Apple Warned About E-Book Price Fixing

The Department of Justice has warned Apple and five major publishers that it plans to sue them for price fixing e-books, according to a report in the Wall Street Journal. When the iPad was first released, Apple and major publishers agreed to a pricing model that allows the publishers to set prices. That's in contrast to the pricing model used by Amazon, which takes pricing decisions out of the hands of publishers.

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How much should you pay for an e-book? The Department of Justice is investigating possible price fixing in the e-book market. According to The Wall Street Journal, the Justice Department has warned five of the six biggest publishing houses and Apple that they could be sued for colluding to keep prices too high. NPR's Lynn Neary has more.

LYNN NEARY, BYLINE: When the Apple iPad was introduced two years ago, publishers thought they finally had a way to offset Amazon's stronghold on the e-book market. The online retailer had set the price of an e-book at 9.99, taking a loss in order to sell more of its Kindles. But with the advent of the iPad, five of the six major publishing houses and Apple agreed on a new way of doing business, the agency model, which allowed the publishers to set the price of an e-book. At that time, David Young, CEO of the Hachette publishing company, said the agency model would allow the publishing industry to survive.

DAVID YOUNG: There was no future, as I saw it, at 9.99 other than ruin.

NEARY: The publishers set the price of e-books at 14.99 and 12.99. Consumers noticed and, eventually, so did the Department of Justice, which confirmed last December that it was investigating the possible price fixing of e-books. James McQuivey of Forrester Research says an investigation into the agency model was needed.

DR. JAMES MCQUIVEY: It has actually shaped the market significantly. It forced other publishers to join the process, and it shaped the way other competitors have access to the books that you might want to read. So it's definitely having a large effect, and it's worth looking into.

NEARY: According to The Wall Street Journal, several of the parties involved have been holding talks in an effort to settle the case. Neither Apple nor any of the five publishing houses would comment on the story for NPR. But McQuivey says the publishers really need to avoid a lawsuit because the digital transition is happening so fast.

MCQUIVEY: They really don't have time to spend sending lawyers to D.C. and trying to negotiate this, which would take a couple of years. And in that time, their whole business could have completely changed. So they want to negotiate this. They want to get it out of the way, so they can return and focus on what they do best, which is getting the right content in front of the right reader at the right time.

NEARY: No one knows exactly what a settlement would involve, but in the two years since the agency model went into effect, e-books have taken off, and the higher prices set by the publishers have indeed helped their profit margin. Sarah Weinman of Publishers Marketplace says a settlement could mean that the agency model has to be modified or done away with altogether.

SARAH WEINMAN: Publishers would then have to think about how could they price e-books in such a way to keep their profit margins at a level that they're now accustomed to, because, obviously, they're in the business not just of buying great books and finding ways for them to reach readers, but they're not exactly altruistic companies either. They want to make money.

NEARY: If publishers price the e-book right, says McQuivey, there's a good chance they'll attract more customers.

MCQUIVEY: And the economics of getting 10 times as many people to pay 5.99 are actually favorable. But the publishers don't want that because then it would make you think, well, wait a minute, why is the paper copy 24.99? I'm never going to buy one of those again. And they're just not ready for that hard switchover yet, even though they know it's coming.

NEARY: With the Justice Department hot on the publishers' heels, that switchover could be coming soon. Lynn Neary, NPR News, Washington.

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