Apple 2.0

Covering the business that Steve Jobs built

Why Apple is telling the DOJ: 'We'll see you in court'

April 11, 2012: 7:12 AM ET

The settlement the Justice Department is seeking could shutter the iBookstore

Reuters and Bloomberg have both reported -- citing a pair of unnamed sources -- that Apple (AAPL) and one or two major publishers are preparing to get sued for antitrust violations, perhaps as early as today.

Three of the five publishers accused of colluding with Apple to fix the prices of e-books have reportedly accepted deals offered by the European Commission and the U.S. Department of Justice.

The settlers -- CBS's (CBS) Simon & Schuster, Lagardère SCA's Hachette Book Group and News Corp.'s (NWS) HarperCollins -- are presumably trying to avoid the cost of engaging in a protracted legal war with the government.

Apple and the two remaining publishers -- McMillan and Pearson's (PSO) Penguin -- are reportedly prepared to go the mat.

The publishers are trying to preserve the right to set their own prices under the so-called agency model. Using a wholesale pricing scheme, Amazon (AMZN) had been selling their e-books below cost -- typically $9.99 for bestsellers -- making it harder for publishers to charge full price for printed books.

Apple, for its part, is trying to save the iBookstore.

At issue is the 2010 deal Steve Jobs made to get e-books on the iPad that he described to biographer Walter Isaacson as follows:

"We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.

"They went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.' "

Jobs also insisted that publishers sign a so-called most-favored nation clause that said they couldn't sell their books more cheaply to Amazon or any other e-book rival.

It's not hard to see why such an arrangement raised eyebrows in antitrust divisions on both sides of the Atlantic.

The settlement the DOJ has proposed -- and which three publishers have reportedly accepted -- would, according to the Wall Street Journal, do two things:

  • It would tear up the contracts the publishers signed with Apple
  • It would scrap the most-favored nation clause and impose a "cooling-off period" before they could sign another deal

According to the Journal, the government has argued that the waiting period would allow publishers and booksellers to resume a one-to-one relationship, "free of the taint of collusion."

The length of that cooling-off period is reported to be one of the sticking points for Apple, and it's easy to see why.

An extended cooling-off period -- in which Amazon goes back to selling bestselling e-books for $9.99 and Apple is still adding its 30% surcharge to the publishers' prices -- could seriously damage Apple's e-book business.

Worse still, it could keep the books off the iBookstore altogether.

Apple's lawyers seem to think they can make a case that going to the agency model actually increased competition, allowing e-book rivals to take back some of the 90% market share Amazon had amassed.

Moreover the company -- unlike most book publishers -- has pockets deep enough to do legal battle with the U.S. government for as long as it takes to get a settlement more to its liking.

UPDATE: The hammer, as expected, fell Wednesday morning. See Why the market shrugged off the Apple antitrust suit.

Join the Conversation
About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

Email | @philiped | RSS
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.