Apple Shares Dip As The U.S. Government And 15 States File Suit

| About: Apple Inc. (AAPL)
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The United States Government has filed an anti-trust lawsuit against Apple (AAPL) and several publishers:

NEW YORK (AP) -- The U.S. government has filed an antitrust lawsuit against Apple Inc. and book publishers. It said Wednesday that the publishers conspired with Apple to raise retail electronic-book prices to limit competition.

The government also filed papers saying it has reached a settlement with publishers Hachette, HarperCollins and Simon & Schuster.

It says it will proceed with its lawsuit against Apple and other publishers, including Holtzbrinck Publishers, doing business as Macmillan, and The Penguin Publishing Co. Ltd., doing business as Penguin Group.

Apple Inc. (NASDAQ:<a href='' title='Apple Inc.'>AAPL</a>)

This move comes after rumors of negotiations between Apple and the government fell through. According to the suit the retail price of the tablets kept competitors like Amazon (AMZN) from being able to offer the e-books at lower prices. According to an Amazon spokesperson this will be a "big win for Kindle owners":

The suit alleges Apple and the publishers reached an agreement where retail price competition would cease, retail e-books prices would increase significantly and Apple would be guarantee(d) a 30% "commission" on each e-book sold.

The publishers shifted from a "wholesale" model to sell books and e-books and replaced it with a so-called agency model, in which the publishers would set the retail price and give retailers no power to alter that price, the Justice Department said in the lawsuit.

According to an article Wednesday morning these agreements "allegedly occurred ahead of the introduction of the iPad in 2010 and as Inc. had driven e-book pricing down to $9.99 for newly released and best-selling e-books". And it goes on to say that this move was allegedly approved by the late Steve Jobs.

The biggest problem that I see for Apple is that the companies that settled with the government will probably testify against all of the defendants as part of their settlement agreement. And there are several states that are filing separate civil suits. A class action suit was filed in California last August that accused Apple of conspiring to fix prices and hurt consumers who buy e-books. And now it was just announced this morning that Colorado has joined with 15 states including Texas claiming that consumers have been over charged by more than 100 million dollars since 2010.

These states will join the U.S. government as plaintiffs in the case, which will just add fuel to the fire. And I am sure more states will follow. What will it cost Apple? Not only will it cost tens (or possibly 100's) of millions of dollars outright if it loses, but it will lose future market share to companies like Amazon if the prices of the e-books are lowered. In a prepared statement the lead counsel for the suit said:

"While Attorney General Holder's actions, if successful, will put an end to the anticompetitive actions, our class-action is designed to pry the ill-gotten profits from Apple and the publishers and return them to consumers.

"One of the main engines of our economy today is technological innovation, including devices such as the iPad and Kindle. Any company-or conspiracy of companies-trying to illegally limit the benefit of these technologies is guilty of more than anticompetitive behavior. They are guilty of stanching future innovation in the marketplace.

So far Apple has not made a formal statement, but they deny the charges. I would have to agree with another Seeking Alpha writer who thinks it will be too costly to have DOJ lawyers hanging around the company looking for other violations:

I get it. Apple wants the 30% it gets on music and apps and everything else to apply equally on books. It fought hard for its advantages and it is unwilling to give them up.

But Apple is Microsoft now. And I know from having covered the story what the presence of Department of Justice lawyers did to Microsoft, over many, many years. That's a path I wouldn't wish on my worst enemy.


Even though there has been a lot of negative press about Apple lately concerning the pending Austrailian lawsuit and the treatment of Chinese workers, the stock price is remaining stable. Wednesday morning it reached a high of $636 after the entire market took a beating Tuesday. When the story broke Wednesday, morning the shares fell to $624, and closed at $626. My answer as to what to do in this situation if you are an investor is literally to Buy, Sell, and Hold. If you feel strongly about Apple and its ability to deal with this situation, this has to be getting near the bottom of the dip, and it might be a good time to buy in.

However, if you have a weak heart and can not afford to gamble your money, then you might sell in case this turns nasty. As I have often said my Dad would tell me in a situation like this to sell half of my shares. If things do get bad and the stock tumbles, you can always buy the other shares back. But if it goes up you have not completely lost out on the gains.

And for the long term investors that don't need the money right now, but think the company will zoom right through this like it has in the past, you should hold. But you need to continue to monitor this situation for any news. Because as I said, it could get nasty.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.