Apple did not engage in a conspiracy with major publishing houses to boost the price of electronic books, the company’s lawyer said Monday, as the U.S. government’s highly anticipated price-fixing lawsuit against the tech giant kicked off in New York federal court. The case is just the latest example of the U.S. government’s increasingly aggressive antitrust scrutiny of top tech companies, and could have major implications not only for the e-book market, but also for other kinds of electronic media, including music and movies.
Last year, the Department of Justice sued Apple and five major publishers — Macmillan, Penguin, Hachette, HarperCollins and Simon & Schuster — and accused them of conspiring to boost the prices of e-books, in part to help break Amazon’s iron grip on the electronic book market. “Apple told publishers that Apple — and only Apple — could get prices up in their industry,” Justice Department lawyer Lawrence Buterman said Monday in opening arguments cited by Reuters. He added that the alleged conspiracy cost consumers “hundreds of millions of dollars.”
The five publishing houses have all settled the case, but Apple has thus far refused, insisting that it did nothing wrong. At a tech conference last week, Apple CEO Tim Cook called the case “bizarre” and said the company is taking “a very principled position on this. We’re not going to sign something that says we did something we didn’t do. And so we’re going to fight.” Speaking in court Monday, Orin Snyder, Apple’s lawyer, echoed that view, saying the company simply wanted to increase competition in the e-book market. “What the government wants to do is reverse engineer a conspiracy from a market effect,” Snyder said in opening arguments cited by Reuters.
Apple faces an uphill battle against the government, because U.S. District Judge Denise Cote, who is overseeing the case, suggested last month that the Justice Department had a strong position. “I believe that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that,” Judge Cote said last month. The government isn’t seeking financial damages, but rather an order prohibiting Apple from engaging in the allegedly illegal conduct. But if Apple loses, the tech giant could face the risk of civil damages in a separate case that is being pursued by more than 3o U.S. states.
The roots of this case stretch back to 2007, when Amazon released the Kindle e-reader, which quickly became a wildly popular hit with consumers and launched the mass e-book market. The Kindle rocked the book publishing market because Amazon priced popular electronic titles at $9.99, vastly below the $25 to $35 that the major publishers typically charged for new hardcover best sellers. According to the government, the publishers were concerned that lower prices would lead to a “deflation” of hardcover book prices, eviscerating their profits in an already shrinking market.
Against that backdrop, the publishers were very keen to raise e-book prices before $9.99 became an “entrenched consumer expectation,” according to the government’s lawsuit. Meanwhile, Apple was preparing for the 2010 launch of its iPad tablet and was weighing various business models for pricing e-books. Seeing an opportunity, Apple’s content chief Eddy Cue reached out to the publishers to propose that the industry shift from the existing wholesale model, in which retailers set the price for books, to an agency model, in which the publishers would set the price. Apple, as the “agent,” would receive a 30% commission.
Apple’s late CEO Steve Jobs described the company’s strategy in a now infamous quote that appeared in Walter Isaacson’s biography of Jobs: “We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.'” The government, which has called Apple content chief Eddy Cue the “ringmaster” of the plot, has repeatedly cited that quote as evidence of Apple’s intention to conspire with publishers to boost e-book prices.
Additionally, Apple struck what’s known as a “most favored nation” agreement with the publishers that ensured that retail outlets like Amazon and Barnes & Noble couldn’t undercut Apple by selling e-books for less than the tech giant. Taken together, the move to the agency model and the most favored nation deal had the goal of boosting e-book prices higher than Amazon’s $9.99 price point, according to the government. Having struck their deal with Apple, the publishers presented Amazon with an ultimatum: either adopt the agency model — in which the publishers would set the price for e-books — or lose the ability to sell new best sellers. Amazon initially protested but quickly gave in, announcing that it had no choice but to accept the agency model.
Prosecutors are also relying on an email from Jobs to James Murdoch, an executive at media conglomerate News Corp., which owns Harper Collins: “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,” Jobs allegedly wrote in the email. The plan worked, at least initially, according to the government. “Overall, average prices of e-books went up, costing consumers millions of dollars,” Buterman, the Justice Department lawyer, said in court Monday. For its part, Apple insists that the quotes and emails attributed to Jobs have been selectively edited and taken out of context.
In short order, the alleged conspiracy had the intended effect, as e-book prices increased by as much $5 per unit, according to the government: “Millions of e-books that would have sold at retail for $9.99 or for other low prices instead sold for the prices indicated by the price schedules included in the Apple Agency Agreements — generally, $12.99 or $14.99,” the government said in its lawsuit. The settlement agreed to by the publishers required them to end their “most favored nation” deal with Apple and allows retailers to offer e-books at a discount.
Apple insists that it did nothing wrong, and maintains that it was simply negotiating with the publishers in its best interest as it prepared to enter a new market and increase competition. And contrary to the government’s assertions, Apple asserts that the average price for e-books actually declined, and there is some evidence to support that position. From Apple’s point of view, it’s not hard to see why the tech giant is vigorously contesting the case. Beside selling gadgets, Apple is in the business of selling content, including music and movies, and pricing power has been a key to the company’s success. If the court finds that Apple’s favored nation deals with the publishers were illegal, it could chip away at Apple’s overall bargaining power with content producers.