The publishing and technology worlds are abuzz with reports that the U.S Justice Department is warning Apple Inc. and five major publishers that it is about to sue them for allegedly colluding to fix the prices of e-books.
Reuters, Bloomberg and the Wall Street Journal reported Thursday that the Justice Department is preparing to sue the six organizations, alleging that they acted together to drive up e-book prices and that they tried to shut out rival e-book sellers like Amazon.com.
The five U.S. publishers being investigated are Simon & Schuster, Hachette Book Group, the U.S. arm of Pearson PLC's Penguin Group, HarperCollins Publishers, and Macmillan.
News reports said some of the publishers were in settlement talks with the Justice Department.
At issue is the so-called "agency model" that many e-book publishers adopted in 2010 when Apple came out with its first iPad tablet. Under this pricing model, publishers would set e-book prices and the retailer would take a 30 per cent cut.
But Apple's agreements with the publishers required them to offer their lowest prices through Apple, rather than rival retailers like Amazon. In other words, the allegation is that Apple and the publishers engaged in anti-competitive practices by agreeing to something that would hurt consumers.
The agency pricing model largely replaced the previous wholesale model championed by Amazon when it entered the e-book market with its Kindle e-reader. Under that pricing arrangement, retailers would buy books at a discount from the publishers and could then charge what they wanted. Amazon typically charged $9.99 for an e-book as part of an ambitious price-cutting campaign to drive sales of its Kindle reader.
The pricing controversy began two years ago, when some book publishers asked Amazon to increase the price of e-books. Amazon initially resisted but eventually changed its mind after some popular titles were pulled from Amazon's site.
Apple is already the focus of a class-action lawsuit filed last year on behalf of e-book customers. Reuters reports that Apple asked a Manhattan court last week to dismiss the suit. In a court filing, Apple denied that it colluded with publishers to effectively slow the Kindle's popularity. In a court filing, Apple said the lawsuit "just strings together antitrust buzzwords," according to a report from PaidContent.org.
But a partner with the law firm that filed the suit said the sudden rise in e-book prices came in the absence of any similar cost increase.
"The case is about … a radical industry shift that simultaneously resulted in a 30-to-40 per-cent price increase across the industry overnight," Jeff Friedman told Reuters.
Some consumers, online retailers and authors have complained that existing e-book prices are too high, compared to the cost of print books. E-book prices have sometimes even exceeded the cost of the printed versions.
But some publishers say they can't lower the cost of digital books too much or they won't survive, arguing that printing costs are a relatively small part of the expense of bringing a book to market.
The e-book market has boomed. One estimate put 2011 e-book sales at $1.7 billion US.