July 11, 2013

Judge rules Apple, publishers conspired to fix prices


Yesterday, Judge Denise Cote found Apple guilty of conspiring with five publishers to raise the price of ebooks.

Yesterday, Judge Denise Cote found Apple guilty of conspiring with five publishers to raise the price of ebooks. According to Cote’s ruling, “Apple played a central role in facilitating and executing that conspiracy. Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.” A trial for damages will follow.

When the trial began in early June, few people—including Judge Cote herself—thought that Apple had a chance against the DOJ. While the DOJ made a case that Apple and the publishers caused a “dramatic” rise in the price of ebooks, which cost consumers millions of dollars, as the trial progressed it was hardly an open and shut case. Following testimony from Apple Senior VP Eddy Cue, whom the DoJ accused of masterminding the conspiracy, a number of commenters felt that Apple had a shot to come out on top. Near the end of the trial even Judge Cote seemed to be coming around—as the trial closed, she said that “issues had shifted,” suggesting that the context provided by Cue, expert witness Kevin Murphy, and representatives from the five publishers may have changed her opinion.

That turned out not to be the case. As Sarah Weinman tweeted earlier yesterday morning, in her decision Cote “outright says that testimony from Eddy Cue, John Sargent, Carolyn Reidy, Keith Moerer & Kevin Saul was ‘unreliable.'”

Reading the decision, one gets the sense that Cote had not only made up her mind, but had begun writing before the trial began. That’s not entirely surprising though, as Cote was familiar with the facts in the case long before it began. As Fortune’s Philip Elmer-Dewitt wrote yesterday:

Judge Cote was familiar with the case from having supervised the proceedings by which the five so-called Publisher Defendants settled without admitting guilt.

And when the judge who would decide the non-jury case on her own announced — even before the trial that Apple insisted on began — that she believed the government would prove that the company conspired to raise the price of e-books, she also let slip that she’d already begun writing her decision.

According to PaidContent‘s Laura Hazard Owen, Cote saw this as an open-and-shut case:

Judge Cote also says that Apple and the publishers “shared one overarching interest — that there be no price competition at the retail level,” especially from Amazon, and thus enacted agency pricing. “Apple seized the moment and brilliantly played its hand,” Cote writes, providing publishers “with the vision, the format, the timetable, and the coordination that they needed to raise ebook prices.” Thus “through the vehicle of the Apple agency agreements, the prices in the nascent ebook industry shifted upward, in some cases 50% or more for an individual title. Virtually overnight, Apple got an attractive, additional feature for its iPad and a guaranteed new revenue stream, and the Publisher Defendants removed Amazon’s ability to price their ebooks at $9.99.”

Over the course of the trial, Amazon was, as expert witness Kevin Murphy said, the “800 pound gorilla in the courtroom.” As Elmer-Dewitt wrote, following Murphy’s testimony:

With an 80% to 90% share of the ebook market (and as one of th biggest retailers of physical books) Amazon wielded enormous power over the book industry. The court heard about the naked exercise of that power when the company punished an impertinent publisher [Macmillan] in January 2010 by removing the Amazon website’s “buy” button from all of the publisher’s books—digital and physical. Why the antitrust division chose to prosecute the publishers and not the ebook monopolist that was selling the products below remains a mystery.

In that context, Apple’s actions look very different. It may be, as the government alleged that the publishers conspired to form a horizontal agreement to fix the price of ebooks—a “per se” violation of the Sherman Act. Since the publishers settled without admitting guilt, we may never know. But there was no evidence presented in trial to prove that Apple knew what the publishers were talking about when they talked among themselves. As Professor Murphy testified, Apple’s actions throughout were exactly what economic theory would predict in the context, independent of any alleged conspiracy.

Amazon’s near monopoly in the ebook market (see image below) was a non-starter for Cote, however. In her decision, according to Weinman, she wrote, “Another company’s alleged violation of antitrust laws is not an excuse for engaging in your own violations of law.”

The DOJ crowed over the ruling. In a statement, Assistant Attorney General Bill Baer, who is in charge of the Department of Justice’s Antitrust Division, said:

“This result is a victory for millions of consumers who choose to read books electronically… Through today’s court decision and previous settlements with five major publishers, consumers are again benefiting from retail price competition and paying less for their ebooks.”

“Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so. This decision by the court is a critical step in undoing the harm caused by Apple’s illegal actions.”

Earlier today Apple spokesman Tom Neumayr indicated that the electronics giant plans on appealing the decision:

“Apple did not conspire to fix ebook pricing and we will continue to fight against these false accusations. When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry. We’ve done nothing wrong and we will appeal the judge’s decision.”

In Philip Elmer-Dewitt’s excellent overview of the end of Cote’s decision, and its chances in its appeal, he had this to say about Apple and its chances going forward:

It’s only in this, the final section of her opinion, that Judge Cote addresses the elephant in her courtroom: Amazon, which before Apple arrived controlled 80% to 90% of the e-book market and was selling the most popular titles below cost.

“If Apple is suggesting that Amazon was engaging in illegal, monopolistic practices, and that Apple’s combination with the Publisher Defendants to deprive a monopolist of some of its market power is pro-competitive and healthy for our economy, it is wrong,” she writes. “Another company’s alleged violation of antitrust laws is not an excuse for engaging in your own violations of law.”

Perhaps. But it does raise a question that begs for an answer even more loudly now than before her verdict: Why the Justice Department chose to prosecute the new entrant in the e-book market, and not the monopolist.

Elmer-Dewitt is right. In her decision, Cote is exacting and damning as she lays out the case against Apple. But the context—the larger picture which contains Amazon and, some would say, a larger antitrust violation—behind Apple’s antitrust violations paint a more complicated picture. In her decision, Cote answers the legal questions expertly: she makes a very compelling case  against Apple. But the political question hanging over the case—why did the DOJ go after Apple and not Amazon?—has not yet been answered.

Yesterday, I read the decision and recorded my reactions. You can read that response here.

This piece was originally published yesterday in a slightly different form. 


Alex Shephard is the director of digital media for Melville House, and a former bookseller.