Apple Antitrust Suit Set for June 2013 Trial Date

| Analysis

Judge Denise Cote has set a trial date for the U.S. Department of Justice’s antitrust case against Apple and two publishers. The case will be tried starting on June 3rd, 2013, which is later than Apple wanted, but earlier than the DOJ had requested.

The DOJ has accused Apple and five publishers of colluding to raise prices in the ebook market, charging the companies with violating antitrust laws. Three of those publishers have settled with the DOJ, but Apple, the Penguin Group, and Macmillan have vowed to fight the charges.

Apple & the DOJ

Sooner Is Better Than Later

Apple had asked for an early court date, arguing that the case was a cloud hanging over its and the publishing industry’s collective heads, according to The Washington Post. Arguing in front of Judge Cote in the U.S. District Court for the Southern District of New York, Apple attorney Daniel Floyd said, “We want an early trial and we strongly feel that we did not do anything wrong. The entire process creates a cloud, or negative impact on the business.”

The DOJ argued back, saying that Apple was trying to rush the lawsuit, and that it needed more time to gather evidence. The legal arm of the U.S. government said that it needed until March of 2013 to gather evidence, and that it wanted a trial at the end of that year. The trial date of June 3rd is a compromise between the two sides’ desires.

The Agency Model

At issue is the agency model, which Apple effectively moved the entire ebook publishing industry to when it launched the iBooks Store for iPad in 2010. Apple signed deals with five of the six largest publishers in the U.S. that allowed them to set their own prices in the iBooks Store, with Apple taking a 30 percent cut.

Apple, Amazon, Publishers

That’s the same scheme that Apple uses for the iTunes Store, the App Store, and the Mac App Store, and it was embraced by publishers. Those publishers had a problem, though, and that was Amazon, who sold books on the retail model.

With the retail model, Amazon paid a set price per book and was free to sell them at whatever price it wanted. The retailing giant, already known for steep discounting, frequently dumped Kindle versions of ebooks, particularly best sellers, below cost in order to grow that platform.

Apple, which didn’t want to deal with that sort of competition, insisted on what’s become known as the “most favored nation” clause, which forbid publishers from allowing their books to be offered for less money elsewhere. Armed with the MFN clause, publishers forced Amazon to renegotiate to the same agency model Apple was using, and overnight the price of many books rose.

Antitrust

That’s where the DOJ entered the picture. The Department accused Apple and the publishes of colluding to raise prices. Apple has argued that Amazon’s stranglehold on the market—Kindle had 90 percent market share when the iPad was released, but has just 60 percent today—was the real problem, and that the agency model has fostered competition and innovation in the market.

Missing the Forest for the Trees

Interestingly, The Post noted that several consumer groups have come out in favor of the DOJ’s suit. Mark Cooper, a director at the Consumer Federation of America, told the newspaper that Apple, Penguin, and Macmillan are wrong to fight the charges.

“The competitive structure built on a cartel agency pricing model increased the price to consumers and the profits of colluding publishers and selected brick and mortar retailers,” Mr. Cooper said. “There are no indications that the book market performed better in the aggregate under the cartel agency model than it would have if the offending practices had not been present.”

His last sentence is precisely inaccurate, however, as today there are more viable digital platforms for ebooks than there were before Apple’s iPad (and the agency model) changed the game. The market has also grown substantially during that period, as ebooks grew to represent 20 percent of the market in 2011, up from 10 percent in 2010. At least one ebook distributor has even said that its prices have decreased since the move to agency pricing began.

All of these things are specific indications that the book market has performed better in the aggregate under the cartel agency model, though we could just be nitpicking.

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Comments

Peter

His last sentence is precisely inaccurate, however, as today there are more viable digital platforms for ebooks than there were before Apple?s iPad (and the agency model) changed the game.  The market has also grown substantially during that period, as ebooks grew to represent 20 percent of the market in 2011, up from 10 percent in 2010. At least one ebook distributor has even said that its prices have decreased since the move to agency pricing began.

First, correlation does not equal causation.  It is impossible to say that Apple’s switch to the agency caused an increase in the market.  The e-book author that you point to is certainly not one of the companies that is involved in the conspiracy.

Nice try, though.

Bryan Chaffin

Peter, I think you misread what I wrote.

Mr. Cooper said there is no indication that the book market performed better [under the agency model].

Yet we have demonstrative and specific data that shows the ebook market has done just that.

You are right that it is impossible to prove that the move to the agency model caused the change, but I was addressing Mr. Cooper’s assertion that the change does not exist.

It does exist?the book market has performed better under the agency model than it did before that model became the industry standard.

In my mind, we have several things that are fairly unequivocal:

1.) Ebooks have improved in quality (in terms of the media, rather than the content), diversity, and interactivity.

2.) Amazon went from 90% share in ebooks to 60%, with several platforms arising that offer consumers more choice.

3.) Some ebooks, particularly best sellers, became more expensive at the retail level. Smashwords (as noted in the article) asserted that its own prices have decreased.

These three things certainly arose due to a confluence of factors, but amongst those factors is the “level playing field” brought about by the agency model.

Nice try, though.

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