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Apple Ebook Dealings Violated Antitrust Law
by
Posted On July 16, 2013


A federal court in New York has found Apple guilty of violating federal antitrust laws, stating that the company “played a central role in facilitating and executing a conspiracy” to raise ebook prices.

Judge Denise Cote found that Apple conspired with a group of five major trade publishers—Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group, and Simon & Schuster—to break Amazon’s then-dominant $9.99 pricing model by collectively agreeing to set higher retail prices using an “agency” pricing model in which the publisher, rather than the retailer, sets the retail price.

The lawsuit dates from late 2009 when Apple was about to introduce the iPad and its iBookstore e-reader app. At the time, its major competitor was Amazon and its Kindle e-reader, although other smaller competitors such as Barnes & Noble’s Nook e-reader were also in the marketplace. Amazon had achieved its market dominance by offering discount ebook pricing, with most new release and bestseller ebooks selling for $9.99. While this was often close to or even below the wholesale price Amazon paid to the publishers, Amazon could afford to do this due to its volume of total sales and the profit from the Kindle e-reader.

However, the publishers were frustrated by Amazon’s pricing because it was undercutting their profits from both ebook and physical book sales. According to the judge’s opinion, Apple “seized the moment and brilliantly played its hand” and began to work with the publishers on a plan that would “eliminate retail price competition in the e-book market” and raise the price of ebooks above $9.99. The Justice Department and several states attorneys general filed lawsuits claiming that the actions of Apple and the publishers violated state and federal antitrust laws.

In her opinion (which only applied to Apple, as the publishers had previously settled their cases), the judge outlined the growth of the publishers’ discontent with Amazon and its $9.99 price point and a number of collaborative efforts that the publishers had already been doing in response. The major technique they used was a process called “windowing” (also called “withholding”), which involved delaying ebook access to newly released books and best-sellers. This technique required significant agreement among the publishers and only met with minimal success.

Enter Apple. Against this backdrop, Apple was in the final stages of developing the iPad tablet and sought to actively enter the ebook market. With full knowledge of the publishers’ problems with Amazon, Apple requested meetings with the publishers. Describing the meetings and subsequent negotiations as “an exciting turn of events” for the publishers, the judge outlined the substance of several weeks of meetings culminating with Apple’s proposing to all of the publishers that it would accept an agency pricing model with standard retail price points ranging from $12.99 to $19.99 and a 30% profit margin, provided that the publishers adopt the agency model “for all their e-tailers,” with Amazon being the main e-tailer. 

The agreement also provided a “Most Favored Nation” clause, which guaranteed that Apple’s iBookstore would sell its ebooks for the “lowest retail price available.” This guarantee would ensure that Apple’s $12.99 to $19.99 price points would be the de facto new lowest retail price.

Ultimately, five of the largest trade publishers signed agreements (Random House initially did not, although it did several months later). The judge noted that this cooperative activity, instigated by Apple, would soon force Amazon to similarly adopt the agency model for the retail pricing of its ebooks. As a result, the release of the iPad and iBookstore was accompanied by nearly instantaneous increases in the price of ebooks from all retailers, Amazon included.

The judge had little difficulty finding that the actions of both Apple and the publishers violated federal antitrust law. Antitrust law prohibits a “contract, combination ... or conspiracy, in restraint of trade.” (Title 15, Section 1 of the U.S. Code). In order to prove that an antitrust violation occurred, the evidence must establish that there has been a “concerted action between at least two legally distinct economic entities” that demonstrates a “unity of purpose, common design or understanding, or meeting of the minds” that results in an unreasonable restraint of trade.

But not all concerted actions violate antitrust law. In order to be illegal, it must be shown to be “in fact unreasonable and anti-competitive” or that the action resulted in an “actual adverse effect on competition as a whole” and that there was no offsetting “pro-competitive” aspect to the arrangement.

However, the judge determined that there was compelling evidence that Apple and the publishers conspired to “eliminate retail price competition and raise e-book prices.” The judge determined that the conspiracy began with the publishers and their concerted efforts to break Amazon’s $9.99 price point. However, she also found that Apple “not only willingly joined the conspiracy” to break the $9.99 price, “but also forcefully facilitated it.” 

The judge focused on Apple’s insistence on the “Most Favored Nation” provision in the agreements, which Apple understood and intended would be the hammer that would force Amazon to abandon the $9.99 price point and adopt the agency model. Apple’s participation in the conspiracy was essential to its success. The judge also looked for a “pro-competitive” aspect to the arrangement but was unable to find any. Apple argued that its launch of the iPad and iBookstore demonstrated new competition in the marketplace. However, the judge noted that neither of those events occurred due to the Apple conspiracy, but they were actually actions that were independent of the conspiracy.

The judge also rejected Apple’s claims that its actions were legitimate business actions, that it was the publishers and not Apple that raised prices, and that but for the price increase, the publishers would have continued or expanded their practice of windowing new releases. Each of these claims did not legitimize Apple’s involvement in the conspiracy, according to the judge.  The court also rejected Apple’s argument that Amazon had engaged in similar actions, even if that was true. By noting that Amazon’s actions served to reduce rather than increase prices, the court seemed to suggest that it was not true; it did not excuse Apple’s actions.

Already, several commentators have weighed in on the impact of the decision. Ebook sales dropped considerably after the price increase, and even the judge took note of this. Writing for Slate, commentator Farhad Manjoo declared Apple’s ebook actions, the “Stupidest Thing Apple Ever Did,” suggesting that the collusion attempt was “shameful” and a “failure” and ultimately contributed to Amazon’s continuing dominance of the ebook market. The New York Times suggested that the ruling could inhibit future negotiations between technology and media companies to avoid the risk of being found to be in collusion.

But the main problem seems to be that both Apple and the publishers are trying to protect a business model that may no longer exist. Among the publishers’ fears that led to the conspiracy was that Amazon could use its market power to exclude publishers entirely and deal directly with authors and agents. This may be already happening. The Amazon/Apple battle also underscores the continuing problem of multiple ebook platforms. As with the VHS/Betamax and Blu-ray/HD-DVD battles of years past, the inability of consumers to effectively rely on a single platform is an inhibiting factor in the advancement of the market, in this case, the ebook market.  The Apple decision does not change that.                                                 

Apple has vowed to appeal the decision. In addition, further court proceedings are expected to determine any damages that Apple is to pay and what relief the court will order.


George H. Pike is the director of the Pritzker Legal Research Center at Northwestern University School of Law. He writes the Legal Issues column and feature articles for Information Today.

Email George H. Pike

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