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Apple, DoJ May Settle Over Ebook Pricing Soon

Although negotiations between Apple, book publishers and the Department of Justice are still "fluid," insiders close to the talks told Reuters that Apple's "most favored nation" status with publishers may be eliminated soon. This could possibly allow rivals like Amazon and Barnes & Noble to regain control of pricing using the "wholesale model," providing ebooks at lower prices rather than overinflated, fixed prices established by the Apple-driven "agency model."

"It would be a positive for Amazon because the company's greatest strength is as a high-volume, low-price retailer and the wholesale model plays into that," said Jim Friedland, an analyst at Cowen & Co.

As previously reported, publishers in the dispute include Simon & Schuster Inc, Hachette Book Group, Penguin Group USA, Macmillan and HarperCollins Publishers Inc. The Justice Department is still trying to figure out what's going on, investigating the agreements Apple made with the five publishers back when the company was gearing up to launch its first iPad tablet.

Prior to the "agency model," retailers like Amazon were able to charge for ebooks at wholesale prices, charging $9.99 or less. But publishers believed their books were worth more, and feared that Amazon would gain too much market power. Thus, Apple and the publishers came up with the "agency model" that allowed the publishers to set the price, but give Apple a 30-percent cut in the process. The publishers loved the idea, but Apple reportedly wouldn't agree unless they forced the model on everyone else.

Now consumers are paying more for ebooks than traditional paperbacks sold on physical retail shelves. While the agency pricing is indeed legal, both the Department of Justice and the European Commission are examining whether the way that Apple reached its agreements with the publishers rose to the level of violations of antitrust law. The Justice Department even suspects that publishers "may have colluded to implement it with e-book retailers."

Unfortunately, Apple may have no way out of the legal mess. Former CEO Steve Jobs, who died last October, seemingly confessed that Apple took advantage of publisher woes and their fear of Amazon. "So 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.' ... So they went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books,'" he said via Walter Isaacson's biography.

When Apple essentially created the tablet market with its iPad, Amazon owned 90-percent of the ebook market. Now Amazon only claims 65-percent while Barnes & Noble commands 20-percent and Apple has only 10-percent.