The long-awaited antitrust lawsuit against Apple and its ebook practices opened in Federal Court on June 3. The lawsuit, filed by the U.S. Department of Justice, alleges that Apple conspired with several publishers to set ebook pricing as a means to counter Amazon’s domination of the ebook market through its online ebook service and Kindle e-reader. The first week of the trial was highlighted by an 80-slide PowerPoint presentation by the government outlining its case against Apple, along with testimony from senior executives from Google, Simon & Schuster, Penguin Group, and Amazon.
The lawsuit, which was filed in April 2012, was a result of a multiyear investigation of Apple’s ebook sales practices. When Apple introduced its iBooks online platform supporting the iPad tablet in January 2010, it entered a market that was dominated by Amazon and the Kindle. Amazon’s sales practice revolved around a standard price of $9.99 for most best-selling ebooks sold for the Kindle. This price significantly undercut the price of the physical book, and in many cases, it was less than the wholesale cost of the ebook. Amazon could afford to do this due its high volume of overall sales, as well as its sales of the Kindle e-reader.
In order to enter the market, Apple is alleged to have entered into agreements with several publishers to change the model by which the publishers wholesale their ebooks to vendors. Under this new sales model, known as an “agency model,” the publishers agreed to follow the same pricing model for all ebook sales to all vendors, including Amazon. This would force Amazon to raise its prices and allow Apple to enter the ebook market at a more profitable price point.
While publishers, like any business, are allowed to set prices they choose, they are not permitted to act collectively to set prices. The Justice Department’s lawsuit asserts that by acting collectively at the instigation of and in concert with Apple, the publishers violated federal antitrust laws. The Justice Department eventually entered into settlements with the publishers involved in the Apple agreements—Hachette Book Group, HarperCollins Publishers, Penguin Group, Macmillan, and Simon & Schuster—leaving only Apple as the defendant at the trial.
The government’s opening statement outlined its case by highlighting an ongoing series of emails and other documents between Apple and the publishers, whereby the publishers agreed to work with Apple to establish the new pricing model. The emails revealed that the publishers were already “unhappy with (the) $9.99 price point” Amazon was using for ebook sales, as they believed that it undercut their print book market. In response, Apple sent out identical proposals outlining the agency model of “realistic pricing” to at least six different publishers.
The next sequence of documents showed the continuing negotiations between Apple and the publishers, all outlining the critical need for every party to follow the agency model. Citing from a 2009 internal email, an executive at Simon & Schuster was quoted as saying, “[W]e’ve always known that unless other publishers follow us, there’s no chance of success in getting Amazon to change its pricing practices.” The government then outlined a series of emails between executives of the various companies in contact with each other to discuss Apple’s proposals.
A continuing theme of the government’s opening statement presentation was the active role that Apple executives played in reaching the agreements, particularly that of Eddy Cue, Apple’s senior vice president of internet software and services. A series of emails and phone calls between December 2009 and January 2010 showed that Cue was reaching out to executives at six publishers (the five listed above, plus Random House), then reporting back to Apple CEO Steve Jobs that things “went well and everyone understood our position and thought it was reasonable” and that it “solve[d the] Amazon issue.” These exchanges culminated in January 2010 with identical proposals sent to all six publishers, and further emails indicated that Apple actively enlisted the publishers to work to convince other publishers to sign the agreements.
After agreements with five of the six publishers were hammered out, a slide from the Justice Department showed that ebook prices from the five publishers rose considerably in the weeks following the agreement. (Random House entered into a similar agreement 1 year later and saw a similar spike in its prices. Because Random House acted separately from the other five publishers, it was not included in the Justice Department’s lawsuit.) Notably, the same slide illustrated that the average price for all publishers rose only slightly, then later decreased by a modest amount.
Of course, the government’s opening presentation is only one side of the story, and while government witnesses were the focus of the trial’s first week, media reports indicated that Apple did score some points in its favor. According to a report in the Wall Street Journal, the testimony of an executive for Penguin indicated that Apple and Penguin “clashed on many things” during the negotiations, raising questions about the strength of the alleged conspiracy. The Verge reported that a Google executive was unable to confirm a prior statement that noted several publishing executives had “told him directly” they were switching to the agency model at Apple’s demand.
It is not uncommon for different businesses in the same industry to match prices. Common examples include retail gasoline prices in a given neighborhood or airfares. In both cases, when one business raises or lowers prices, the others will often match those price changes to avoid losing market share. There is nothing illegal about this activity as long as the gas stations or airlines don’t act in agreement to set or control prices. While the government is arguing that the publishers conspired with Apple to establish an agency model and set prices, Apple appears to be taking the position that it simply entered into negotiations with the publishers on terms that Apple preferred. Apple also asserts that the publishers agreed because they wanted Apple as a vendor and were unhappy with their other options—primarily Amazon.
Early criticism of the Justice Department’s lawsuit arose as Sen. Charles Schumer (D-N.Y.) urged that the suit be dropped as the agency model increased competition and decreased prices. The government’s slide indicated that for “all publishers,” there was some truth to that. However, prices for the six publishers that entered into the Apple agreements for the most part remained higher than this overall average. And notably, these six publishers cover the bulk of the best-selling book publishing industry. Other commentators suggested that the ebook business model was notably different from the traditional book sales model and that the industry was simply adjusting to a new model. Still, the evidence suggests that as a result of the agency model agreements, consumer prices went up.
Ultimately, it will be up to the court to decide, and then the marketplace will respond. The trial is expected to last about 3 weeks, with the court’s decision to follow.