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Connecticut Attorney General Richard Blumenthal has launched an investigation into the pricing agreements between publishers and the leading makers of ebook reader devices, suggesting that Amazon and Apple could use their market power to freeze prices and crowd out potential competitors.
Blumenthal this week released letters his office sent to the general counsels at Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) requesting a meeting to discuss the companies' pricing strategies.
Of particular concern for Blumenthal is the so-called "most-favored-nation" (MFN) status that both companies are reportedly seeking as part of their negotiations with publishers for distributing ebooks. With a most-favored-nation clause, the publisher would agree to make its collection available to the technology company for the lowest price, effectively setting a pricing floor that Blumenthal worries will prevent new entrants from gaining a foothold in the fast-growing ebook market.
A spokesman for Apple declined to comment on Blumenthal's probe. Amazon did not immediately respond to a request for comment.
For Blumenthal, who is the Connecticut Democratic Party's choice to seek the U.S. Senate seat that will be vacated by retiring Chris Dodd this fall, the ebook pricing inquiry continues a series of probes into potentially anti-consumer or illegal activity, with a particular focus on the technology sector.
The Connecticut attorney general has a long history of sparring with Craigslist, working with the online classified site to strike a deal to work together to stamp out prostitution and other criminal activity on the site. He has since lashed out at the company for failing to vigorously police its listings under the terms of that agreement. In May, Blumenthal issued a subpoena seeking documents and other evidence about Craigslist's efforts to keep ads for sexual services off of its site.
Blumenthal's office has also worked with social networking companies like Facebook and MySpace to keep sex offenders and child predators off their sites, and recently added his name to the list of officials asking for answers from Google (NASDAQ: GOOG) about its Street View cars that inadvertently collected Internet traffic from unsecured Wi-Fi networks.
By now moving to challenge Amazon and Apple, Blumenthal is diving into one of the hottest sectors of the technology industry. Both companies have recently touted their soaring ebook businesses, with Apple boasting in April that consumers had downloaded 250,000 titles from its iBookstore on the first day the iPad tablet hit the market.
Amazon, with its better-established Kindle, has not released specific sales figures, but has said that the Kindle is the most popular product in its marketplace, and recently announced that sales of ebooks had outpaced hardcover editions by more than threefold in the first half of the year. Earlier this week, Ian Freed, Amazon's vice president in charge of the Kindle, told CNet that Amazon estimates that it controls between 70 percent and 80 percent of the ebook market.
Between the fast rise of Apple's iPad and the established market power of Amazon's Kindle, Blumenthal warned that the two companies are likely to entrench themselves as the runaway leaders in the ebook industry. Noting the most-favored-nation agreements that the companies have already signed with several leading publishers, including Macmillan, Simon & Schuster and Penguin, he warned of the net effect of setting a floor that would prevent rivals from competing on price and the attendant harm to consumers.
"I fully understand that MFNs are not per se illegal under our antitrust laws," Blumenthal wrote in his letters to the companies. "Yet, as I am sure you are aware, MFNs are not per se legal, either. MFN clauses -- especially when they are offered to two of the largest ebook retail competitors in the United States -- have the potential to impair horizontal competition by encouraging coordinated pricing and discouraging discounting."