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Macmillan, Last Publisher Holdout on E-Books, Settles
By Barry Levine
Posted: February 8, 2013 1:33pm PST

The Macmillan settlement requires that the publisher provide advance notification of any e-book ventures to the Justice Department and that, for five years, it does not enter into any "favored nations" agreement that could undermine price competition. Macmillan must also allow e-book retailers to discount its titles. Apple is the last of the holdouts.

E-Books may be getting cheaper. On Friday, Macmillan announced it has settled with the U.S. Department of Justice over e-book price-fixing, becoming the last of the five targeted publishers to do so.

In April 2012, Justice sued Apple and five book publishers for conspiring to fix e-book prices. In addition to Macmillan, the publishers were Hachette, HarperCollins, Penguin, and Simon & Schuster. The suit, filed in a New York district court, alleged that Apple "facilitated the publisher defendants' collective effort to end retail price competition by coordinating their transition to an agency model across all retailers." Apple and the publishers denied the charges.

Under an agency model, publishers establish their own e-book prices, as opposed to a wholesale-retail model where publishers set the wholesale price and retailers set the final price for the consumer.

'Fundamentally Unfair'

The alleged arrangement occurred after Apple unveiled its first iPad in 2010, and publishers asked Amazon to raise their e-book prices. Amazon refused to do so, contending that e-book prices above $9.99 were too high, but Macmillan pulled titles and Amazon was forced to revise its prices. E-book best sellers subsequently rose to $12.99 and $14.99.

On the day that the Justice Department lawsuit was announced, Justice said it had settled with three of the publishers -- Hachette, HarperCollins, and Simon & Schuster. Apple and the other two publishers continued to fight on. In December, Penguin settled, so Macmillan was the last holdout.

Apple is still headed toward a trial, which is now set to start in June. Among other terms, the settlements require the publishers to end their current contracts with the technology giant. Apple said that nullifying its contracts, when it had not settled, was "fundamentally unfair, unlawful, and unprecedented."

'More Than the Entire Equity'

Apple has also accused Amazon of being behind the Justice Department investigation. There have been reports that more than a dozen Amazon employees have met with the agency, and some industry observers have suggested that the investigation and the subsequent settlements have now tilted the e-book pricing structure in favor of Amazon. Of course, by lowering prices, the settlements also tilt in favor of consumers.

The Macmillan settlement also requires that the publisher provide advance notification of any e-book ventures to the Justice Department and that, for five years, it does not enter into any "favored nations" agreement that could undermine price competition. Macmillan must also allow e-book retailers to discount its titles.

In a letter posted online, Macmillan CEO John Sargent said the company settled because "the potential penalties became too high to risk even the possibility of an unfavorable outcome." He said he received an estimate a few weeks ago of the "maximum possible damage figure."

Sargent said that he "cannot share the breathtaking amount with you, but it was much more than the entire equity of our company."

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