June 2, 2013
Trial on E-Book Price-Fixing Puts Apple in Spotlight
By BRIAN X. CHEN and JULIE BOSMAN
NY Times
http://www.nytimes.com/2013/06/03/technology/e-book-antitrust-case-against-apple-to-begin.html
Government lawyers are set to face off against Apple this week in a
Manhattan courtroom, trying to prove that the company conspired with
publishers to raise prices in the e-book market.
But the evidence in the case will not just determine whether Apple has
violated antitrust laws. It will also tell a broader story of how the
introduction of e-books created upheaval in the publishing industry —
with guest appearances by major players like Amazon and Barnes & Noble
and e-mails from the late Steven P. Jobs, Apple’s former chief executive.
In the case, brought a year ago, the Justice Department accused Apple
and five book publishers of conspiring to raise e-book prices. The idea,
the government said, was to allow publishers to set their own prices
rather than letting retailers do so.
Their motivation, according to the Justice Department, was to defend
themselves against Amazon, which was setting the price of most new
e-books at $9.99 and becoming increasingly dominant in the market. Simon
& Schuster, HarperCollins and the Hachette Book Group settled the day
that charges were filed; Penguin and Macmillan settled months later.
Complaints by Amazon, which now controls at least 60 percent of the
e-book market, are widely believed to have incited the investigation.
Amazon declined to comment.
After the lawsuit was filed, the expectation was that e-book prices
would drop sharply; the publishers that settled agreed to allow
retailers to discount their e-books for two years. But the price drop
has still not happened.
A government victory against Apple, which would not involve monetary
damages, might also not affect e-book prices.
“Are consumers going to be better off as a result of any government win
here?” said Charles E. Elder, an antitrust lawyer at Irell & Manella,
which is not involved in the case. “That’s going to have to be seen
depending on what happens to book publishing generally. It’s in trouble,
and e-books are either the savior or they’re going to hasten the demise
of book publishers.”
Apple declined to comment, but has said it has done nothing wrong.
“The e-book case to me is bizarre,” Timothy D. Cook, Apple’s chief
executive, said during an onstage interview at a business conference
last week in Southern California. “We’ve done nothing wrong there, and
so we’re taking a very principled position of this. We were asked to
sign something that says we did do something, and we’re not going to
sign something that says we did something we didn’t do. And so we’re
going to fight.”
Apple certainly has the money to fight, and a brand to protect, at a
time when its stock is sagging and its tax practices and manufacturing
processes are under scrutiny. Yet it is bigger than ever — with hundreds
of millions of its iPhones and iPads in the hands of customers all over
the globe.
The trial, before Judge Denise L. Cote of United States District Court,
is expected to feature testimony from chief executives from the five
publishers, who will offer a window into their world of fierce price
negotiations. But the star witness may well be Mr. Jobs, even though he
died in October 2011.
In the case, the government cast Apple as the “ringmaster” of the
conspiracy. It said that when the company entered the e-book industry in
2010 with the introduction of the iPad, it wanted to pressure Amazon to
raise its prices above its uniform $9.99 for new e-books.
At the time, publishers’ agreements to sell e-books were made under the
so-called wholesale model of print books; publishers charged retailers
about half the cover price for a book, and the retailers then set their
own prices. The government said Mr. Jobs had persuaded publishers to
agree to agency pricing, which allowed publishers to set their own
prices for e-books, giving Apple a 30 percent commission for books sold
in its online store.
The publishers’ contracts with Apple included a “most favored nation”
clause, requiring that no other retailer sell e-books for a lower price;
if they did, the publisher would have to match the price of the e-book
in Apple’s store. That, the Justice Department said, resulted in higher
prices that harmed consumers.
Around the same time, the five publishers renegotiated their contracts
with Amazon to the agency model. In its case, the government said the
result was that the price of newly released e-books went up to $12.99
and $14.99, evidence that a price-fixing conspiracy had taken place.
In pretrial papers, the government said part of its evidence would be
this e-mail from Mr. Jobs to James R. Murdoch, an executive of News
Corporation, which owns Harper Collins: “Throw in with Apple and see if
we can all make a go of this to create a real mainstream e-books market
at $12.99 and $14.99.”
In court this week, Apple will be relying on Eddy Cue, its senior vice
president for Internet software and services who also negotiated deals
with the book publishers, to give more context to Mr. Jobs’s e-mail.
The government also pointed in its pretrial filings to a quote from Mr.
Jobs’s authorized biography, in which he conceded that he had “told the
publishers, ‘We’ll go to the agency model, where you set the price, and
we get our 30 percent, and yes, the customer pays a little more, but
that’s what you want anyway.’ ”
In its own pretrial filings, Apple said the quotations from Mr. Jobs
were edited and taken out of context in the government’s papers. The
company said that even before it entered the e-book market, publishers
were getting fed up with Amazon’s uniform e-book pricing and were
planning to delay the release of e-books. That caused Barnes & Noble to
push for agency agreements with publishers, Apple said.
In its defense, Apple has also picked out e-mail conversations for
ammunition. It cites one Amazon executive who found it “hysterical” that
Amazon used “Jedi mind tricks” to get publishers to do what it wanted.
Furthermore, Apple says that the average selling price of an e-book
dropped after it entered the market. The trial will cap a difficult year
for the industry, with five of the six major publishers grappling with
the aftermath of the lawsuit. But the industry’s woes began long before.
E-books have caused a monumental disruption in the last five years, as a
once-fledgling technology has taken hold for millions of readers. In
2009, e-books made up 1 percent to 3 percent of publishers’ total sales,
but now account for 20 percent.
Publishers have also faced a transformed retail environment. Borders
went out of business in 2011, leaving Barnes & Noble as the only major
national bookstore chain. Barnes & Noble has its own troubles and is
considering a move that would split its retail stores from its
struggling e-reader division.
Two of the biggest publishers, Penguin and Random House, announced last
fall that they would merge, a deal that is expected to be completed
later this year.
John Sargent, the chief executive of Macmillan, which settled in
February, has insisted that the company did not engage in collusion. He
said it had no choice but to settle after receiving an estimate of the
possible damages.
“I cannot share the breathtaking amount with you, but it was much more
than the entire equity of our company,” Mr. Sargent said in an e-mail to
authors, illustrators and agents.
Meanwhile, many new e-books have been released at presettlement prices,
among them “Silken Prey” by John Sandford and “A Delicate Truth” by John
le Carré, both new releases whose e-books were offered on Amazon for
$12.99 last week. Some have been released at less than $10.
“There hasn’t been an aggressive amount of cost-cutting from Amazon,”
said Michael Norris, a senior analyst for Simba Information who studies
the publishing industry. “Slashing the prices down to nothing isn’t
going to get them much if it’s not going to attract multitudes of people
to their platform. In the couple of years since that pricing discussion
began, Amazon released the Kindle Fire, and a lot of their attention
these days is focused on video content.”
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