Wednesday afternoon the Department of Justice lived up to its threat to sue Apple and five publishers accused of ebook price fixing. The lawsuit was filed in U.S. District Court for the Southern District of New York, accusing all six parties of conspiring to fix ebook prices and forcing consumers to overpay tens of millions of dollars.
In what sounds like a plot yanked straight out of a John Grisham novel, the Department of Justice claims that all six parties involved colluded to fix ebook prices during the launch of the first iPad tablet in 2010. Executives "at the highest levels" of Apple and the publishers met together in private rooms and worked together to break up Amazon's low-cost dominance of the ebook market, to eliminate competition among all ebook sellers and to solve "the $9.99 problem."
The complaint states that the publisher defendants' U.S. chief executives placed at least 56 phone calls to one another during December 2009 and January 2010. "As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles," said U.S. Attorney General Eric Holder during a press conference.
It gets even better. According to the Department of Justice, Apple and the five publishers took careful steps to conceal their communications with each other. They even "double deleted" their email and used measures to erase their paper trails. All parties involved also reassured each other that they would collectively move together to raise ebook prices. Thus because of the agreement, ebook prices rose up an average of $2 to $3 across the board in a three-day period in early 2010. Now they cost up to $14.99, more than a physical paperback book.
As reported Wednesday morning, three of those publishers already settled with the government, not wanting to spend millions defending themselves in court. That means Amazon and other retailers can now set their own prices on ebooks published by HarperCollins, Simon & Schuster and Hachette Book Group. The "most favored nation" contracts with Apple will now be eliminated, and all three will not be allowed to enter an Agency Model for another two years.
Hachette said it reluctantly agreed to settle although it was not involved in a conspiracy. HarperCollins settled but denied the conspiracy theories as well. Simon & Schuster didn't even bother to comment.
Along with Apple, the other two publishers who refused to settle was Penguin and Macmillan. Apple has refused to comment on the lawsuit, but an insider stated that Apple wasn't even part of the settlement negotiations. Previously the company said in a private class action suit on the same issue that it had not colluded with publishers, but instead "individually negotiated separate vertical agreements with each of the publishers."
Macmillan issued a statement to the book industry, announcing its innocence to accusations of collusion. The company reportedly even tried to negotiate with the Department of Justice for months, but the settlement terms were too onerous. ""After careful consideration, we came to the conclusion that the terms could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model," said Macmillan Chief Executive John Sargent.
Penguin CEO John Makinson said on Wednesday that his company didn't do anything wrong. Penguin was the only publisher in the group that did not negotiate a settlement with the Department of Justice, and plans to put up a fight.
Apple seemingly doesn't have a chance to win its case, partially thanks to the late Steve Jobs, his personal involvement and his testimony. "Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99," Jobs wrote to one of the publishers. As it stands now, the Agency Model provides Apple and other retailers with a 30-percent cut of all best-seller ebook sales.
Overseas, the EU Competition Commissioner Joaquin Almunia said on Wednesday that the Commission has received preliminary settlement proposals from Apple and four publishers so that its own investigation into ebook price fixing will come to a close.
In addition to the lawsuit filed by the Department of Justice, a similar lawsuit was filed in federal court in Austin, Texas, by a group of 15 states and Puerto Rico, led by Texas and Connecticut, against Apple, Penguin, Simon & Schuster and Macmillan. Hachette and HarperCollins reportedly settled with the 15 states prior to the lawsuit submission, agreeing to shell out $51 million in restitution to consumers who bought ebooks.
Ultimately for Amazon, the settlement of the three local publishers is a definite first victory in its war against Apple for the consumer dollar. "This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books," Amazon said yesterday in a statement.