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Penguin tries to fix its ebook pricing problems

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The end game in the U.S. Justice Department’s still-pending lawsuit against Apple and two major publishers over alleged price-fixing in the ebook market may be about to get a lot more interesting.

On Thursday, the British media conglomerate Pearson confirmed press reports that it is in talks with Germany’s Bertelsmann about merger between their respective publishing houses, Penguin and Random House. “Pearson notes recent media coverage regarding Penguin, its consumer publishing division, and Random House (part of Bertelsmann),” the company said in a statement. “Pearson confirms that it is discussing with Bertelsmann a possible combination of Penguin and Random House. The two companies have not reached agreement and there is no certainty that the discussions will lead to a transaction. A further announcement will be made if and when appropriate.”

The merger, should it come about, would create an entity with control of about 25 percent of the English-language consumer book market and reduce the number of “major” houses from six to five. Any such consolidation would have to pass regulatory muster both in the U.S. and in Europe, however, which could prove highly problematic for Penguin.

Penguin is one of two major publishers that has refused, along with Apple, to settle the charges brought against it in the U.S. The Justice Department accused the publishers of engaging in a conspiracy with Apple to force Amazon and other ebook retailers to adopt so-called agency pricing, in which publishers would set the retail price of ebooks directly while retailers would receive a fixed percentage (i.e. agency commission) on any sales. Previously, most retailers purchased ebooks from publishers on standard wholesale terms, in which retailers paid publishers a per-unit price and were then free to set their own cash-register prices. To the dismay of many publishers, however, Amazon in particular generally set a price for ebooks that was equal to or lower than the wholesale price, and about one-third the price of a typical hardcover book. In the government’s view, the publishers coordinated move to impose agency pricing on unwilling retailers was a naked attempt to force higher prices on consumers.

Three of the five publishers originally sued by the government — Hachette, HarperCollines, and Simon & Schuster — agreed to settle the charges in September. Penguin and Macmillan, however, did not sign on to the agreement (Random House was not charged in the case). While the three settling publishers did not admit wrongdoing — typical in such settlements — they did agree to terminate their agency-pricing deals with Apple, Amazon and others and allow retailers to resume discounting ebooks,

It now seems possible that one reason Penguin did not sign on is that talks with Random House were already underway. Any agreement with the government that even implied a recent history of price-fixing would be an extremely awkward bit of baggage heading into an antitrust review of a major merger. Thus, Penguin may have felt it had no choice but to fight the government charges and prevail in court.

Should a merger agreement between Penguin and Random House be reached, however, agency pricing is most assuredly dead. Any approval of the merger by the Justice Department would almost certainly be conditioned on Penguin and Random House agreeing to forgo any agency pricing deals with retailers for at least several years.

The question then would become whether the newly bulked up Penguin House would be able to impose higher wholesale prices on retailers by virtue of their market share and their bulked-up roster of elite, best-selling authors including Dan Brown, Toni Morrison and John Grisham of Random House and Junot Diaz and Patricia Cornwell of Penguin.

“A combined Random House and Penguin would be a supplier so large it would be very difficult for any anyone to dictate terms to,” Idea Logical CEO Mike Shatzkin told the New York Times. “You’re allowed to collude if you’re combined.”

But only if you’re allowed to combine.