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Publishers, Apple deny price-fixing allegations

By Jim Puzzanghera and Andrea Chang, Los Angeles Times –

WASHINGTON — Former Apple Inc. Chief Executive Steve Jobs was a key player in a conspiracy with five major book publishers to drive up the price of digital books, federal and state officials said in antitrust lawsuits filed against the companies.

Jobs helped orchestrate a complex price-fixing plan that cost consumers tens of millions of dollars in the past two years by boosting the price of many new releases and bestsellers by $3 to $5 each, federal investigators said. Apple even proudly described the maneuver — which gave the iPad maker a guaranteed 30 percent commission on each e-book sold through its online marketplace — as an “aikido move,” referring to the Japanese martial art, according to the lawsuit.

“The customer pays a little more, but that’s what you want anyway,” Jobs told the publishers at one point, said Sharis Pozen, the acting head of the Justice Department’s antitrust division.

“We allege that these executives knew full well what they were doing. That is, taking steps to make sure the prices consumers paid for e-books were higher,” she said Wednesday in announcing the federal suit, which some analysts said could lead to lower e-book prices.

All five publishers vehemently denied the allegations and contended that e-book and e-reader sales had surged since the industry went to the iPad pricing model. E-book sales for instance climbed 117 percent in 2011, generating revenue of $969.9 million at the companies that report sales to the Association of American Publishers.

The suit, along with another by 16 state attorneys general, was filed against Apple, Simon & Schuster, Hachette Book Group, HarperCollins Publishers, Macmillan and Penguin Group.

Hachette, HarperCollins and Simon & Schuster agreed to a settlement with the Justice Department that would require them to allow retailers such as Inc. and Barnes & Noble Inc. to reduce the prices of e-books they sell from the publishers. If approved by a federal judge, the settlement will restore competition to the e-book market, Pozen said.

In addition, Hachette and HarperCollins agreed to settle the states’ lawsuit and pay a total of about $51 million in restitution to e-book customers. The states are still negotiating restitution with Simon & Schuster.

Connecticut Attorney General George Jepsen, who helped lead the state effort, estimated the price fixing by all the publishers cost consumers more than $100 million.

Apple, Macmillan and Penguin did not agree to a settlement. The Justice Department promised that it would pursue the case against them vigorously in an attempt to keep the emerging e-book market “open and competitive.”

Macmillan Chief Executive John Sargent denied the charges in an open letter on the website of the publisher’s imprints. “Macmillan did not collude,” he wrote. Penguin CEO John Makinson said the firm’s pricing decisions were made independently and “we have done nothing wrong.”

An Apple spokesman said the company had no comment.

Because of the settlement, the book publishers will have to renegotiate their contracts with e-reader makers including Apple, Amazon and Barnes & Noble, and that is expected to bring down prices for the next two years.

But with two publishers refusing to settle and other publishers not involved in the suits, prices in the e-book industry could vary widely, experts said.

Amazon cheered the lawsuits. The suits portrayed Amazon, which makes the Kindle e-reader, as a victim of the price fixing because it could not charge lower prices and ostensibly lost e-book sales to Apple.

“This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” the Seattle online retail giant said.

Consumers Union also praised the suits for stopping a practice that “appears to have seriously hurt competition.”

“This is a ‘slam-dunk’ case of collusive, anti-competitive behavior,” Mark Cooper, director of research at the Consumer Federation of America, said in a statement.

James McQuivey, a media analyst at Forrester Research, said publishers already had been lowering e-book prices, so the antitrust suits appeared late.

“Amazon’s going to very rapidly drop the price on some of its biggest best-sellers as a way to say, ‘Look, haha, we’re free again,’ ” he said. But McQuivey predicted that Amazon wouldn’t slash e-book prices across the board because the company already was charging a low price for the Kindle.

The publishers that settled said they did so to avoid a potentially protracted legal battle, not because they admitted wrongdoing.

But federal and state officials painted a much different picture, sketching a broad conspiracy that they say began in 2008. For the next year, officials said, publishing executives met quarterly “in private dining rooms of upscale Manhattan restaurants,” with similar meetings taking place in Europe.

Their target was what one publishing executive called the “wretched $9.99 price point” for e-books on Amazon, the suit said. The publishers feared they would have to start charging that price for hardcover books as well.

The collusion began no later than 2009 when the publishers agreed to work together, the suits said. An email from the chief executive of one of the publisher’s parent companies in July 2009 said that the top publishers were “in discussion to create an alternative platform to Amazon for e-books,” the federal suit said.

“The goal is less to compete with Amazon than to force it to accept a price level higher than 9.99,” the suit said, quoting the email from an unnamed executive.

The publishers and Apple saw an opportunity with the pending launch of the iPad tablet in 2010.

“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 the executive of one of the publisher’s parent companies, the suit said. Jobs died in October after a long battle with cancer.

Apple had the clout to impose a new system on the publishers that gave it a 30 percent commission on books sold through iTunes and guaranteed that competitors could not undercut the price, the suit said.

Apple and the publishers “reached an agreement whereby retail price competition would cease (which all the conspirators desired), retail e-book prices would increase significantly (which the publisher defendants desired) and Apple would be guaranteed a 30 percent ‘commission’ on each e-book it sold (which Apple desired),” the suit said.

In the span of three days in January 2010, all five publishers entered into “functionally identical” contracts with Apple that boosted the price of new-release or bestseller e-books from $9.99 to $12.99, $14.99 or $16.99. The companies violated antitrust law by joining together to agree to the new pricing structure, the suit said.

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