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[Update] DOJ Sues Apple, Five Publishers for Antitrust

Those charged include Macmillan, Penguin, Simon & Schuster, Hachette and HarperCollins

The Justice Department sued Apple and five prominent book publishers Wednesday morning for colluding to fix the price of iPad-borne e-books. The suit was filed in federal court in Manhattan. Sixteen states have filed separate civil suits so far looking for money.

Those charged include Macmillan, Penguin, Simon & Schuster, Hachette and HarperCollins.

Simon & Schuster, Hachette and HarperCollins immediately agreed to settle and terminate their arrangements with Apple, clear any joint e-book ventures with the government and report any communications with other publishers to the DOJ for the next five years.

Hachette and HarperCollins have agreed to pay a total of about $51 million in restitution to e-book customers to settle the states' suit. Simon & Schuster is still negotiating.

Bloomberg said they might fold to avoid the heavy cost of antitrust litigation.

Apple and Macmillan reportedly won't settle - or even talk anymore about settlement. Penguin also remains defiant.

They deny colluding to jack up the price of e-books and are expected to argue that Apple's two-year-old agreements with publishers were good for competition. Apple's anti-Amazon deals let publishers, not vendors, set the price.

That's called the agency model and restricts discounting by retailers.

Claiming the agency model is anticompetitive, Washington wants Amazon and other retailers to decide what to charge and void the "most-favored nation" clauses in Apple's contracts that require booksellers to sell it e-books at their lowest prices with Apple getting a 30% commission.

Two years ago when the iPad came out Amazon was buying at a discount and selling the cream of the publishers' titles for an artificially low $9.99, often below cost to gain market share. That's why the publishers liked the Apple arrangement so much.

The government alleges that the Apple deal resulted in consumers paying tens of millions of dollars more than they had to. It says, "As a result of the conspiracy, consumers are now typically forced to pay $12.99, $14.99 or more for the most sought-after e-books."

The DOJ alleges the conspiracy (called Project Z) began in the summer of 2009. For color, it says that CEOs of the publishing companies met about once a quarter in the private dining rooms of upscale Manhattan restaurants or in London and had 56 phone calls - not to mention e-mails - where they discussed confidential business and competitive matters including Amazon's loathed e-book pricing, which was then aggravated by Amazon cutting direct deals with authors that bypassed publishers altogether.

According to the government's complaint, one of the CEOs said, "Our goal is to force Amazon to return to acceptable sales prices through the establishment of agency contracts in the USA....To succeed our colleagues must know that we entered the fray and follow us."

According to estimates by the Association of American Publishers e-book sales were up 117% last year to $969.9 million, returning a higher margin than paper books.

The Consumer Federation of America says consumers will pay about $200 million extra for e-books this year.

The DOJ essentially destroyed Microsoft at the height of its powers a generation ago with its antitrust suit. Ironically Apple hit an all-time high Tuesday and for one brief shining moment had a market cap worth $600 billion.

People didn't have this kind of problem when we went from the scroll to the codex.

There's a copy of the 49-page federal suit on Scribd thanks to Forbes. See www.scribd.com/doc/88888979/United-States-v-Apple-Inc-et-al.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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