US v. Apple: eBook Antitrust Ruling Reveals Conspiracy Between Apple and Publishers, Efficacy of Antitrust Enforcement

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In a particularly vivid exemplar of the renewed potency of antitrust enforcement, District Judge Denise Cote, of the influential Southern District of New York, recently ruled that Apple had violated antitrust law by conspiring with publishers to raise retail prices of eBooks and to eliminate retail price competition. See United States v. Apple, Inc., No. 12-2826, Opinion & Order (S.D.N.Y. July 10, 2013) (available here).

As Judge Cote summarizes, “Apple and the Publisher Defendants shared one overarching interest — that there be no price competition at the retail level,” and the plan was largely successful. Opinion at 11. The crux of the problem, as Apple viewed it, was that Amazon’s pricing was too low for Apple to make a profit. “Through the vehicle of the Apple agency agreements, the prices in the nascent e-book 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 e-books at $9.99.” Opinion at 12.

Apple thus set in motion a plan to conspire with publishers to force Amazon to raise its prices. To do so, Apple proposed that publishers adopt the “agency model” for eBooks, by which a publisher sets the retail price of the book, and the eBook store would then take 30 percent of that price. The agency model is reflected in the frequent apology seen at eBook sites such as Apple’s, noting that “prices are set by publishers” — a statement that is stunningly disingenuous in light of the close, conspiratorial relationship between Apple and the publishers.

After negotiating deals with Apple, five major publishers approached Amazon simultaneously with an offer it couldn’t refuse — either Amazon could move over to the new, higher-priced agency model, or it would have to wait months to begin selling best-selling titles in its store. See Opinion at 64-72. Only by colluding could the play work, because if any single publisher approached Amazon, Amazon could have balked and removed that publisher’s titles from the Kindle Store. Id.

The opinion documents Apple’s plan to undermine the dominance of Amazon and its Kindle in the emerging e-book technology, and with reference to astonishingly candid evidence including internal Apple emails and memos. In its initial meeting with publishers to discuss the conspiracy to fix prices, Apple outlined a strategy categorically at odds with U.S. antitrust laws, stating that the company “cannot tolerate a market where the product is sold significantly more cheaply elsewhere.” Opinion at 33.

Originally, the federal government had sued Apple along with the five other publishers — Lagardere SCA’s Hachette Book Group Inc and Macmillan, News Corp’s HarperCollins Publishers LLC, Pearson Plc’s Penguin Group (USA) Inc and CBS Corp’s Simon & Schuster Inc —in April of 2012. However, while the publishers settled with the government, Apple insisted they had done nothing wrong—a stance that Apple continues to hold in the wake of this week’s ruling, vowing to appeal to the Second Circuit.