against the government's lawsuit.

Surprisingly, Barnes & Noble is on the side of publishers. Chief executive William Lynch reportedly testified in a deposition that abandoning the "agency model" would effectively result in a single player gaining even more market share than it has today. That in itself sounds like a fear of Amazon and its Kindle products, a fear that may help in the publishers' case.

To read the full report, head here, or pick up a physical copy of the Wall Street Journal on stands now.