On April 11, 2012, the U.S. Department of Justice (DOJ) filed suit in the U.S. District Court for the Southern District of New York (case number 12-cv-2826) against Apple, Inc., and five of the six largest publishers of general interest fiction and non-fiction books in the United States: Hachette Book Group, Inc., HarperCollins Publishers, Macmillan, The Penguin Group, and Simon & Schuster, Inc. Along with Random House, which was not named in the DOJ's complaint, these publishers comprise the "Big Six" of the publishing industry and are responsible for approximately 60 percent of the revenue from print titles sold in the United States and approximately 85 percent of the revenue generated by New York Times bestsellers. The DOJ alleges that Apple and the publisher defendants entered into a conspiracy to raise and stabilize prices for e-books by eliminating price competition at the retail level in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.
E-Book Pricing
Prior to the consummation of the alleged conspiracy, publishers sold e-books according to a "wholesale" model, which had been the industry standard for physical books for more than 100 years. Under the wholesale model, publishers sold the e-books to retailers at a discount from the list price, and the retailers then independently determined the final retail prices. Price competition at the retail level had benefited consumers by lowering the retail price at major retailers such as Amazon and Barnes & Noble to $9.99 for newly released popular titles. The publisher defendants allegedly were concerned that Amazon's pricing would establish a consumer expectation of $9.99 as the price of e-books, leading to retailer demands for reduced wholesale prices as well as price erosion for print editions. In addition, the publishers feared that a low price point for e-books would allow digital publishers, particularly companies with large retail operations like Amazon, to achieve the scale necessary to eliminate the intermediary role of traditional publishers and engage directly with content owners.
The Alleged Conspiracy
The DOJ alleges that beginning no later than September 2008, the publisher defendants and Apple conducted regular discussions on how to change their business model to eliminate retail price competition and to fix higher prices for their e-books. By late 2009, Apple and the publisher defendants had outlined a strategy to accomplish this goal: the defendants jointly agreed to transition to an agency model, under which retailers would act as agents with no authority to alter the prices set by the publishers. In July 2009, the CEO of a publisher defendant's parent company noted, "The goal is less to compete with Amazon as to force it to accept a price level higher than $9.99." The DOJ asserts that no single publisher could unilaterally force large retailers such as Amazon to either increase their prices or to accept the agency model. One publisher executive acknowledged that "we've always known that unless other publishers follow us, there's no chance of success in getting Amazon to change its pricing practices." However, according to the complaint, Apple's entry into the e-book market, which coincided with the release of the iPad, served as the perfect vehicle for a coordinated, industry-wide transition from the wholesale model to the agency model.
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