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U.S. Sues Apple, Macmillan, Penguin for Price-Fixing

Simon & Schuster, Hachette Book Group, HarperCollins Settle

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Apple and two publishers, Macmillan and Penguin, were accused by the Justice Department of conspiring to fix prices of digital books to undermine Amazon dominance of the industry.

Three other publishers, CBS Corp.'s Simon & Schuster, Lagardere SCA's Hachette Book Group and News Corp.'s HarperCollins, also named in the government's antitrust lawsuit, settled their cases, according to court filings.

"Apple clearly understood that its participation in this scheme would result in higher prices to consumers," the department said in its complaint, filed today in federal court in Manhattan.

U.S. antitrust authorities have increased their scrutiny of Apple's business practices in digital publishing, mobile computing and music retail as the maker of the iPad and owner of iTunes has become the world's most valuable company.

"If the allegations are true, this was an orchestrated effort to get Amazon to stop discounting electronic versions of books," said Allen Grunes, a lawyer with Brownstein Hyatt Farber Schreck in Washington. "To the extent that Apple was involved in the plot, it reflects badly" on the company, he said.

Cupertino, Calif.-based Apple, Macmillan (a unit of Verlagsgruppe Georg von Holtzbrinck GmbH) and Pearson Plc's Penguin refused to engage in settlement talks. The three deny they colluded to raise prices for digital books, according to two people familiar with the matter who weren't authorized to speak publicly. The companies will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, formerly led by Amazon, which sold digital books for $9.99 each.

Meanwhile, under the settlements filed today, Simon & Schuster, Hachette and HarperCollins agreed to cancel contracts with Amazon, Google Inc. and other electronic booksellers that let the publishers set prices, according to the filing.

The settlement called for the three companies to refrain for two years from entering contracts that would prevent retailers from discounting books, according to court papers.

Gina Talamona, a Justice Department spokeswoman, declined to comment on the suit and settlements. Tom Neumayr, a spokesman for Apple; Erin Crum, a spokeswoman for HarperCollins; Sophie Cottrell, a spokeswoman at Hachette Book Group USA; and Penguin spokeswoman Erica Glass didn't immediately respond to phone calls and emails seeking comment. Adam Rothberg, a spokesman at Simon & Schuster, declined to comment.

Publishers' Pricing
When Apple introduced the iPad in 2010, it let publishers set their own prices for e-books as long as it got a 30% cut and the publishers agreed to offer their lowest prices through Apple. This so-called agency model overtook Amazon's practice of buying books at a discount from publishers and then setting its own price for e-reader devices.

Apple, Macmillan and Penguin want to protect the agency model that lets publishers -- not vendors -- set e-book prices, said people familiar with the matter, who declined to be identified because they weren't authorized to speak publicly.

Sales of e-books rose 117% in 2011, to $969.9 million, Publishers Weekly reported Feb. 27, citing estimates from the Association of American Publishers. Because they carry no printing or shipping costs, digital versions generate higher profit margins than physical copies.

Consumers and competition can be hurt when a group of companies agrees to benchmark prices against those charged to rivals even if none of the firms dominate an industry, said Fiona Scott-Morton, a Justice Department economist, in a speech in Washington on April 5.

The suit was filed in Manhattan, where U.S. District Judge Denise Cote is supervising pretrial proceedings in a group of at least 27 antitrust suits by private parties against Apple and the publishers.

"There is substantial overlap as to the identity of the defendants as well as the factual allegations giving rise to the antitrust claims in the different cases," the government said in its filing today.

--Bloomberg News

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