DOJ files antitrust lawsuit against Apple, five publishers for alleged price fixing

As expected, the United States Department of Justice has filed an antitrust lawsuit against Apple and five major book publishers over an alleged price fixing related to digital books. Three publishers are reportedly close to settling with Uncle Sam in order to dodge costly and lengthy litigation and avoid risking potentially high damages.

However, Apple and two other publishers are not willing to cut a deal with the government and are said to be gearing up for a fight with the U.S. Justice Department in court, if necessary…

Bloomberg first broke the news on Twitter, writing that the price-fixing antitrust lawsuit has been filed against Apple and publisher Hachette. The full report says the government sued publishers Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster in New York district court, claiming collusion over e-book pricing.

Apple and Macmillan, which have refused to engage in settlement talks with the Justice Department, deny they colluded to raise prices for digital books, according to people familiar with the matter. They will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, which was dominated by Inc. (AMZN)

Named publishers with the exception of Macmillan, Penguin and Apple are reportedly willing to settle to avoid costly legal fees. The Justice Department said it would announce an “unspecified” antitrust settlement today.

The Wall Street Journal has key excerpts from the lawsuit. The Verge also has a handy analysis for those eager to lear more.

Here’s what the government wants:

The government is seeking a settlement that would let Amazon and other retailers return to a wholesale model, where retailers decide what to charge customers, the people said. A settlement could also void so-called most-favored nation clauses in Apple’s contracts that require book sellers to provide the maker of the iPad with the lowest prices they offer competitors, the people said.

Reuters reported yesterday that the U.S. Department of Justice was gearing up for a big antitrust lawsuit against Apple and five major book publishers. Uncle Sam apparently thinks that Apple and publishers convoluted to fix prices in the e-book industry.

Apple signs up e-book titles for its iBook Store under the so-called “agency” model which allows publishers to set the prices themselves, with Apple taking their usual 30 percent cut.

Amazon, on the other hand, operates under the “wholesale” model, meaning they control prices of e-books. The problem is, Amazon has been abusing its dominant market position to limit competition by often selling e-books at a loss.

Rival e-book stores had to follow suit and cut their prices in order to remain competitive. As a result of this forced discounting, underpriced e-books often barely cover fees for writers, editors, marketing and so forth.

And because there’s little money to be made under Amazon’s wholesale model, it’s impossible for anyone but the big boys to make a decent living producing e-books.

Apple’s model lets publishers small and big alike to set their prices and therefore control their own destiny. Apple also requires publishers to price their titles on competing stores the same or higher than on the iBook Store. As a result, major publishers doing business with the iBook Store have actually raised their prices across platforms.

Higher-priced e-books on the iBook Store led to Amazon raising prices of Kindle books above their $9.99 ceiling or risk losing content found on Apple’s store.

This happens to be a violation of federal antitrust laws.

What a bunch of you-know-what.

Uncle Sam is suing Apple for letting publishers control their prices and protect their business model from Amazon? Wholesale model may be beneficial to consumers, but only in short-term. Aggressive discounting and running business at a loss has never been a prudent business strategy in my book.

In the long run, Amazon’s rules of the game actually discourage individual writers, educators and wordsmiths around the world to continue putting out great content and make a living in the process.

Why would anyone bother authoring an e-book if they are unable to cover the costs?

Did the government make the right move here? I’d love to hear your thoughts down in the comments.