It's Up to the Judge Now in Apple's Big Anti-Trust Case

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Reuters

The Department of Justice's anti-trust case alleging collusion among Apple and five major publishers to set prices on e-books ended last week. All of the publishers involved, insisting they had done nothing wrong, had already settled with DOJ and a group of state attorneys general rather than confront the very expensive litigation and the prospect of enormous fines should they lose. Only Apple went ahead with the trial, on grounds that it hadn't colluded but had actually spent weeks in early 2010 haggling with the publishers separately over terms just before the launch of the iPad and the iBookstore.

In fact, DOJ's original charges of an active conspiracy among the publishers -- Hachette, Penguin, HarperCollins, Simon & Schuster, and Macmillan -- seemed to become less clear as the courtroom testimony unfolded. According to Apple's lawyer Orin Snyder of the law firm Gibson, Dunn in his closing statement, the publishers actually fought "tooth and nail" with Apple's representatives before reaching agreements on sales terms that, while similar in concept, were not jointly devised. Federal District Judge Denise L. Cote, whose comments at the outset seemed to favor the government's case, spoke with notable admiration at the end of the three weeks about the presentations of the parties.

Publishers Lunch, the industry newsletter, quoted her as saying "the issues have somewhat shifted during the course of the trial and that's how it should be. . . . As you see it play out in the courtroom, things change a little bit and people have to stay nimble." But the next day she went on to say, "On the basis of this trial record I would find that the publishers conspired with each other in December of '09 and January of 2010 to raise eBook prices."

A thorough narrative of the background to the case has just been released by Publishers Weekly as an e-single bookThe Battle of $9.99, by Andrew Richard Albanese. At $1.99, it is available from e-retailers and draws adroitly on extensive legal briefs, discovery transcripts, and testimony during the trial. In fact, this e-single is a particularly good example of the evolution of digital publishing over the past three years in which scores of short books are being released by traditional and specialty publishers such as Byliner and Atavist as well as magazines, newspapers, and through a range of self-publishing options. The competition for readers, especially of these nonfiction chronicles, is a significant new factor in the book marketplace that didn't exist to any significant degree as recently as the period from 2007 to 2010, when Kindles were the dominant device and e-books were just beginning to gain popularity.

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The Battle of $9.99 is just the right length to summarize how the publishers came to recognize that Amazon's pricing strategy--selling books at a loss as a draw to build the Kindle constituency--amounted to a considerable challenge to publishing's business model. The prospect of the iPad emerging as a formidable competitor to Amazon with a different approach to pricing gave the publishers considerable incentive to work with Apple. But what comes across in Albanese's reporting is less of a formal collaboration among the publishers (the DOJ's original allegations included colorful anecdotes of exclusive CEO dinners where the conspiracy was agreed) than a scramble among a group of book company executives alarmed by the overwhelming power of Amazon in the emerging e-book market. At the time the iPad was released, Amazon had 90 percent of the e-book market with its Kindles.

The publishers' 2010 agreements with Apple following the "agency" model would permit them to set their own price for books and pay a 30 percent commission to Apple on sales. Under this arrangement, prices for e-book bestsellers would rise to $12.99 and $14.99. Amazon operated on a "wholesaler" model, in which it bought books from publishers at a discount from their list price and then set one of their own, which was $9.99 for the leading titles. Ultimately, the publishers dropped their agreements with Apple to settle their cases. Still, there was focus at the trial on two issues that the publishers and Apple were prepared to adopt:

  1. A provision that would have guaranteed Apple a "most-favored-nation" clause, allowing it to match the lowest price for a book offered elsewhere regardless of what the publisher had intended to charge. The publishers had never advocated for this clause, but Apple apparently made it a condition of their agreements.
  2. The practice of "windowing," in which a highly anticipated book would be held back from digital release to enable the printed book to maximize sales. In an April 2009 e-mail that was displayed in the trial, Amazon chief executive Jeff Bezos called windowing "an absolute declaration of war." The practice of windowing never really took hold and only a small number of books were ever included.

Judge Cote will now write her opinion, which could be released in a matter of weeks. If Apple loses and is found to have violated anti-trust law, the money damages will be large, although the company has billions in cash on hand to cover the fines. To settle their cases, the publishers had to agree to provide credits--as much as $1.25 per bestseller--to consumers who had paid the higher price for books, amounting to $175 million to settle the claims brought by the states and a consumer class action. Moreover, DOJ is now monitoring the publisher's digital businesses until 2014. Apple also could be subjected to DOJ oversight in areas beyond books, which the company surely regards with dread.

Ironically, as the anti-trust case progressed, Amazon's share of the e-book market has dropped from 90 percent to 60 percent, while Apple and other players in the e-book market (Nook and Kobo, among others) have made inroads. As for the cost of e-books, beginning with $1.99 singles like The Battle of $9.99, the average price has remained relatively low compared to print books. Overall, the role of e-books has grown to about 20 percent of revenues. Whatever Amazon, Apple, or the publishers thought they could do to control the evolution of e-books, consumers, as they should, have the final say.


Peter Osnos is a contributing writer for The Atlantic. He is the founder and editor at large of PublicAffairs books and a media fellow at the Century Foundation.


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