DOJ's antitrust case may have huge implications for publishing

The agency's price-fixing case against Apple and five publishers shakes up e-book strategies

The U.S. Department of Justice's antitrust lawsuit against Apple and five book publishers over alleged e-book price fixing means that the publishers have to reinvent their digital futures, some experts said.

The lawsuit, filed Wednesday, accused executives of Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group and Simon & Schuster of meeting regularly beginning in late 2008 to discuss e-book pricing and Amazon.com's decision to sell most e-books for US$9.99. Apple later offered agreements with the publishers to sell the books for $12.99 or more, the DOJ alleged.

Hachette Book Group, HarperCollins and Simon & Schuster have agreed to settle the DOJ's lawsuit.

The lawsuit shows a book publishing industry grasping for ways to make money on e-books, said Allen Weiner, vice president of research in Gartner's media research group. "Book publishers have absolutely no idea on how to price e-books," Weiner said.

Publishers make little money on e-books, and the pricing deal, allegedly offered by Apple, was an attempt to make money in the growing area of digital services, Weiner said. The pricing model allegedly agreed upon represented an attempt by the major publishers to stay away from the major business problems encountered by newspapers in the Internet environment, he said.

Publishers, even under the Apple pricing model, make "pennies" per sale on an e-book, compared to dollars per printed book, Weiner said. While more of their business is moving to e-books, publishers continue to pay large sums of money to major authors, who, at any time, could decide to go independent and publish e-books on their own, he said.

Some people have questioned whether the publishers are struggling. Mark Cooper, research director at the Consumer Federation of America, suggested the e-book pricing agreements likely went directly to profits in a letter to U.S. lawmakers sent earlier this week.

Some of the publishers in the DOJ lawsuit are private companies, so it's difficult to discern what financial shape they are in. But Simon & Schuster is a division of CBS, a public company. In 2011, Simon & Schuster had revenue of $787 million, falling each year from $857.7 million in 2008.

The DOJ lawsuit may force a change in the publishing industry, Weiner said. In addition, the lawsuit may force Apple to rethink its commitment to selling consumer e-books, instead of focusing on textbooks, he added.

"Apple may, at some point, decide that this is not worth the hassle," he said.

The DOJ's settlement with three of the publishers will also shake up the publishing industry, added Kellie Lerner, an antitrust lawyer with the New York-based Labaton Sucharow law firm. The DOJ will enforce some provisions of the settlement for up to five years, making it nearly impossible for other publishers to set e-book prices, she said.

The three publishers, in the settlement, have agreed to "completely reverse course," Lerner added.

It's usual for the DOJ to actively monitor these kinds of settlements, Lerner said. "To me, it seems like the house of cards is falling," she said.

The DOJ's complaint was surprising, in that most news reports before Wednesday seemed to suggest that Apple initiated the price talks, said Fordham University law professor Mark Patterson. But the DOJ's complaint alleges that CEOs of the publishers met for more than a year before Apple became involved, he said.

Older news report had not indicated that it was "quite so blatant a conspiracy as the complaint alleges," Patterson said.

But Apple is not off the hook if the allegations are true, he said. While the public seemed to largely ignore the DOJ's antitrust case against Apple rival Microsoft, Apple may take a reputational hit, he said.

"People may not care about browsers, but people do are about money," he said. "E-book pricing is a big deal."

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.

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Grant Gross

IDG News Service
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