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Federal Court Finds Apple Guilty of E-Book Price Fixing
By Alexandra Chang
07.10.13
11:58 AM
A federal judge today ruled that Apple is guilty of violating antitrust law by conspiring with major publishers to raise e-book prices. The Justice Department originally brought charges against five publishers and Apple in 2012. All of the publishers — Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster — agreed to settlements in early 2013, leaving Apple alone to face trials.
“The Plaintiffs have shown that the Publisher Defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy,” federal judge Denise Cote stated in her ruling. “Without Apple’s orchestration of this conspiracy, it would not have succeeded.”
Cote goes on to further detail how Apple and its co-conspirators aimed join forces against Amazon, who had cornered the market with its standard price of $9.99 per book. Apple and publishers agreed to use a so-called agency model, which gave publishers, not retailers, the power to determine e-book prices. Along with the agency model, Apple introduced a “Most-Favored-Nation” clause, which would guarantee that Apple could match the lowest price of e-books available on competing stores and also impose fines on publishers if they could not get Amazon and other retailers to agree to the agency model.
All five publishers went to Amazon asking to switch to the agency model. Macmillan, for example, gave Amazon two options. “[CEO John] Sargent advised Amazon on January 28 that it had just two options: either (1) move to an agency arrangement or (2) not receive Macmillan’s Kindle versions of New Releases for seven months thus forcing Amazon to raise its own prices and forfeit its pricing advantage,” the ruling stated. With pressure coming from five major publishers, Amazon eventually agreed to the agency model, thus forcing the company to raise its own prices and forfeit its pricing advantage.
Apple was the mastermind behind the conspiracy, Judge Cote ruled. “Apple seized the moment and brilliantly played its hand. Taking advantage of the Publisher Defendants’ fear of and frustration over Amazon’s pricing… Apple garnered the signatures it needed to introduce the iBookstore at the Launch,” she says. “It provided the Publisher Defendants with the vision, the format, the timetable, and the coordination that they needed to raise e-book prices.”
The agreement between Apple and publishers, Cote says, pushed e-book prices up as much as 50-percent and provided Apple with a new revenue source, “changing the face of the e-book industry.” A trial on damages will follow, she says.
“This result is a victory for millions of consumers who choose to read books electronically,” Assistant Attorney General Bill Baer of the DOJ’s Antitrust Division, said in a release. “Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so. This decision by the court is a critical step in undoing the harm caused by Apple’s illegal actions.”
It’s no surprise, however, that Apple remains firm in its declaration of innocence, already voicing plans to appeal the ruling. “Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations. When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry. We’ve done nothing wrong and we will appeal the judge’s decision,” Apple spokesman Tom Neumayr told AllThingsD.
The trial highlights the industry’s bumpy transition from print to electronic books. As readers opt for e-books over print, publishers are struggling to maintain revenue and control. Working with Apple at least gave them the ability to raise prices, but it also offers a glimpse of how a powerful retailer could run away with a given industry. But Apple’s defense attorney Orin Snyder argued in his last day in court that a ruling against Apple would set a “dangerous precedent.” It could hurt the way retailers negotiate with the media industry by preventing retailers from striking deals with multiple companies at once, or even mentioning other deals in place. He said this would have a “chilling and confounding effect not only on commerce but specifically on content markets throughout this country.”
The five books publishers have, however, agreed to end the agency pricing model for two years and to end the “most-favored-nation” clause with Apple and other retailers. To that end, consumers can potentially look forward to lower e-book prices
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