The U.S. Justice Department has warned Apple and five book publishers that it is planning to sue, alleging that the companies colluded to raise the price of digital books, reports The Wall Street Journal. The Wall Street Journal's sources also said that several, but not all of the involved parties have been holding talks in an attempt to settle the antitrust case before it reaches court.
The companies expected to be named in the lawsuit are Apple, Hachette Book Group, HarperCollins Publishers, Macmillan Publishers, Penguin Group and Simon & Schuster. Spokespeople from Apple and the five publishers declined to comment to The Wall Street Journal.
The federal attention is directed at the model in which e-books are sold by Apple. Traditionally, book publishers sell physical books to retailers for about half of the recommended cover price, and the retailers are then free to sell those books to customers for less than cover price if they want. This is called the "wholesale model." Amazon used this model to build its early lead in the e-book market by selling popular new books at $9.99 in an attempt to push its Kindle e-readers. Publishers were unhappy with this strategy, because they believed that it would make book buyers grow used to inexpensive e-books, thus devaluing them and limiting the publishers' ability to sell them at higher prices.
In early 2010, before the introduction of the first iPad, the late Steve Jobs suggested using an "agency model" for selling e-books on the upcoming tablet. In the agency model, publishers are allowed to set their own prices for digital books, and Apple then takes a 30% cut of that price. If that sounds familiar to you, it's because it is very similar to the model used for iOS apps sold through iTunes.
"We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway,'" Jobs was quoted as saying by his biographer, Walter Isaacson.
That decision affected the publishing industry as a whole in a big way, as the publishers then went to Amazon and demanded agency contracts as well.
Now the Justice Department believes that Apple and book publishers worked together to raise prices across the industry. Of course, the publishers have denied acting jointly. The Wall Street Journal's sources say that the DOJ is preparing to sue for violation of federal antitrust laws, though several of the involved companies are reportedly in talks to settle. Whatever the outcome, it will likely have huge repercussions on the book publishing industry. Revenue of digital books is the fastest-growing segment of the business, and it's no secret that sales of physical books are struggling, to say the least.