B&N Drops Bombshell in DOJ’s Price Fixing Case Against Apple

| Analysis

Online and brick-and-mortar book retailer Barnes & Noble shot a massive hole through the Department of Justice's ebook price fixing case against Apple on Tuesday. When Theresa Horner, B&N's Vice President of Digital Content, took the stand she told the court her company was already negotiating agency pricing deals with publishers before Apple was on the scene in hopes of killing the profit losses it was suffering at the hands of Amazon.com.

Retailers and publishers keep chipping away at the DOJ's price fixing case against AppleRetailers and publishers keep chipping away at the DOJ's price fixing case against Apple

While the DOJ characterized Apple as the ringleader in a conspiracy with book publishers to artificially raise prices by forcing an agency pricing model retailers, Ms. Horner's testimony told a different story. She said her company had been in talks with publishers ahead of Apple's negotiations, and those deals were essentially the same as what landed the iPhone and iPad maker in court.

Apple, along with Penguin, MacMillan Simon & Schuster, HarperCollins, and Hachette Book Group were all accused of conspiring to push ebook prices higher by forcing retailers into using an agency pricing model. The agency model lets publishers, instead of stores, set book prices. That, coupled with Apple's contract clause blocking other retailers from selling ebooks at prices below the iBookstore's prices, landed the company in court over DOJ accusations that the deals ultimately forced retailers into charging more.

All of the publishers eventually settled out of court instead of taking their chances at trial, leaving Apple to stand alone insisting it did nothing wrong.

Amazon was using the traditional wholesale model to buy and sell books, which gave the online retailer the ability to sell at a loss and undercut its competition. Those lower prices at Amazon were at the root of the problem Barnes & Noble was trying to deal with: bleeding money by selling ebooks at a loss just to compete.

According to Fortune, Barnes & Noble was paying US$13 per book, but lost $3 on every sale to match Amazon's $9.99 prices, so CEO William Lynch decided it was time for a change if retailers were to compete: the agency pricing model.

Mr. Lynch proposed the idea to publishers, complete with requirements that it could match other retailer's prices to avoid getting undercut, in December 2009 -- a couple weeks ahead of Apple's own negotiations. Not only did those talks predate Apple's own negotiations with book publishers, they showed that Apple didn't start the move to agency pricing since other retailers were already working on similar deals.

Barnes & Noble isn't the first company to offer testimony that helps Apple's case. Penguin CEO David Shanks backed up Apple in court when he said the company seemed indifferent to the ebook market and was willing to walk away if it couldn't strike deals with publishers, which doesn't sound like the move a company hell-bent on forcing new pricing on book retailers would make.

Evidence has surfaced showing Amazon was negotiating the same agency-based pricing deals with publishers, too, and those contracts also included the same price matching terms found in Apple's, and Barnes & Noble's, deals.

That's a strikingly different picture than the DOJ has been painting. According to the government's case, Apple spearheaded a conspiracy with publishers to artifically raise book prices and steal away Amazon's market control.

With more than a week's worth of testimony and evidence so far, the DOJ case against Apple isn't looking as strong as it implied -- at least from outside the courtroom -- leaving a few questions:

With the strong case Apple is presenting, plus the testimony from publishers and retailers, why did Penguin, MacMillan Simon & Schuster, HarperCollins, and Hachette Book Group all settle out of court? Presumably because even the slightest chance that they could lose posed an unacceptable financial loss. There could also be a missing piece of the story we don't know about that publishers didn't want to risk exposing.

Amazon was signing the same deals with publishers, too, so if agency pricing contracts with lowest price matching clauses are cause to bring Apple into court, why hasn't Amazon been treated the same?

Unlike TV shows and movies, surprise evidence typically doesn't happen in real courtrooms. Knowing executives from publishing companies and retailers were taking the stand means the DOJ most likely had a pretty good idea what they would say. If so, how could the DOJ think moving forward to trial was a good idea?

As the case stands now, it feels more like the DOJ has been trying to support Amazon's monopoly while crushing any chance of competitors getting a foothold in the ebook market. Amazon has been pretty successful so far at controlling online book prices. Other retailers have been forced to sell at a loss to compete, and that's what pushed publishers and companies like Apple and Barnes & Noble to look to agency pricing as an alternative.

The DOJ, however, says Apple and the publishers wanted to force customers into paying more than they were for books. Before the trial started, Jodge Denise Cote said she thought the DOJ had a strong case against Apple. I wonder how strong she thinks that case is now.

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7 Comments Leave Your Own

FlipFriddle

Perhaps Amazon has paid for more politicians than Apple has?

Bregalad

Does this mean that Amazon typically sells eBooks at a loss?
If so then it’s clear Amazon’s “consumer friendly” pricing is just a ploy to drive their competitors out of business.
If not then I have to wonder why B&N has to pay $13 when Amazon is able to get the same product for less than $10. Surely the publishers have some control over wholesale pricing.

Peter Blood

The disingenuous DOJ is killing real competition for the appearance of competition, which is just plain dumb.  They apparently don’t know the difference nor the fact they are creating the very e-book monopoly in Amazon they theoretically are trying to prevent.  I believe it’s the first anti-trust suit by the DOJ where they “perps” they are after have 10% of the market and the unintended Amazon monopoly has 90%  HUH?!  Common sense also not a government virtue.  Apple was dead-on right defending themselves against such government incompetence.  The DOJ should be sued for creating a monopoly instead.

As inept as our government often is, Eric Holder and his crew did not do their homework and are wasting taxpayers money and the courts time.  I hope Apple sues for court expenses from the government after they are exonerated.  It’s this, ironic IRS taxpayer budget abuse revelations and other federal faux pas and waste that make people cynical of government and question the leadership from the top.

skipaq

Could be a political graft issue . It may just be another example of the arrogance of this administration in its’ attempt to fundamentally change America. They want to pick the winners and losers thinking they know best.

This DOJ is lacking in justice. The IRS is lacking in service. The DOS is lacking in stateliness. America needs to fundamentally change who is running our government. The judge in this case should send the lawyers for the DOJ back to law school.

jameskatt

Before Amazon changed to the agency model,  Amazon was selling eBooks at a loss.  It was predatory pricing at its best.  Amazon was going to kill every other competitor - the neighborhood book stores and the online books stores.  To compete, other companies had to sell at a loss.

Amazon should have been the one charged with abusing its monopoly position.

The DOJ Lawyers should be given the death penalty for practicing prosecutorial evil or being simply stupid.

Peter Blood

I guess according to the DOJ it’s OK to create a monopoly as long as the consumer gets a better price via loss leaders aka predatory pricing, even at the expense of competitors. 

@ skipaq - right on brother!
@ jameskatt - ditto on the money

Would that we could string up the DOJ for such massive stupidity and for missing the obvious.

zewazir

IMO, those who smell under-the-table money in this case are dead on.  The whole thing arose from a complaint, by Amazon, that the model being pursued would interfere with their pricing model. In short, they whined to an inept and irresponsible government that bad, bad Apple was threatening their predatory pricing scheme.

That the DOJ actually pursued the complaint to the point of filing charges, let alone taking Apple to court, is just another example of how the current administration remains completely out of touch with reality.

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