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The government's evidence in its price-fixing case against Apple and several book publishers is so strong that the companies would be foolish not to settle the case with the Department of Justice out of court, said a former policy director of the Federal Trade Commission, which regulates industry competition in the U.S.

"This is one of the most compelling complaints I've seen in my life," said David Balto, who was also an attorney in the DOJ's antitrust unit. "Government enforcers fantasize about this kind of evidence but this is beyond their fantasies," Balto said in an interview.

The DOJ filed its antitrust suit against Apple and five major book publishers, including Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster, on Wednesday, accusing them of conspiring to fix the prices of electronic books in order to force Amazon to raise its prices. They feared Amazon was destroying their profit margins by selling e-books for as little as $9.99.

Three of the defendants, Hachette, HarperCollins, and Simon & Schuster, have settled their cases.

South Dakota Attorney General Marty Jackley said in a statement Wednesday that his state and 14 others also filed an antitrust lawsuit against Apple and major book publishers to "restore the free market for e-book sales."

Among the government's evidence is records of emails and phone calls that allegedly show executives from the companies, including late Apple CEO Steve Jobs, openly conspiring to use their market clout to increase the price of e-books industry wide.

[ Does the expiration of its consent decree with the DOJ mean a bolder Microsoft? See Skype Buy First Of Many For DOJ-free Microsoft. ]

In one instance, an unidentified exec from the group sent an email to a superior that in part read, "The top publishers are in discussions to create an alternative platform to Amazon for e-books. The goal is less to compete with Amazon as to force it to accept a price level higher than $9.99."

And in an email to one of the publishing execs, Jobs, according to court records, wrote that "all major publishers" had told Apple that "Amazon's $9.99 price for new releases is eroding the value perception of their products in customers' minds, and they do not want this practice to continue for new releases."

Monthly US Book Revenue

Jobs also told one of the execs that he should, "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." The DOJ also alleges that the execs met quarterly in private rooms at pricey Manhattan restaurants to discuss their plan.

"One must wonder about the degree to which these business people thought about asking their antitrust lawyers for advice," said Balto, who is now in private practice. "Clearly the government has a case, and it will survive any motion to dismiss."

Balto said Apple and its co-defendants face another problem if the case goes to trial. It's been assigned to Judge Denise Cote of the U.S. District Court in Manhattan. Cote is a former head of the U.S. Attorney's Office for New York's Criminal Division. "She's fair, but she's very tough," said Balto.

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Hachette, HarperCollins, and Simon & Schuster have all agreed to enter a consent decree with the government.

Under the terms of the settlement, they must terminate any deals they had with Apple that restrict pricing in the e-book market. The companies must also notify the DOJ of any e-book related joint ventures they form with any other publisher. They must also submit quarterly reports to the DOJ that describe the terms of any e-book agreements they strike with retailers.

The defendants also agreed not to interfere with retailers' promotion of e-books, including discount programs, for a two-year period and other business restrictions. Balto thinks that if Apple doesn't settle it risks harsher penalties. "The one thing about refusing to settle is that you can expect the government to be a lot tougher."

The DOJ claimed that the alleged conspiracy came together in 2009, as Apple was preparing to launch the first iPad, which the company saw as a platform for lucrative sales of electronic books and other media.

The government alleges that Apple and the publishers teamed up in a campaign to move the publishing industry from a wholesale model under which retailers, like Amazon, buy books from publishers and charge whatever they like, to a so-called agency model under which publishers set prices and give the sellers a fixed commission.

The DOJ contends that, by moving publishing to an agency model, the defendants could limit Amazon's ability to sell e-books for the Kindle and other e-readers at steep discounts.

Monthly US Book Revenue

All of this comes as demand for e-books is growing. Some 17% of U.S. book buyers purchased e-books in December of last year, compared to 9% in December 2010, according to RR Bowker. Overall book revenues, including print and electronics, increased 27.1% last year, to $503.5 million, according to the American Association of Publishers.

Demand for e-books is expected to continue growing as more low-cost e-readers, including Amazon's $199 Kindle Fire, hit the market.

Apple, Penguin, and Macmillan, have yet to formally answer the government's charges.

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