The U.S. Department of Justice filed an antitrust suit against Apple Inc., and five of the "Big Six" book publishers today over e-book prices. The DOJ alleges that the publishers (Hachette Book Group Inc., HarperCollins Publishers L.L.C., Macmillan, Pearson's Penguin Group, and Simon & Schuster Inc.) and Apple entered into illegal pricing agreements that artificially jacked up e-book prices in order to prevent retailers (mainly Amazon) from devaluing them.
What's worth noting here is that the "Big Three" of textbook publishers—McGraw-Hill Education, Houghton Mifflin Harcourt, and Pearson—are not named in the suit, even though Pearson's Penguin division is targeted. That's because the suit is related to trade e-books, or consumer books, which don't include textbooks, children's pictures books, or reference materials. Those products are "sold through separate channels, and are not reasonably substitutable for trade e-books," the suit says (read a PDF of it here, via The Wall Street Journal).
In their January deal with Apple to publish e-textbooks, Pearson, McGraw-Hill and Houghton Mifflin Harcourt agreed to offer the books at $14.99. But the textbooks are mostly purchased by schools or school districts, with individual licenses given to each student each school year.
Typically, publishers sell their consumer e-books to retailers, like Amazon or Apple, for about half the list price and the retailers, in turn, sell the books through their stores, ultimately ending up on e-readers, the suit explains. Because Amazon would offer those books for $9.99, the books became devalued.
The DOJ alleges that the publishers held several clandestine meetings and "conspired" to turn that trend around; eventually, Apple stepped in. In what is known as an "agency" pricing model, Apple allowed publishers to set their own e-book prices on iTunes and iBooks, in exchange for a 30 percent cut of each sale and a promise to not offer the books to other retailers at a lower price, the suit says.
The agency model alone isn't illegal, it's the alleged collusion, Acting Assistant Attorney General Sharis A. Pozen said in a statement today.
"When companies get together and conspire to enter into agreements that eliminate price competition, it crosses the line," she said.
Three publishers—Hachette, HarperCollins, and Simon & Schuster— have already agreed to settle, Pozen said. Apple, Penguin, and Macmillan have not. In a statement, Penguin/Pearson questioned the DOJ's claims and asserted that the company acted alone in using an agency pricing model, preventing a "monopoly."
"The agency model is the one that offers consumers the prospect of an open and competitive market for e-books," the statement said. Pearson officials did not immediately respond to an email asking to clarify potential e-textbook implications.
The Department of Justice wouldn't comment beyond its public statements. McGraw-Hill and The Association of American Publishers declined to comment. Houghton Mifflin Harcourt did not respond to requests for comment.