The US on Wednesday filed an antitrust lawsuit against technology giant Apple and five of the nation's largest publishers, charging that the companies "conspired" to raise prices of e-books and limit competition in the sale of e-books.
In a 40-page civil antitrust complaint filed in the US District Court for the Southern District of New York here, the US alleged that Apple, Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group and Simon and Schuster reached an agreement where retail price competition would cease, retail e-book prices would increase significantly and Apple would be guaranteed a 30 per cent "commission" on each e-book it sold.
The lawsuit said the publishers saw the rise in e-books and particularly online retail major Amazon's price discounting as a "substantial challenge" to their traditional business model.
"The publishers feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid," the lawsuit said.
The suit also quotes Apple's late chief Steve Jobs, who when describing his company's strategy for negotiating with the other publishers had said, "We'll go to an agency model, where you set the price, and we get our 30 per cent, and yes, the customer pays a little more, but that's what you want anyway.
"E-book sales had been increasing rapidly ever since Amazon released its first Kindle device in November 2007. One of Amazon's most successful marketing strategies was to lower substantially the price of newly released and bestselling e-books to 9.99 dollars," the lawsuit added.
Amazon's pricing posed significant competition to the publishers and by the end of 2009, they had concluded that "unilateral efforts to move Amazon away from its practice of offering low retail prices would not work, and they thereafter conspired to raise retail e-book prices and to otherwise limit competition in the sale of e-books.
"As a result of the "ongoing conspiracy and agreement" between the publishers, e-book consumers had to pay "tens of millions of dollars more for e-books than they otherwise would have paid," the lawsuit said.
The lawsuit said the conspiracy by the publishers to limit e-book price competition came together as they were jointly "devising schemes" to limit Amazon's ability to discount ebooks and Apple was preparing to launch its tablet iPad.
At the time Apple was considering whether it should sell e-books that could be read on the new device. .
The complaint said, "Apple had long believed it would be able to trounce Amazon by opening up (its) own ebook store," but the intense price competition that prevailed among e-book retailers in late 2009 had driven the retail price of popular e-books to 9.99 and had reduced retailer margins on e-books to levels that Apple found unattractive."
Apple facilitated the publishers collective effort to end retail price competition by coordinating their transition to an agency model across all retailers.
"Apple clearly understood that its participation in this scheme would result in higher prices to consumers," it said.
Beginning no later than September 2008, the publishers senior executives engaged in a series of meetings, telephone conversations and other communications in which they jointly acknowledged to each other the threat posed by Amazon's pricing strategy and the need to work collectively to end that strategy.
By the end of the summer of 2009, the publishers had agreed to act collectively to force up Amazon's retail prices and thereafter considered and implemented various means to accomplish that goal, including moving under the guise of a joint venture.
Ultimately, in late 2009, Apple and the other publishers settled on the strategy that worked - replacing the wholesale model with an agency model that gave them the "power' to raise retail e-book prices themselves.
"The plan - what Apple proudly described as an "aikido move" - worked. Over three days in January 2010, each publisher defendant entered into a functionally identical agency contract with Apple that would go into effect simultaneously in April 2010 and "change the industry permanently," the lawsuit said.
The suit says that "starting no later than September of 2008 and continuing for at least one year, the Publisher Defendants' CEOs met privately as a group approximately once per quarter.
These meetings took place in private dining rooms of upscale Manhattan restaurants and were used to discuss confidential business and competitive matters, including Amazon's e-book retailing practices.
No legal counsel was present at any of these meetings.
"In September 2008, the suit says, Penguin Group CEO John Makinson was joined by Macmillan CEO John Sargent and the CEOs of the other four large publishers at a dinner meeting.
"One of the CEOs reported that business matters were discussed," the lawsuit said.
The publishers also "took steps to conceal their communications with one another, including instructions to 'double delete' e-mail and taking other measures to avoid leaving a paper trail.
"The United States said through this suit it is asking the Court to declare the publishers' conduct illegal.