9:37 a.m. | Updated
In just a few short years, e-books have gone from fringe product to mainstay of the publishing industry, exploding in popularity in genres ranging from romance to military history.
But the fight over how much they should cost consumers is far from resolved.
An investigation by the Justice Department of pricing collusion between Apple and electronic book publishers has been building in recent months as antitrust officials have pressured five major publishers to reach a settlement, threatening to sue them on charges of working together to raise the price of e-books, people with knowledge of the inquiry said Thursday.
The dispute centers on a pricing policy that many in the publishing industry consider critical to its survival as e-books become an increasingly large share of the market. And because electronic books are so new, the cost structure is an emerging issue on which there is little history to provide guidance and many diverging interests.
Among the publishers being investigated — Penguin Group USA, Hachette Book Group, HarperCollins, Simon & Schuster and Macmillan — several said privately Thursday that they had engaged in negotiations
with the government for months. But there are varying levels of agreement on how many concessions to make. And not all of the publishers are negotiating with the Justice Department. All five publishers declined
to comment publicly on Thursday.
There is general agreement among them, however, that it is vitally important to retain the current model, which allows publishers to set their own prices for e-books as they face
an aggressive challenge from Amazon in the book market.
One publishing executive with knowledge of the situation, who insisted on anonymity so as not to upset continuing negotiations, said that investigators had expressed interest in finding ways to augment the current system, known as the agency model, and not discard it entirely.
If that system were to disappear, it would be a boon to Amazon, said Mike Shatzkin, chief executive of the Idea Logical Company, which advises book publishers on digital change, adding that it would be “essentially bad news for just about everybody else in the book business.”
“Ultimately, that would mean that the price of books is going to come down and the amount of money that authors can earn is going to come down,” Mr. Shatzkin said.
Any new limits on agency pricing could also benefit the consumer, however, if it allowed Amazon to offer lower prices for e-books again.
In December, Sharis A. Pozen, the acting director of the Justice Department’s antitrust division, confirmed to a House subcommittee that the department was investigating the electronic book industry. Ms. Pozen also said that the European Commission and state attorneys general were looking into the matter.
A day earlier, on Dec. 6, the competition committee of the European Union said that it was conducting an investigation of Apple and five publishers over whether they had made illegal agreements to restrict pricing on e-books.
Ms. Pozen is scheduled to leave the Justice Department at the end of April. One person close to the investigation, who spoke on the condition of anonymity because the person is not authorized to discuss the case, said that the department was hoping to reach a decision before Ms. Pozen departed on whether to file a lawsuit against five publishers if a settlement had not been not reached by then. The Wall Street Journalreported Thursday that the department had warned Apple and the publishers that it could soon take them to court on collusion charges.
A Justice Department spokeswoman, Gina Talamona, declined to comment, as did a spokesman for Apple, Steve Dowling. In court filings related to class-action complaints that are also challenging the pricing system, Apple has denied any collusion with the publishers.
Discussions between Apple and the publishers developed two years ago as publishers grew frustrated with Amazon’s practice of pricing most newly released and best-selling electronic books at $9.99. That price was sometimes below what Amazon paid publishers for the books and was aimed at lifting the sales of e-books and Amazon’s Kindle e-reader.
Publishers charged that Amazon’s strategy crowded out competitors by keeping the prices of e-books artificially low. Antitrust officials in the United States and Europe say they believe that Apple might have unfairly worked with publishers to adopt a model where the publishers could set whatever price they wanted for their books through Apple’s iBookstore, with Apple taking 30 percent of the revenue.
That model has been adopted for e-books by the largest publishing houses. It replaced wholesale pricing, under which publishers sold books to retailers for a set cost, often about half the cover price, and then booksellers could charge customers whatever they wanted, even less than the bookseller had paid. It was under that model that Amazon set the $9.99 price for e-books.
Publishers contend that agency pricing helps level the playing field and prevents one company from gaining too great an advantage. They say that a model that greatly undermined their profits would only make Amazon more dominant, thus reducing competition from Barnes & Noble and smaller retailers.
It is unclear how serious the impact on Apple would be from any legal action on books. The company’s iBookstore remains a minor player in the electronic books business by most estimates. An overwhelming majority of Apple’s revenue comes from the sale of devices like the iPhone and iPad, not from the content that the company sells online likemusic, books and apps.
Still, its tangles with the Justice Department underscore the difficulties Apple has had in establishing itself in a market that Amazon helped pioneer. Unlike its strong position in other forms of media — like music and apps — that help it sell devices, Apple was a latecomer to the electronic books business, arriving with its iPad well after Amazon found success among book readers with the Kindle.
Amazon has begun competing with Apple’s other online offerings more and more, with rival music, video and app stores.
Randal C. Picker, a professor at the University of Chicago who teaches antitrust law, said that the emerging market of e-books could have influenced Justice Department investigators to intervene.
“We think we’re on the cusp of this transition,” Professor Picker said. “If you’re the D.O.J., you recognize that at this point of transition, it’s really important to get these competitive arrangements right.”
One publishing executive said on Thursday that settling with the Justice Department would make it more difficult to fight off class-action lawsuits that have recently emerged. Several of those suits were recently consolidated in federal court in New York, with the plaintiffs contending that “several major book publishers, working together and with Apple, Inc., decided free-market competition should not be allowed to work.”
Nick Wingfield contributed reporting.