The Justice Department on Wednesday accused Apple and five of the nation's largest publishing houses of fixing prices on e-books and forcing consumers to pay more than $100 million in the past two years for their favorite titles by adding $2, $3 or sometimes as much as $5 to the price of each e-book.
In a lawsuit filed in U.S. District Court in New York, the government painted a portrait of an industry desperately trying to turn a profit amid rapid changes in technology and aggressive competition from online retailers. In phone conversations, e-mails and dinners at exclusive New York restaurants, the companies' top executives colluded to wrest control of the market from Amazon.com and raise prices on e-books, the complaint said. It was this coordinated effort that raised flags for federal investigators.
"We allege that these executives knew full well what they were doing," acting Assistant Attorney General Sharis Pozen said.
None of the firms has admitted wrongdoing, but three publishers -- Hachette, HarperCollins and Simon & Schuster -- have agreed to settle the case, threatening to overturn a pricing model that allows publishers to set their own e-book prices and dangling the possibility of lower-priced e-books for consumers in the near future. Apple is contesting the charges, embarking on its most prominent fight with Washington. Macmillan and Penguin Group have declined to settle. "It is also hard to settle a lawsuit when you know you have done no wrong," Macmillan chief executive John Sargent said.
The scope of the Justice Department's investigation and the fact that several firms are not backing down are testaments to the intensity of the battle for dominance in a billion-dollar market that is expected to triple by 2015. A recent survey from the Pew Research Center's Internet and American Life Project found that one-fifth of all American adults have read an electronic version of a book in the past year.
The problem for publishers is that consumers expect e-books to be priced lower than printed ones because they are cheaper to produce and distribute. But publishers were outraged when Amazon pushed prices even lower when they sold them for $9.99 as a way to encourage consumers to buy its Kindle e-reader.
According to the Justice Department complaint, publishers worried that this would lead to lower wholesale prices for e-books and reduce what consumers would pay for any books. They feared that Amazon's dominance in distribution would allow it to bypass publishers altogether and sell content directly from authors.
Even as it announced its settlement with the government on Wednesday, Hachette pointed to Amazon as the real industry predator. "Amazon effectively had a monopoly on the sale of e-books and e-readers, and was selling products below cost in an effort to exclude competitors," it said.
But the Justice Department said the publishers' response to Amazon's threat crossed the line. Starting around fall 2008, the suit said, they began meeting to discuss what was called "the $9.99 problem" and decided to act together to try to force Amazon to raise its prices. The opportunity presented itself in 2009 as Apple prepared to launch its iPad, the complaint said. It wanted to create an e-book marketplace similar to iTunes but was concerned that margins were too thin.
The suit alleges that Apple decided to work with publishers to establish a new model of doing business: Instead of buying books from them at one price and selling them to readers at another, Apple would allow publishers to set the prices up to $16.99. In exchange, Apple received 30 percent of the proceeds. The suit said the company called this the "aikido move" that would cripple Amazon.
"Yes, the customer pays a little more, but that's what you want anyway," the late Apple chief executive Steve Jobs said, according to the complaint.
All five publishers agreed to Apple's plan within two days in January 2010, the Justice Department said. By April 2010, all had increased the price of e-books.
"We are sending a clear message that competitors, even in rapidly evolving technology industries, cannot conspire to raise prices," Pozen said.
The government's decision to pursue major publishers on antitrust charges has put Amazon in a powerful position: The nation's largest bookseller may now get to decide how much an e-book will cost, and the book world is quaking over the potential consequences.
As soon as the suit was announced, Amazon announced plans to push down prices on e-books. The price of some major titles will fall to $9.99 or less from $14.99, saving voracious readers a bundle.
But publishers and booksellers argue that any victory for consumers will be short-lived and that the ultimate effect of the antitrust suit will be to exchange a perceived monopoly for a real one. Amazon, already the dominant force in the industry, will hold all the cards.
"This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books," said Amazon, the Seattle retail giant.
The proposed settlement with Hachette, HarperCollins and Simon & Schuster would end their agreements with Apple and allow retailers to set their own prices for e-books.
But litigation for Apple, Macmillan and Penguin could take years. The group of 15 states and Puerto Rico that sued wants restitution for consumers who bought e-book titles at higher prices.
The Los Angeles Times, New York Times and Associated Press contributed to this report.