Judge Cote Likely to Side with U.S. Against Apple

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Apple in CourtJudge Denise Cote said on Thursday that she expects the U.S. Department of Justice (DOJ) will be able to prove that Apple conspired with publishers in the run-up to the release of the iPad. The judge issued a "tentative view" to attorneys representing the DOJ and Apple to that effect, adding that the opinion is based on reading through some of the evidence.

Apple and five publishers were accused of conspiring when they entered into agreements to sell ebooks through agency pricing that allowed the publishers to set the retail price. The contract terms proposed by Apple then allowed those publishers to force Amazon to accept the same terms.

Amazon had until then been dumping ebooks below cost to promote its Kindle platform, grabbing more than 90 percent market share in the process. Though all five publishers have settled with the DOJ, Apple has fought the charges, arguing that the company didn't conspire and that it brought competition to an emerging market otherwise controlled by Amazon.

Judge Cote has consistently shown signs of doubting Apple's version of the story. In May of 2012, for instance, she denied Apple's request to have the case dismissed, ruling that Apple was at the heart of the case and helped the publishers collude.

On Thursday, Reuters reported that Judge Cote told attorneys that she had begun work on her opinion, though the case if far from over. When attorneys for the DOJ asked if she would give them a sneak peek at her thoughts, she said:

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.

Orin Snyder, a lawyer for Apple, said in a statement obtained by Reuters, "We strongly disagree with the court's preliminary statements about the case today. We look forward to presenting our evidence in open court and proving that Apple did not conspire to fix prices."

Judge Cote is a well-respected judge and can't be accused of having an anti-Apple bias. Earlier this month in an unrelated case, she granted summary judgement in Apple's favor over a trademark infringement suit on the mark "IBOOK."

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This case drives us nuts. On the one hand, Apple mostly likely did act as ringleader in getting the publishers to shift to the agency model for pricing (Apple argues that the publishers arrived at the goal of agency pricing independently of Apple). That did result in higher prices on ebooks.

On the other, much more important to us, hand, Amazon had monopoly power in this market and was dumping books to gain that power and shut down competitors. After Apple released the iPad with its iBooks store, there was growth in Barnes & Noble's Nook platform, growth in the independent book store Kobo platform, and the emergence of several third party online book stores.

Amazon lost share even as the market grew by orders of magnitude. Ebook software got better—compare Amazon's own Kindle Web app for iPad today to the original Kindle app for iPad that was released soon after the iPad's launch. Reading ebooks is a better experience today than it was when Kindle was the only game in town, and that's true no matter what device you use to read them.

The DOJ's case seems incredibly short-sighted, but so far Judge Cote has not seen it that way. Apple is intending to take this case to trial—rather than settle—and it will be very, very interesting to see if the company's arguments can change her opinion.

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Comments

Lee Dronick

  On the other, much more important to us, hand, Amazon had monopoly power in this market and was dumping books to gain that power and shut down competitors..

Yes, that is apparently not a problem.

 

ibuck

So the DOJ, and apparently Judge Cote, are enforcing the letter of the anti-monopoly law while violating the spirit of that law?

vpndev

This is a puzzling move on the Judge’s part. Such an expression of opinion before trial is attractive grounds for appeal.

It’s one thing for a Judge to rule against an injunction etc. on the grounds that a case has substantial possibility of success, and quite another to say that she is already working on her opinion (decision). This is a very bad thing for a Judge to do.

Peter

I want to get this straight for a second…

Apple opens the iTunes Store.  According to Apple, they make next to no money on the store, basically selling at cost.  This is okay because Apple makes it’s money selling hardware, so having inexpensive music helps Apple sell it’s hardware.

Of course, it’s difficult for other music stores to compete with Apple because they don’t have hardware to fall back on.  Of course, Apple had a monopoly on music sales, too, back in the mid-2000s, and still holds better than 60% of online music sales today.

And this is a good thing that helped spur online music sales.

Amazon starts an eBooks store and sells books inexpensively in order to spur sales of their hardware eReaders.  Similar concept to Apple, but this is decidedly NOT okay because DUMPING!  ANTI-COMPETITIVE!

I didn’t see the Mac press too awfully concerned when various music sellers folded in the mid 2000s.  Heck, they generally gleefully reported the news.  Now it’s “Dear God, won’t somebody think of the competition?!”

Bryan Chaffin

Hi Peter,
Apple has claimed for years that iTunes runs just above breakeven. Of course, when you’re doing many billions of dollars of business per year, “just above breakeven” can still translate into a hefty profit. I have personally written that some of Apple’s messaging here is a scare tactic to ward would-be competitors away, but your basic underlying point remains: Apple runs iTunes at only a slight profit as part of its ecosystem to sell more hardware.
Yet look at the state of competition. Google Play is very viable. Amazon’s MP3 store is thriving, as is the retailer’s streaming service. eMusic.com had proven viable. There’s BandCamp, and I recently discovered that one of my favorite bandsThe Black Angels—has an online store powered by a company called ColorTest Merchandise. There are other online music services, too.
I should also note that Amazon sells its songs for less than Apple today, though I don’t think they’re dumping. I have also written several times that $0.99 per tune—let alone $1.29—is too much for digital music. The labels are far too fixated on maximizing profits per song than in regrowing their industry, but that’s a subject for another time.

In the meanwhile, there is lots of competition today. Apple has always had lots of competition.

Perhaps that’s because there is a far cry from running just above breakeven and dumping best sellers below cost. The two practices aren’t even comparable in my opinion. You said “sell books inexpensively,” but that’s not what dumping is. Dumping is the practice of selling below cost to gain share or stifle competition.

Amazon’s goal is to suck all profits out of every market they enter so as to price out the competition. It’s why the company makes little or no profit on the tens of billions of dollars in annual revenue (AMZN lost $39 million on $68 billion in revenue in 2012). That clearly is not Apple’s goal. As someone who enjoys high quality products, services, and even a high quality shopping experience, I worry about Amazon’s effect on the world, just as I do Walmart.

As someone who loves great books, I worry about Amazon’s effect on the publishing industry. As an aspiring author finishing his first novel, I worry doubly about such things. Amazon is training customers to value books less, and that has an effect on the industry. There are fewer publishers, fewer editors, fewer books being picked up, and less time and resources being devoted to developing authors, their work, and then marketing it once it gets released.

As a reader, that means I lose. As a hopeful author, that lessens my chances of having the years of work I’ve put into my work reworded.

And the best thing is that not even Amazon is making money from it.

Apple’s practices are almost diametrically opposed to that. The company makes high quality product and services it sells at a reasonable price. iTunes propped up the music industry (for good and for ill, FWIW), and the iBooks deal at the heart of this story was good for everyone except those whose only concern is to pay the least possible amount for ebooks.

You mentioned sites like ours crowing about the death of competing online music stores back in the day. I can’t speak for others, but I do remember crowing about the deaths of stores whose executives derided iTunes/Apple/iPods.  I personally buy 98% my music either on CD or from BandCamp—I like having options. We have consistently said that it’s good for Apple to have competition because it pushes the company to do more, to be better.

I understand how you arrived at your conclusions and why you pitched your comments as you did. I have a different view of things, and I hope this lengthy post removes any confusion.

Thanks for the comment!

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