Last week a New York trial began in which the US government attempts to prove that Apple conspired with publishers to artificially raise ebook prices. The government’s position is that Apple and a cartel of the five largest book publishers conspired to allow publishers to set their own prices on their books (the agency model). Book prices have traditionally been set by retailers (the wholesale model).
The conspiracy took place, according to the government, as a defensive reaction to Amazon’s setting of new ebook prices at US$9.99. Apple allegedly coordinated the conspiracy to increase revenues on ebooks for its newly-introduced iPad. The Hachette Book Group, HarperCollins, and Simon & Schuster settled the day the charges were filed and Macmillan and Penguin settled a few months later. Amazon — whose complaints are thought to have triggered the investigation resulting in the current charges — now controls roughly 60 percent of the ebook market.
Under its agency model, Apple receives 30 percent of each ebook sold through its iTunes Store. The company’s contracts with book publishers included a “most favored nation” clause whereby no other retailer could sell ebooks for a lower price. The government alleges that action resulted in higher consumer prices. As evidence, the government charges that the five co-conspiring book publishers renegotiated their contracts with Amazon — to the agency model; at Amazon’s insistence — resulting in Amazon’s ebook prices increasing to US$12.99-US$14.99.
Ebook sales rose from 1-3 percent in 2009 to 20 percent last year.
On the opening day of the trial, US Justice Department lawyer Lawrence Buterman argued that leading up to Apple’s introduction of its iPad in 2010, more than 100 telephone calls took place between book publishing executives. Buterman opined that at least three of the publishers discussed their plans about signing Apple’s agency model contract and cited Steve Jobs’s comment to a journalist that ebook “prices will be the same” in response to a question about pricing disparities between Amazon and Apple. Buterman went on to cite an email thread between Simon & Schuster executives and its general counsel critical of Jobs’s comment that Buterman interpreted as evidence of the conspiracy.
The Justice Department released a slidedeck of evidence supporting its conspiracy allegations before the trial began and used it in its opening argument.
Apple’s legal representative, Orin Snyder, said the government had no direct evidence of a conspiracy.
The judge in the trial, US District Judge Denise Cote, said that she believed “that the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of ebooks, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that” at a pre-trial hearing.
Apple’s arguments in this issue are incredibly thin. The only conceivable reason the company continues to fight is to avoid the possible implications of the elimination of “most favored nation” contractual clauses which are quite common in the entertainment business.