The Department of Justice is alleging in a new law suit that Apple conspired with five book publishers to raise prices for ebooks. If the case is found in the DOJ?s favor, Amazon could regain significant power in determining what price consumers pay for ebooks.

Several of the publishers named in the case have reportedly reached a settlement with the DOJ that, if approved, would end their agreements with Apple while giving Amazon and other book retailers the freedom to reduce prices for ebooks. The suit underscores the challenges faced by retailers, publishers and technology providers when it comes to finding a business model for selling digital content.

?Apple believes they are right and is not feeling a lot of pressure to settle,? said Carl Howe, vice president of consumer research at Yankee Group, Boston.

?I don?t think Apple feels this is such a threat that it is going to keep them from doing business,? he said. ?Books do not make a lot of money for Apple ? it is not one of their core businesses.?

?It is unlikely that the outcome is going to affect them going forward, other than as a cautionary tale to not work too closely with content owners and, in some ways, I think that is too bad.?

Restoring price competition
The publishers who have reached an agreement with the DOJ are Hachette Book Group, HarperCollins Publishers and Simon & Schuster. Under the terms of the settlement, the publishers have agreed to terminate their agreements with Apple.

The other publishers named in the suit are MacMillan and Penguin Group.

The DOJ is alleging that Apple and the publishers worked together to end ebook retailers? freedom to compete on price, to take control of ebook pricing themselves and to increase the price that consumers pay for ebooks.

By bringing the suit, the DOJ hopes to restore retail price competition to the market and enable consumers to pay lower prices for ebooks.

At issue, is the claim that Apple and the five publishers colluded to write contracts that say they will not sell ebooks using the wholesale model with Amazon.

The agency model established by Apple when it entered the ebook market enables publishers to dictate what price their ebooks are sold for at retail while the wholesale model puts the pricing strategy solely in the hands of the retailer.

?The DOJ is making a good effort to try to protect the consumer ? ebooks were one price when Amazon was the major retailer, then Apple entered and prices went up,? Mr. Howe said.

Two pricing models
One possible outcome of the suit is that there will be two models for selling books. Instead of overturning the agency model, the suit is focused on prohibiting publishers from creating exclusive agreements that only use the agency model. This means publishers could write contracts that use both the agency and the wholesale model.

?If Amazon wants to lose money selling books, I think that will be upheld,? Mr. Howe said. ?If Apple were forced to go to the wholesale method that Amazon uses, I do not think Apple would be that interested in losing money and we could wind up with two models.

?It gets more confusing for the consumer because you end up with more variation in pricing,? Mr. Howe said.

While Apple has not reached a settlement with the DOJ yet even though several of the publishers have, in the end the case is more likely to be settled out of court than to go to trial, per Mr. Howe.

?They are mostly concerned about the rise in prices,? Mr. Howe said. ?If they can be sure that processes are in place to make sure that does not happen, it will go away.

The DOJ alleges the conspiracy began in the summer of 2009 and that Apple and the publishers worked together to raise prices for ebooks at a time when Apple was preparing to launch its first iPad.

Prior to the launch of the iPad, Amazon sold many new best sellers at $9.99, lower than what many book stores were selling them for and sometimes less than what Amazon had paid. The low prices were used to encourage consumers to buy Amazon?s Kindle ereaders.

Apple disrupted the traditional model of selling books by offering to take a 30 percent cut of book sales and letting publishers set the price for consumers as long as other retailers were not allowed to sell the same book for less. This opened the door to publishers imposing the same pricing structure, called the agency model, on all book retailers and, in effect, raising prices for ebooks.

Are music sales next?
Under the proposed settlement agreement with Hachette, HarperCollins and Simon & Schuster, they will terminate their agreements with Apple and other ebooks retailers and will be prohibited for two years from entering into new agreements that constrain retailers? ability to offer discounts or other promotions to consumers to encourage the sale of the publishers? ebooks.

The agreement will impose a strong antitrust compliance program on the three companies, which will include a requirement that each provide advance notification to the department of any ebook ventures they plan to undertake jointly with other publishers and that each regularly report to the department on any communications they have with other publishers.

Per Mr. Howe, Apple is taking the opposite approach on ebooks compared with music

?Apple is taking the opposite position it took with music, where it set the price and said it would deal with suppliers separately,? Mr. Howe said.

?I keep struggling with the fact that the music market has the same problems and the decisions have come down in other ways,? he said.

?It is really hard to find digital tracks available for anything other than the three prices that the major labels have established. If this were decided in favor of the DOJ, do they go after the music business next and iTunes??