10 Comments

Summary:

Apple and the federal government are about to go to trial over an alleged conspiracy to fix ebook prices — but recent court filings show that Amazon will play a large role in determining the outcome.

Jeff Bezos holding Kindle Fire
photo: Getty Images / Spencer Platt

Apple and the Department of Justice are set to spar in a closely watched price-fixing trial set for early June but, increasingly, attention in the case is turning to a third party — Amazon. In pre-trial filings, Apple is trying to expose redacted evidence that the company claims will “embarrass” Amazon and show that the retailer engaged in the same activities for which Apple is now on trial.

The claims are set out, in part, in a letter last week from Apple’s law firm that urges US District Judge Denise Cote to reveal information about its pricing as well as “internal discussions about the inferiority” of its Kindle e-reader compared to the iPad. Apple also says the redacted information will help expose the “fiction” that Amazon was “forced” to adopt a new pricing system as a result of a 2010 arrangement between Apple and five big publishers.

This arrangement — known as “agency pricing” — resulted in publishers requiring retailers to sell ebooks on a commission basis, in which publishers could set the price. This led the Department of Justice, state governments and class action lawyers to sue Apple and the publishers; the latter settled the cases and agreed to pay out millions but Apple is holding its ground.

Apple argues that the Department of Justice is wrong to portray Amazon as a victim, along with consumers, of a conspiracy to raise prices. Instead, the company claims that Amazon was contemplating agency pricing too and was pleasantly surprised when the publishers took it up on their own. Apple is also using colorful emails obtained from Amazon executives to make its point:

 “I guess what we never figured in was the idea that five publishers would band together and insist on receiving worse terms,” the email said. “And then Amzn would be ‘cornered’ into accepting them.”

“Hysterical, isn’t it?” the Amazon executive replied. “Jedi Mind Tricks here in Seattle.”

The email exchange was reported by Reuters legal reporter, Alison Frankel, whose recent analysis portrayed Amazon as the “elephant in the (court)room.” Her report adds that Judge Cote stated that she doesn’t want the trial “distorted by a larger battle between two commercial giants.”

What do others think? Apple’s view is likely to find support in at least some quarters. The publishing community continues to fume about Amazon’s enormous clout in the book business. Meanwhile, some copyright lawyers have joked to me in the past that Amazon should send US Attorney General Eric Holder a holiday card for suing Apple and the publishers.

Amazon will get to offers it own views directly; its executives, along with publishing executives, will be among the witnesses testifying on behalf of the Department of Justice.

For now, Judge Cote has decided that the evidence Apple is seeking will remain redacted. But the issue will not doubt arise again if the trial, scheduled to begin on June 3, goes ahead as planned. There is a pre-trial conference planned for later this Thursday — we’ll let you know if any new twists emerge.

Here’s the letter from Apple’s law firm:

Amazon to Disclose (Request)

  1. Quote: “Judge Cote stated that she doesn’t want the trial ‘distorted by a larger battle between two commercial giants.'”

    Is this judge really that clueless? At the heart this dispute lies the fears these publishers had about Amazon monopolizing ebook sales and the welcome competition that Apple could offer them.

    And if Amazon thought these publishers had been persuaded to accept a lesser deal than they might have gotten, what sense does it make to claim that they engaged in a conspiracy to get more than they deserved?

    I have a bad feeling about this judge, a very bad feeling.

    Share
    1. While Amazon is no disinterested third party in this, at the heart of this dispute is whether or not consumers were harmed by the actions of Apple and the 5 publishers.

      It may be unfortunate that Amazon could be a beneficiary of bad behavior by the defendants but they brought all of this on themselves. Where the heck were their anti-trust attorneys when they were cooking up this plan?

      Share
      1. David Thomas Friday, May 24, 2013

        If the heart of the dispute is consumer harm, Amazon & DOJ will lose. The data doesn’t support that narrative. The vendors actually took a hit.

        Share
        1. Yes, the vendors took a hit but the only question that matters is were consumers harmed?

          The narrative supports that prices to consumers increased as a result of the price fixing coupled with the mnf clause. Therefore, consumers were harmed.

          They could have avoided all of this by running the plan by competent anti-trust attorneys. They obviously didn’t.

          Share
  2. David Thomas Friday, May 24, 2013

    All along Amazon has cloaked the argument as a moral issue of consumer fairness — its practically a straw man for them to point and guide attention away from their own culpability. What still needs to be interpreted is the transaction role of the intermediary of an e-book sale: do they ‘own’ the product or do they just broker the transaction between consumer and vendor. This case may not clarify that in the end because it is really about how the agency plan was enacted, not the plan itself.
    (It could be argued that the physical book product is not really owned by an intermediary because they can freely return unsold product for full credit. It is fundamentally a consignment deal — where the intermediary is only an ‘agent’ of the transaction.)

    Share
  3. I fail to see how these publishers and Apple deciding what they want to charge is very different for what I learned about Wal-mart via a PBS frontline episode from a few years ago. Wal-mart forced American businesses like Rubbermaid to cut its prices in order to be sold in the Wal-mart stores. Wal-mart’s profit strategy pushed American manufacturing to get transferred to China, Mexico and elsewhere. Apple and these publishers did not own every ebook available in the market. Their strategy was like many companies. We want a certain price. If you want to buy it, that’s what you pay. How is that different, for example, from specialty companies like Bradford Exchange, Franklin Mint, etc? I must not be quite smart enough to understand why price fixing via companies to retailers (i.e. you can only carry it in your store if you sell it at MSP) is different from this.

    Share
    1. David Thomas Friday, May 24, 2013

      Little bit different — Publishers were seeking to regain control of the value of the product. Amazon was selling below cost as a loss leader for selling kindles. Publishers then changed the terms of sale. What is being called illegal is the way the publishers did it — seemingly in a consortium — not the terms. The terms were not an issue. The alleged collusion was deemed anti-consumerist by the DOJ.

      Share
      1. Thanks for the clear summary

        Share
      2. You’ve actually got it backwards. The Kindles were being sold at a loss in order to provide the platform for content purchases. Most ebooks were sold at the recommended retail value, of which was $9.99 at most. The Publishers “sold” the ebooks to Amazon at wholesale prices (let’s say, $5 for the sake of this discussion). Amazon then sells it for whatever price and profit margins they’re willing to take. Unfortunately those prices were far below what trade paperbacks and hardcovers sold for, thus provoking the fear in publishers that ebook sales were going to cut into their physical book sales.

        Apple then comes along and says in secret to all the publishers, “let’s collude to fix prices such that you get what you want (ebook prices equivalent to hardcovers or slightly cheaper) and I get my 30% cut. We’ll then force Amazon to agree to these terms or you guys will exclude them from selling ebooks at all (thus causing Amazon to go bankrupt).”

        The second paragraph highlights the background of the entire lawsuit, and why it happened. Industry-wide collusion to fix prices is illegal according to US law.

        Share
  4. This explains why Apple is sticking with the issue. What I don’t understand is why Apple would care at all about what ebook prices are. Apple sells every other kind of digital media for about a buck a title; it profits off the hardware. Amazon sells its hardware cheap; it profits off the software aka ebooks. What drew Apple into this fight in the first place; Apple could hurt Amazon a lot more by giving ebooks away.

    Share

Comments have been disabled for this post