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Friday, May 24, 2013 9:00am
Judge: Apple probably guilty of e-book price fixing
In an unusual pre-trial "tentative view," the judge in charge of the Apple versus the Department of Justice trial over alleged e-book price-fixing said that the DOJ would likely be able to prove that Apple colluded with publishers to raise e-book prices, despite not having seen all available evidence. This is not the first time Judge Denise Cote has ruled against Apple ahead of a full examination of the facts.

By her own admission, Cote's opinion is drawn mostly from a set of correspondence between former Apple CEO Steve Jobs and News Corporation CEO James Murdoch (on behalf of HarperCollins, which NewsCorp owns) between December 2009 and January 2010. In the emails that have been made public, there is no evidence of any such collusion: the negotiation process between Murdoch and Jobs shows the former starting off with a completely different view on pricing and models that does not agree with Apple's proposal. Over the course of a few emails, however, Murdoch is persuaded by Jobs' scenarios of how the emerging e-book market is likely to play out under Amazon's "wholesale" model versus Apple's "agency" model.

The "agency" model, which has been a staple of the publishing industry for decades, lets publishers set prices for goods; Apple takes its normal 30 percent distribution cut, and for that provides a complete eco-system experience from storefront to billing and legal. Amazon's "wholesale" model allowed Amazon to set the price of the e-book, giving it the freedom to sell the e-books at a loss in order to engage in predatory pricing that would drive out competitors and gain a monopoly in the e-book market.

Bizarrely, the DOJ has thus far turned a blind eye to this aspect of the case (despite Apple's pointing out that before it entered the e-book market, Amazon had greater than 90 percent of e-book sales) and instead focused on Jobs' suggestion in various emails that publishers preferred a price point of around $13 for a typical new release e-book, about $3 higher than the "loss leader" pricing Amazon sold for. Apple never required publishers to adhere to a particular price, but suggested the range as the must sustainable option.

Although not all the emails between the two men have been released, reading the publicly-available ones makes it obvious that publishers were persuaded to go with Apple's "agency model" not because of the promise of a higher price as much as the promise of a stronger business model. Apple's contract included an also-contentious "most favored nation" clause that said that publishers could not sell a book for less than the price they set for Apple's iBookstore.

The clause, once agreed to by all five major publishers, essentially broke Amazon's ability to continue to engage in the predatory pricing scheme, since it and any other future competitors would have to sell at the same price as what publishers set as the price for the iBookstore. In short order, Amazon's monopoly fell and it settled into a marketshare of under 70 percent -- allowing both Apple and later players (including Sony and Barnes & Noble) to enter the market without incurring large losses to try and compete with Amazon. This move not only protected publishers from possible Amazon abuse of its monopoly, but also secured a diversity of publishers and thus e-book options for consumers -- longer-range benefits the DOJ has ignored in favor of misguidedly fighting for the lowest possible price.

The publishing houses, after some initial resistance, have entered into settlements with the DOJ and other authorities agreeing to nullify the "agency" contracts with Apple and resume the "wholesale" model for a period of time. The DOJ has pointed out that under the "wholesale" model, consumers paid less for e-books -- ignoring the realities of that model's sustainability for publishers, who complained at the time that Amazon's discounting was hurting the overall value of e-books. Apple has since adapted to the lack of the agency model and begun discounting e-books itself, forcing Amazon to take steepening losses.

This is not the first time Judge Cote has sided with Amazon against both the publishers and Apple. In May of 2012, she allowed a class-action civil lawsuit "on behalf of consumers" suing over the alleged price-fixing to go forward ahead of the DOJ trial -- issuing a strongly-worded opinion dismissing Apple's defence that the agency model was better for consumers in the long haul because it preserved both publisher control of pricing and the viable diversity of smaller publishers.

In her opinion, Judge Cote accused Apple of helping facilitate a collusion between publishers that conspired to keep e-book prices slightly higher than Amazon's discounting. It would seem unusual that a second admission of bias by a judge in the case ahead of an actual trial would not be used to have the lawsuit's venue changed, but Apple will likely use the judge's pre-disposition against it as grounds for appeal following any (apparently pre-determined) loss in its initial DOJ trial.

In issuing her latest finding, Judge Cote went so far as to admit that she was already drafting the written decision that would be issued at the end of the proceedings, indicating that she has already made up her mind on the points of law based on evidence previously seen and selected by the DOJ. Preliminary findings such as this one were likely a factor in Penguin's recent settlement in the class-action lawsuits filed by the attorneys general in more than 17 states. It agreed to pay $73 million in various disbursements to settle the suits.

Ironically, the settlements agreed to by the DOJ only prohibit publishers from using the "agency model" for a period of two years, after which they can revert to it if they can get sellers like Amazon to agree. A similar European investigation yielded a nearly-identical settlement, though in that case Apple also agreed to the terms along with the publishers.