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EU launches antitrust investigation into Amazon's e-books business

Europe's regulators want to know whether Amazon's deals with book publishers require them to inform the e-retail giant of more favorable terms from rivals.

Amazon's e-book contracts are now the subject of an investigation in the EU. Screenshot by David Carnoy/CNET

E-book contracts are under investigation again, but this time, it's Amazon on the receiving end of the inquiries.

The European Union's competition watchdog, the European Commission, has launched a formal investigation into Amazon's deals with e-book publishers. The EC is particularly interested in determining whether Amazon's contracts with e-book publishers violate competition rules by requiring book publishers to disclose more favorable terms in deals they may have signed with competitors, like Apple.

Amazon is the world's top e-book seller, offering titles through its Kindle e-book marketplace. Amazon was one of the first movers in that space after it launched its first Kindle e-reader in 2007. Since then, the company's e-books store has grown to over 3 million titles. Several other companies are competing in the e-books space, including Barnes & Noble and Apple. Public libraries also often offer free e-books that people can check out for a period of time.

The investigation turns the tables on Amazon, the biggest e-book retailer in the EU. Earlier in this decade, regulators carried out an investigation into whether Apple's contracts with publishers were intended to break Amazon's hold on the market.

In an attempt to improve its position in the e-books market with its own iBooks in 2010, Apple offered a contract that allowed publishers to determine the price of e-books. The pricing system, called the "agency model," meant prices would go up and publishers would in turn make more from the sale of each title.

Amazon, meanwhile, was using a traditional pricing model that allowed the e-retail giant to offer a sales price on e-books. While the revenue was lower per sale, Amazon argued that it followed traditional pricing on regular books, which gave retailers latitude to offer pricing on their own terms to follow demand.

Soon after, Apple, along with major book publishers, were rolled into lawsuits across the US, including one from the US Department of Justice. The EU also launched an investigation into the matter, arguing that the agency model could be in violation of competition law, but promptly closed it after the parties settled in 2012.

In a series of statements and e-mails revealed through the investigation, Apple co-founder and then-CEO Steve Jobs made clear that his intent was to take down Amazon's e-book business. He wrote in one e-mail to a publisher in 2010 that they could benefit them to "throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99." At the time, Amazon had kept most e-book pricing to $9.99.

As a lengthy investigation wore on, the major book publishers accused of collusion with Apple in the case settled out of court for their alleged involvement in the agency model pricing. Apple continued to argue that it was innocent, but finally agreed to settle the case with the Justice Department last year.

Now it's the Kindle Store's turn

Now, though, Amazon is in the subject of a new investigation to determine whether its own contracts are hurting consumers. The EC claims that Amazon has a clause in its contracts with publishers that require them to tell the e-retail giant "about more favorable or alternative terms" offer to them by the e-retail company's competitors. The EC said that Amazon's clause could make it more difficult for competitors to take on the company in the e-book space and in turn, hurt consumers.

"Amazon has developed a successful business that offers consumers a comprehensive service, including for e-books," the EU competition watchdog Margrethe Vestager said in a statement Thursday. "Our investigation does not call that into question. However, it is my duty to make sure that Amazon's arrangements with publishers are not harmful to consumers, by preventing other e-book distributors from innovating and competing effectively with Amazon. Our investigation will show if such concerns are justified."

Vestager said that her office would initially focus on e-books in English and German, but could expand to other languages. Her office pointed out that it has yet to determine whether Amazon committed any violations and did not put a timetable on the inquiry's completion.

The investigation adds to Amazon's issues in the EU. The company is already under investigation by European authorities to determine whether its tax practices in its European headquarters of Luxembourg violate the region's laws. EU regulators in January said that Amazon's tax practices could be providing it an unfair advantage against competitors.

Amazon channeled 13.6 billion euros, or $15 billion, through its Luxembourg office in 2013, up 14 percent, the company said in a regulatory filing last year. The move allowed Amazon to reduce its overall tax rate by 8 percent to 31.8 percent, the company reported.

In a move last month to possibly satisfy regulators, Amazon announced that it would engage in new tax practices that will see the company pay taxes in individual European countries, rather than through its headquarters in Luxembourg. The strategy shift is likely to appeal to investigators and will result in a higher tax burden this year.

Neither Amazon nor the EU immediately responded to a request for comment on the new investigation.