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.
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.
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.
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.