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The Department of Justice’s ebook pricing case against Apple (s AAPL) kicked off in federal court in New York on Monday, and is expected to last for three weeks. The DOJ accuses Apple of conspiring with book publishers to fix ebook prices for the launch of the iBookstore in 2010. All five publishers originally named in the case have settled with the government, and Apple remains the sole defendant pressing on with the trial.
The Department of Justice and Apple’s opening statements lasted for nearly the entire day, but they introduced little material that would be surprising to anybody who has been following the case since the DOJ first sued Apple and publishers in April 2012. Both parties primarily rehashed the agreements that they have been making for over a year.
Judge Cote: No, I’m not siding with the DOJ…yet
Federal judge Denise Cote, who is overseeing the case, indicated in a pretrial hearing last week that she is “leaning toward” the DOJ’s version of events, based on all of the evidence that she has seen already. Not surprisingly, Apple attorney Orin Snyder brought up that inclination in court again today, describing Cote’s “tentative view” as “not so great for my client…every defendant should be presumed to have done nothing wrong” until the end of a trial.
Cote quickly jumped in to defend her position, saying that it is customary for her to share her pretrial views if both parties agree and that it is not an uncommon practice in either New York or California courts. “You had months to think about whether you wanted my pre-trial views or not,” she told Snyder, and stressed she hasn’t made a final decision yet: “My view was a tentative view…The deck is not stacked against Apple unless the evidence stacks the deck against Apple.” She noted that both parties’ opening statements and summations “will be particularly helpful” in making her decision.
DOJ: Apple and publishers conspired to change the entire industry
In the DOJ’s opening argument, attorney Lawrence Buterman described the launch of the iBookstore in April 2010 as “the day the prices of the most popular ebooks went up across the United States as much as 50 percent … The $9.99 price for ebooks that [customers] had become accustomed to was largely gone.” Buterman argued that Apple conspired with publishers to move to agency agreements (in which the publisher sets an ebook’s retail price and the retailer takes a cut) with Apple and then forced other retailers — namely Amazon — to move to agency as well. “The key word here is collective,” Buterman said, because no one publisher was willing to adopt agency pricing on its own. Apple needed to keep “weak-kneed CEOs” in line and “move the whole market off of $9.99.”
Buterman repeatedly stressed that Apple and publishers acted together with the goal of changing “the entire ebook industry.” Citing an email exchange between Apple SVP of internet software and services Eddy Cue and Simon & Schuster CEO Carolyn Reidy, for instance, Buterman said, “These are not the words of an independent actor.” The DOJ also alleges that Apple was a “facilitator and go-between” to get publishers to enact higher ebook prices in the agency pricing negotiations between publishers and Amazon — when Macmillan CEO John Sargent went to Seattle to talk to Amazon about agency pricing, for example. And when individual publishers were trying to decide whether they should adopt agency pricing and join Apple’s iBookstore, the DOJ says that Apple acted as “a conduit” by telling them what other publishers were doing and thinking.
The DOJ cited the MFN (most-favored nation) clause that Apple required in its publisher contracts as an obvious way for Apple to try to control Amazon’s own ebook pricing practices: Buterman said that Apple was “fully aware that the imposition of an MFN in its agency agreements” would lead publishers to enact agency agreements with Amazon.”
Apple’s entry into the ebook market “arrested all ebook price competition,” Buterman concluded, arguing that any innovation in the space around the time that the iBookstore launched either existed before the launch or couldn’t be tied to it. “The iPad was going to be introduced regardless of whether there was an iBookstore,” he said, while describing “increased book sales and new devices” as “trends that were well underway” before Apple came on the scene.
Apple: DOJ “reverse-engineered a conspiracy”
Apple’s attorney Orin Snyder argued in his opening statement — which lasted over three hours — that the government had provided no direct evidence of a conspiracy between Apple and publishers. Apple “simply was not willing to start a new business that would lose money” by matching Amazon’s $9.99 price for bestsellers. But the DOJ, Synder said, is asking the court to “ignore the actual negotiation of the contracts that define the relationships between the parties.”
Apple and publishers were not aligned, Snyder argued: Rather, he claimed negotiations between them were “contentious and hard-fought…in some cases knock-down, drag-out fights” (becoming so “noxious” in the eyes of Random House that it would not sign a deal). HarperCollins only agreed to an agency agreement with Apple, he said, because News Corp wanted to retain a good relationship with the company. Snyder said that Apple had “no evidence — zero — that Apple knew anything about interactions between publishers.”
In response to the DOJ’s allegations that Apple acted behind the scenes to help publishers get Amazon to agree to agency pricing, Snyder said there is “iron-clad proof…in emails and in testimony that Apple told its supposed co-conspirators” that it didn’t care what kinds of agreements publishers signed with Amazon. He said Apple would not have needed a MFN clause in its agreements if it already knew the types of agreements that publishers would enact with other retailers: Instead, an MFN gave Apple “the ability to be indifferent to what happens at other retailers.” He also alleged that Amazon initiated discussions about changing the pricing model with publishers before Apple signed its own agency agreements.
“Apple should be applauded and not condemned for its beneficial impact on the ebook market,” Snyder said. Before the launch of the iBookstore, the market was “headed nowhere good.” With the iBookstore’s launch, Snyder claimed that many more parties have been able to start selling ebooks — everyone from “little brownstones in Vermont” to “solo authors acting without a publisher.”