A Closer Look At Apple's Role In The E-book 'Conspiracy'

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In the mushrooming controversy over e-books, it’s easy to understand the publishers’ motives. But what about Apple? (NSDQ: AAPL) Did the company want to raise book prices in order to protect its iPad and blunt the rise of Amazon?

These questions will figure prominently in two regulatory investigations and in the more than two dozen class action suits that have been filed in the US since August.

Recall that, according to the accusations, big publishers colluded to impose “agency pricing” on Amazon (NSDQ: AMZN). This pricing model is a commission scheme that lets publishers control the minimum amount that retailers like Amazon and Barnes & Noble (NYSE: BKS) can charge consumers for e-books.

The origin of the scheme, and Apple’s role in it, was described in a prescient 2010 New Yorker article by Ken Auletta. The author describes how the publishers despaired over Amazon’s pricing tactics but feared that standing up to the Seattle giant together would invite an antitrust investigation. The impending arrival of the iPad promised salvation. The tablet appeared to offer an alternate e-book platform and, better yet, it was controlled by a partner who was willing to along with the scheme to raise prices.

The alleged conspiracy was afoot. The smoking gun moment, according to the lawsuits, occurred when Steve Jobs told a Wall Street Journal (NSDQ: NWS) reporter at the iPad launch in January of 2010 that publishers might withhold their books from Amazon because they were “unhappy.”

What was Jobs’ motive in going along with the scheme? Auletta suggests that Jobs saw an opportunity to help the publishers and to muscle in on the e-books market at Amazon’s expense. But the class action lawyers see a deeper strategic motive:

Apple conspired with the Publisher Defendants … in order to cut into Amazon’s substantial share of the markets for eBooks and to prevent Amazon from emerging as a serious competitor to its mobile platforms for the distribution, storage and access of digital media.

The lawyers’ theory is bolstered by recent events. This Christmas, Amazon’s multi-media Kindle Fire is flying off the shelves and may pose the first real threat to a tablet market that has been utterly dominated by Apple (even though the Fire is reported to be a “miserable” experience). In retrospect, then, Jobs had every reason to weaken Amazon in 2010 by undercutting its e-book business.

The one problem with this grand conspiracy theory is that it overstates the importance of e-books in the larger consumer market. Remember that, in 2010, Apple was raking in fabulous profits from its iPhone and starting to tangle with Google (NSDQ: GOOG) in the great game for control of the smartphone market. As this terrific graph from Asymco (via Felix Salmon) shows, Apple’s business is driven by sales of devices not content. In other words, the e-book market is inconsequential to Apple if you consider that the company’s overall earnings could allow it to buy the entire publishing industry several times over.

In light of these facts, the price-fixing conspiracy does not make a lot of sense unless Jobs’ deal with the publishers was indeed part of a far-sighted strategy to keep Amazon out of the tablet market.

Apple is likely to argue that it did not create any special deal with the publishers but simply engaged in its usual pricing practices. After all, the agency pricing that has been so controversial in the publishing sector is simply common practice for Apple which imposes a 30 percent commission on everything it sells in its app stores.

As it typically does when it comes to legal issues, Apple declined to comment for this story.

Apple has yet to file an answer to the class action claims. Its only significant court filing so far has been a brief (embedded below) in favor of consolidating the dozens of cases in the antitrust affair. In the filing, the company states that it is indifferent to whether the case takes place in New York or California.

Finally, the Apple filing provides a window into the scale and complexity of the impending litigation:

Two of the complaints name Amazon.com, Inc. as a defendant … the Burstein complaint also names Barnes & Noble as a defendant and is the only complaint to do so. Meanwhile, not all of the complaints name all six publishers. Eight of the 15 complaints do not name Random House, Inc. as a defendant .. whereas the Greene complaint also omits Simon &Schuster, Inc. as a defendant.

Apple in support of multidistrict litigation
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