The U.S. Department of Justice went into its trial with confidence it could prove Apple was part of a conspiracy to artificially raise book prices, and even had Judge Denise Cote believing its case was strong. After three weeks, however, the DOJ's arguments seem to be in shambles, Judge Cote said the issues have shifted, and it seems pretty clear why Apple was willing to go to the mat defending its claims that there never was any collusion with book publishers.
The DOJ's case against Apple over conspiracy to control ebook prices? Not so good.
The DOJ's civil trial against Apple started three weeks ago with an opening statement that, at least superficially, showed what looked like a detailed case listing the actions Apple took to bring publishers on board with its scheme to change the online book market and push Amazon out of its dominant position as the company all other retailers had to compete against.
Penguin, MacMillan Simon & Schuster, HarperCollins, and Hachette Book Group were also named in the suit, but settled out of court to avoid the astronomical legal costs and potential fines they faced. The DOJ called Apple the ringleader in a conspiracy with book publishers to artificially raise prices by forcing an agency pricing model retailers, and that the iPhone and iPad maker included wording in its contracts ensuring no other retailer could sell books below its iBookstore prices.
Despite the DOJ's compelling opening statements and apparent strong case, Apple's legal team, along with the witnesses both sides called to the stand to testify, systematically tore apart the government's position, leaving their arguments against Apple in tatters.
The DOJ's case claimed that Apple and pubishers colluded to force book prices up from the US$9.99 price point Amazon was charging by pushing retailers into an agency model where publishers set prices, instead of the wholeslae model they were using where retailers pay a set price for books and then charge whatever they want. Since Amazon was selling books at a loss, other retailers were forced to do the same.
When the DOJ called Penguin CEO David Shanks to the stand, he testified that Apple had a take it or leave it attitude towards the ebook market. Apple was trying to swing deals to bring ebook titles to the iPad ahead of its unveiling and launch, but had it failed to do so, it would've dropped the idea and left iPad ebooks to other companies.
"It was fairly clear that they could take or leave being in the book business," Mr. Shanks testified. "If they couldn't get it on their terms, they weren't going to take the jump into being in books."
If Apple really was focused on bringing the major publishers on board in a plan to control the ebook market, its cavalier attitude certainly didn't fit.
The DOJ's tactic to show Apple's intent by introducing a draft email from Steve Jobs didn't pan out, either. The email that was never sent from Mr. Jobs to Senior Vice President of Software and Services Eddy Cue stated, "I can live with this as long as they move Amazon to the agent model too for new releases for the first year. If not, I'm not sure we can be competitive."
The email that Mr. Jobs actually did send detailed the terms Apple and the publishers eventually agreed on: If other retailers drop their prices below the iBookstore's rates, Apple can lower its prices, too, and what it pays publishers for those titles drops accordingly, as well.
When Philip Elmer-Dewitt joined Bryan Chaffin and me on Apple Context Machine to talk about the case, he said that Mr. Cue testified about how Mr. Jobs didn't fully understand all of the details in the negotiations and that his unsent draft emails reflected that. Once Mr. Jobs had a firm grip on the facts, he composed the message that went to Mr. Cue, shooting down the DOJ's intent agrument.
Barnes & Noble helped shoot down the argument that Apple spearheading a conspiracy when Vice President of Digital Content Theresa Horner took the stand and said that her company had started strikingly similar talks with publishers a couple weeks ahead of Apple. She said that B&N was bleeding money on Nook ebook sales because it had to sell each title at a loss to compete with Amazon. Her company was already negotiating agency model contracts with publishers, complete with clauses that let it price match other retailers, ahead of Apple's entry into the game.
Evidence also showed that Amazon struck similar agency pricing deals with publishers, and that it, too, included price matching clauses.
The Department of Justice had to know about the evidence that would be presented ahead of time, just as Apple did, and yet it wasn't able to present a strong case supporting its position. Witness testimony can always bring up surprises, but both sides likely had a good idea ahead of time what those people would say once on the stand, and the DOJ didn't seem prepared to mold those statements to fit its case through examination and cross examination.
And now here we are, three weeks later and waiting for closing statements from both sides. Judge Cote has gone from saying the DOJ had a strong case and would likely win to saying,
It seems to me the issues have somewhat shifted during the course of the trial. Things change. People have to stay nimble.
Once the DOJ and Apple finish their closing statements today it could take a couple months before Judge Cote issues her verdict. Unless I'm completely mistaken, Apple's case was far more compelling and it's likely Judge Cote will rule in its favor. At least, that's how it looks to me.
The bottom line is that when you take on a company that's certain it did nothing wrong -- and has a nearly bottomless money bag to defend itself -- maybe you should make sure your case is air tight.