Suspected of collusion with intent to drive up e-book prices, Apple and some of its major publication partners are now negotiating to settle a suit brought by the U.S. Department of Justice.
Negotiations continue, but sources close to the talks tell Reuters that Apple and its partners are looking to avoid a long litigation process by bending on some of the wording used in contracts with publishers and retailers.
The "most favored nation" clause, as it has come to be known, states that the price of an electronic book published using Apple's iBookstore cannot be higher than any other iteration of the same content at other retailers. The contract has, to this point, prevented other content retailers like Amazon from undercutting Apple's iBookstore prices for e-books.
According to Reuters' sources, Amazon (as well as consumers in general) stand to gain the most from this settlement. Amazon could sell e-books cheaper, making its Kindle hardware more attractive for potential tablet buyers, and if the prices on Amazon fall, Apple, Barnes & Noble, and any other e-book retailers would have to tailor their prices accordingly -- a win for consumers.
Agreements between Apple and several major publishers helped launch the original iPad (and Apple) into the e-book market in January 2010, giving Apple an inroad to disrupting Amazon's stranglehold on the e-book business.
Because of the success of the iPad, the "agency model" (a business model that allows publishers to set prices of their content for retailers and enables companies like Apple to take a 30 percent cut from each sale) has come under intense scrutiny.
Though Apple is not likely to take a major financial hit after the settlement (it represents about 10 percent of the e-book market according to analysts), Amazon stands to gain upward of $1 billion in revenue, according to Cowen & Co. analyst Jim Friedland.
In the pre-iPad world, Amazon was able to control pricing of e-books individually, and to undercut publishers still placing large investments in paper-based distribution. As publishers worried that their margins would collapse with Amazon reducing prices at will, Apple was able to secure deals for fixed-pricing on e-books made available on its newly formed iBookstore.
The lawsuit is expected to be settled in the next couple of weeks, which would include an elimination of the agency model wording in contracts between Apple and publishers. Once the settlement is reached, expect to see a shift in pricing strategies, especially from Amazon, as it will surely look to secure some of its lost market share.
Would lower e-book prices from Amazon sway your decision to buy a Kindle instead of an iPad? Let me know your thoughts in the comments!