Apple (AAPL - Free Report) found itself at the receiving end of an adverse ruling in the e-book pricing case filed by the U.S. Department of Justice (DOJ). U.S. District Judge Denise Cote ruled that the iPhone maker had conspired with five U.S. publishers to raise e-book prices.
In the civil antitrust lawsuit, the DOJ had charged Apple and five publishers for conspiring and manipulating e-book prices to make an average $2.0 to $3.0 extra on each book for a three-day period in early 2010. This resulted in consumers paying millions of dollars more for the e-books.
The accused publishers included Hachette Book Group, News Corp.’s HarperCollins, Holtzbrinck Publishers, Pearson’s Penguin Group and CBS Corp’s (CBS - Free Report) Simon & Schuster Inc. Though all the publishers have already settled with the DOJ, only Apple stood for the trial.
Apple entered the e-book market with the launch of its iBookstore app in 2010 and initiated an ‘agency model’ for pricing the e-books. Per the agency pricing model, publishers could set the retail prices of e-books and the retailer would earn 30% of the e-book price as commission. This assured a guaranteed income for the retailer and also enabled the publisher to raise e-book prices to more than 50% of the list price, which is what competitor Amazon (AMZN - Free Report) was offering.
Amazon had a wholesale price model, under which the retailer paid the publisher half the listed price of the books, while it retained the option to charge any amount for the e-book. Amazon used to charge a maximum of $9.99 for e-books, making losses on the sales to promote its reader.
Many online retailers shifted to the new agency model. After some brief resistance, Amazon eventually gave in to the demand of publishers. This led to the e-book prices equaling the physical ones at times. Apple continues to deny any wrong doing in the case and stated that it would appeal.
The current ruling is likely to have a domino effect as it will open up other private lawsuits against Apple for alleged price-fixing. Separately, the company is facing lawsuits on possible damages to customers for charging higher e-book prices brought by 33 state attorney generals.
This judgment is a major blow to Apple as it may not only result in possible penalty payments but it also tarnishes Apple’s image. Besides this unfavorable ruling, Apple continues to face a number of other legal headwinds, including pending patent infringement lawsuits against Samsung in different countries.
Recently, Apple had lost to Samsung at the U.S. International Trade Commission. Moreover, Apple withdrew its lawsuit against Amazon for using the “app store” word.
We, however, believe that since the e-book segment does not form a major part of Apple’s business, it will not be a major overhang on the stock in the near term.
Currently, Apple has a Zacks Rank #3 (Hold).