You’ve been had.
So says the Department of Justice, which is throwing the book at Apple with an antitrust lawsuit that accuses the tech giant and six top publishers of colluding to drive up the price of e-books.
Regulators allege that the defendants conspired to overcharge e-book buyers to the tune of tens of millions of dollars. If the case goes against Apple and the cohort of publishers, which include Hachette, HarperColllins, Macmillan, the Penguin Group and Simon and Schuster, e-book prices could be slashed virtually overnight, experts say.
“I can’t think of an antitrust case that has been brought in the past decade that has as significant of a potential impact on consumers as this case has,” said David Balto, the former policy director at the Federal Trade Commission’s Bureau of Competition. “This case isn’t just important for opening up these e-book markets, but it could set down a critical marker for the development of future electronic commerce markets.”
The Justice Department's 36-page complaint lays out detailed evidence, from as far back as 2009, suggesting close collaboration between the chief executives of the publishing houses named in the suit. Over phone calls and fancy lunches at Manhattan hotspots such as Picholine and Alto, this elite book club of executives conspired to halt price competition and raise prices, regulators claim. They allegedly came to each others' defense against the onslaught from Amazon.com, with an executive at one point apparently telling another, "I can ensure you that you are not going to find your company alone in the battle."
The old world media companies found common ground with Apple in their shared desire to "trounce" Amazon.com and undermine its power in the e-book market, the complaint says.
Working with Apple, the publishers hammered out an unconventional arrangement that gave them, rather than retailers, the power to set the price of their e-books, the Justice Department says. As a result, the presses were able to move away from what they called the "wretched" $9.99-or-less price point offered by Amazon.com and instead charge as much as $16.99 per e-book.
Everyone was a winner -- except you, the Justice Department argues. Publishers were able to elevate their prices. Apple negotiated a 30 percent cut on all e-book sales, meaning the tech behemoth benefited from higher pricetags and had an interest in keeping them high. And, thanks to a provision guaranteeing Apple’s iBookstore couldn’t be undersold by competing e-book retailers, consumers couldn't find lower prices on e-books through other sites.
All that wheeling and dealing left you paying more for your e-books, regulators charge.
“Defendants' ongoing conspiracy and agreement have caused e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid,” the Justice Department wrote.
Steve Jobs once asserted in no uncertain terms that Apple’s negotiations with publishers would put the squeeze on customers, the complaint says.
“We’ll go to [an] 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 said, according to the complaint. Apple also boasted that its plan was an “aikido move,” a reference to Japanese martial arts.
If regulators are successful, the suit is likely to benefit consumers by lowering the price of e-books, antitrust experts say.
“If they all went back to the old way of doing things, which is that the publishers sell books to the retailer and retailers decide what price to set, then prices will probably go down,” said Harry First, a law professor at New York University who oversees the law school’s Competition, Innovation and Information Law program. “Don’t buy your e-books for a while, just wait and see what happens.”
Experts also predict that the high-profile antitrust case will bring scrutiny to other areas of e-commerce that may be guilty of similar conspiracies.
“This isn’t just about Apple. This is about Internet retailing and the extent to which manufacturers are colluding with some of the large Internet distributors to get, as they like to say, control over retail pricing,” First said. “I think this is a problem beyond books. It is very important to try to allow Internet retailers to lower prices and push those lower prices down to consumers.”
Though the consequences of the suit remain to be seen, some analysts argue the case will be at most a headache for the $600 billion giant.
"Being sued is never a positive thing, but the reason why Apple stock isn't off is because e-books is still a relatively small business for Apple, it's emerging, and probably more importantly, this issue is actually fixable," Shaw Wu, a technology analyst with Sterne Agee & Leach, told Bloomberg TV.
Wu also pointed out that Apple doesn't really make much of a profit on e-books, serving mainly as a conduit between readers and publishers. Apple's annual revenue from e-book sales totaled around $50 million, or a fraction of the more than $100 billion in revenue the Cupertino company raked in last year.
"For Apple," Wu said, "it's about making the content providers profitable selling e-books on iTunes."