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Apple e-book defeat aids Amazon

Ruling also puts pricing at risk in other markets

Adam Satariano and Danielle Kucera

SAN FRANCISCO – In the retailing wars with Apple, score one for Amazon.com.

A judge’s ruling that Apple violated U.S. antitrust laws by colluding to increase e-book prices gives retailers such as Amazon added flexibility to sell digital books more cheaply and gain market share.

The decision may also lead to greater government oversight of the iPhone maker’s ability to control pricing in other markets, such as music and movies.

“Amazon emerges as the winner from all of the activity related to e-book pricing,” said Tom Forte, an analyst at Telsey Advisory Group in New York. “The company seems to be free to price the way it wants to, which, by Amazon’s standards, is aggressively to gain market share.”

Apple used agreements with publishers to fix prices of e-books, a federal judge in Manhattan ruled Wednesday. Those deals helped the company sell reading content that boosted the appeal of its smartphones and tablets, while forcing Amazon to raise prices on some books and abandon the one-size-fits-all pricing that lured users to its Kindle readers. The verdict stands to give Amazon more leverage in negotiations with publishers.

While sales of e-books have exploded in the U.S., they still make up only 20 percent of the market, and those gains are slowing.

Last year, e-book sales rose 44 percent to $3.04 billion after more than doubling in 2011, according to the Association of American Publishers.

The U.S. government and 33 state attorneys general sued Apple and five of the biggest publishers in April 2012, claiming the Cupertino, Calif., company pushed publishers to sign agreements letting it sell e-books in a way that raised prices and harmed consumers.

Apple fought the lawsuit, seeking to fend off greater oversight and continue the agency model of letting content owners rather than retailers set prices, while generating income by taking a commission.

“Apple is using that agency model in a number of contexts and they chose to use it in part for e-books because they were using it in other contexts,” said Scott Kessler, an analyst at S&P Capital IQ.

Apple is the world’s largest seller of music, and established the pricing model where tracks typically sell for 99 cents and albums for $9.99. With movies and television shows, where there is more competition from cable companies and online services such as Netflix Inc. and Hulu LLC, Apple has a less rigid pricing model.

By adopting a new model with higher e-book prices, Apple sought to force Amazon to change its pricing, the plaintiffs argued. At the time, the online retailer was selling titles for $9.99, often below cost. E-books now have a wider price range. More than 650,000 e-books sold by Amazon cost $4.99 or less and more than 1.2 million are $9.99 or less, the company said in May. Currently, the digital version of Dan Brown’s “Inferno” sells for $12.99.

U.S. District Judge Denise Cote said Apple lost the case, in part, because of statements by its deceased founder, Steve Jobs, that government lawyers said showed Apple was targeting Amazon.

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