Steve Jobs' last big deal is Apple's biggest headache

Before his death in October of last year, one of Steve Jobs' last big moves was Apple's foray into electronic books. The company announced the platform in March 2010, but the method in which Apple handled its deals with publishers has caught the eye of regulators.

The Justice Department plans to sue Apple and the five biggest book publishers -- including Simon & Schuster Inc, Hachette Book Group, Penguin Group USA, Macmillan, and HarperCollins -- and accuse them of colluding to raise prices of books. Apple is alleged to have struck an agreement with the publishers that allowed them to change the way they sold ebooks, and in turn allowed the publishers to take more control over pricing.

DOJ investigators consider the arrangement as a violation of the Sherman Act, and see Apple's deal as a method of price fixing. Collusion to fix prices ranks among the most egregious acts under US antitrust law.

At the onset of the ebook revolution, companies like Amazon structured its deals with publishers to get wholesale pricing for ebooks. Under this method, the retailer is then free to charge whatever it wants. Using Amazon as an example again: to quickly gain market share for the Kindle, Amazon sold these titles at a loss.

Publishers hate this strategy because it in turn cheapens the price of books and teaches the consumer to expect lower prices. That all changed as Jobs planned iBookstore. Jobs' own biography tells the story: Apple agreed to "agency pricing" for books, where the price of the book is set by the publisher and the seller gets a commission, in Apple's case 30 percent.

In order to get the rest of the industry under the same pricing model, a clause was placed in Apple's agreement forbidding the publishers to allow other retailers to sell the books at a cheaper price. In turn, this forced the entire industry to the agency pricing model, which caused end prices to consumers to go up.

BetaNews suspected price fixing in ebooks as early as December 2010, less than a year after the launch of iBooks. My colleague Joe Wilcox had also argued that Apple should play a part in stabilizing ebook prices overall, but I don't think he imagined at the time the lengths the Cupertino, Calif. company went in order to muscle its way into the market.

The Wall Street Journal reports that several of the parties involved are in settlement discussions. Terms of the settlement could change how the industry works, and possibly lead to lower ebook prices overall. One thing is certain: a court case could be damaging not only to Apple and the publishers, but the late Steve Jobs as well.

Jobs' key role in these negotiations will be hashed out in court, and the testimony will undoubtedly place him in a bad light. Apple is keen to protect the image of its late leader, so a settlement seems fairly likely. Also, in many antitrust cases the companies are more likely to settle out of court in an effort to save face. That said, the WSJ warns that negotiations have already taken several turns and may not lead to a deal.

European Union antitrust regulators are also said to be looking into the deals, and based on past history could be the first to strike. A class-action suit is also ongoing in New York federal court accusing Apple of collusion, which it already has filed motions to have dismissed saying its iBookstore provided more competition in the ebooks space.

Neither Apple nor any of the publishers involved responded to requests for comment on this story.

Photo Credit: Tischenko Irina/Shutterstock

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