The U.S. Justice Department has warned Apple and five major U.S. publishers that it plans to sue them, accusing them of colluding to raise the prices of electronic books, a person familiar with the probe said on Thursday.
Several parties have held talks to settle the potential antitrust case, said the person, who was not authorized to speak publicly on the matter. It is not yet clear what such a settlement might look like.
The five publishers facing possible Justice Department action are Simon & Schuster Inc, a unit of CBS Corp; Lagardere SCA's Hachette Book Group; Pearson Plc's Penguin Group (USA); Macmillan, a unit of Verlagsgruppe Georg von Holtzbrinck GmbH; and HarperCollins Publishers Inc, a unit of News Corp.
U.S. and European officials have been investigating whether publishers and Apple acted together to drive up prices in the booming electronic book industry, blocking rivals such as Amazon from offering cheaper e-books.
Antitrust rules forbid price-fixing agreements designed to shut out competitors or drive up what consumers pay.
E-book publishers adopted an "agency model" in 2010, around the time that Apple launched the iPad.
That model allowed publishers to set the price of e-books and in turn, Apple would take a 30 percent cut. The Apple agreements with publishers effectively barred them from allowing rival retailers to sell the same books at lower prices.
The strategy upended the "wholesale model" in which retailers pay for the product and charge what they like. Amazon, which got a headstart in the e-book market with its Kindle e-reader, had used the wholesale model to generally charge $9.99 for its e-books.
The Wall Street Journal first reported the Justice Department's lawsuit warning to Apple and the publishers.
An Apple spokeswoman declined to comment, as did a Justice Department spokeswoman. HarperCollins and MacMillan did not immediately respond to requests for comment. Penguin and Simon & Schuster declined to comment.
Hachette Books chief Arnaud Nourry said on Thursday during an analyst call on Lagardere's annual results that he was not going to comment on ongoing legal proceedings. "We have obviously decided to cooperate with the authorities on both sides of the Atlantic, and we believe that we have committed no objectionable acts."
Apple and the publishers face a parallel class action lawsuit now in a Manhattan court that was brought on behalf of e-book customers.
The class action suit, filed last year by law firm Hagens, Berman, Sobol, Shapiro, LLP, accuses Apple of being a "hub" for collusion.
Jeff Friedman, a partner at Hagens Berman who helped file that suit, said it was prompted by a sudden increase in the price of e-books that was not matched by any cost increases.
"The case is about... a radical industry shift that simultaneously resulted in a 30 to 40 percent price increase across the industry overnight," Friedman said.
Apple asked the court last week to drop the class action suit, saying it did not collude with a group of publishers.
"Before Apple entered the eBook market, one competitor, Amazon, the nation's largest bookseller, had taken 90% of the market by pricing key eBooks below their wholesale cost," Apple said in the filing.
"Having no desire to incur the losses that would flow from retailing in such an environment, Apple individually negotiated separate vertical agreements with each of the Publishers to serve as a distribution agent in exchange for a 30% commission on eBook sales," the company said in its motion.
The e-book industry has exploded in recent years, growing from $78 million in sales in 2008 to $1.7 billion in 2011, according to Albert Greco, a book-industry expert at the business school of Fordham University.
Greco estimates e-book sales will be $3.55 billion in 2012.
Apple, which launched a new version of its iPad tablet computer on Wednesday, competes aggressively against Amazon's Kindle and Barnes & Noble's Nook e-reader.
Barnes & Noble in particular has made a big bet on electronic books. The No. 1 U.S. bookstore chain has relied on digital books and readers to offset shriveling sales at its brick-and-mortar stores.
Mark Coker, founder of e-book distributor Smashwords, blamed big publishers for pricing books too high and warned that any Justice Department action that hurts the agency model would benefit Amazon.
"I‘m incensed over this whole thing," Coker said. "It would be so bad for the future of books if the DOJ does anything to limit the agency model. They are either wittingly or unwittingly acting as Amazon's lapdog."
EU PROBE, JOBS' WORDS
The European Commission said in December that it was looking at the same five publishers for potential violations of antitrust law in how e-books were priced.
The decision by the European Commission to open an investigation followed raids on the companies in March 2011.
Apple's push for agency pricing was detailed in Walter Isaacson's biography of Apple founder Steve Jobs.
The book says that Jobs, who died in October, was aware of publishers' frustration with Amazon. It quotes Jobs as saying: "So we told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30 percent and yes, the customer pays a little more but that's what you want anyway.' ... So they went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books.'"
(Reporting by Diane Bartz in Washington, with additional reporting from Yinka Adegoke in New York, Georgina Prodhan in London, Alistair Barr and Poornima Gupta in San Francisco, Leila Abboud in Paris, and Sakthi Prasad in Bangalore; Writing by Karey Wutkowski; Editing by Lisa Von Ahn and Tim Dobbyn)