Why the Apple e-book trial should be over already: The DoJ has an open-and-shut case

Court

The federal antitrust case over collusion and price-fixing in the e-book industry entered what will likely be its final chapter on Monday, with opening statements in court from the Department of Justice and Apple — since all of the accused publishers have already settled. And while Apple is undoubtedly going to make an impassioned defence of its innocence over the next few weeks, the fact is that the DoJ has what amounts to a slam-dunk case: no matter how you look at it, the company colluded with publishers to keep e-book prices high.

In fact, the government’s case is so compelling that the judge in the trial has already said she thinks it will prevail, despite Apple’s protests to the contrary. In pretrial comments, U.S. District Judge Denise Cote said she believes the government “will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case will confirm that.”

Apple: Amazon made us do it

Not surprisingly, Apple has complained that this amounts to pre-judging the case, but it’s not hard to see how the judge arrived at that conclusion: Emails sent from Steve Jobs and other Apple executives to various publishers as they tried to strike a deal make it obvious that the computer company wanted to see a united front from the book industry before it agreed to any terms, and that it essentially pressured publishers to collude in order to achieve that.

Apple-slide-one

In the run-up to the antitrust trial, Apple and the Big Five publishers who were named in the lawsuit tried to make their case in the court of public opinion, and their argument was that while their behavior may have looked an awful lot like collusion, they needed to do so in order to blunt the effect of Amazon’s virtual monopoly over e-books — which they suggested was a far worse danger than cutting a deal with Apple, the underdog in the market.

In an open letter about the case published a year ago, Macmillan CEO John Sargent denied that his company colluded with anyone when it decided to move to what is called the “agency model” of pricing (in which the publisher gets to set the price for e-books, rather than the retailer), and argued that doing this was necessary to blunt the force of Amazon’s hold on the market. At the end of the letter, he quoted Authors’ Guild president Scott Turow:

“The irony of this bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition. This would be tragic for all of us who value books and the culture they support.”

Were consumers harmed?

Inside Apple

Very little of this is likely to be part of Apple’s legal arguments in the current trial, for the simple reason that it would never fly as an excuse for encouraging or facilitating collusion and price-fixing. If the major players in an industry get together and effectively agree on a strategy for keeping prices artificially high, it’s not enough to say “But your honor, we had to do this because our competitor is too large and it was the only way we could compete with them.”

As we’ve tried to point out in posts about the accusations against Google for its behavior, antitrust law in the U.S. isn’t designed to help prevent competitors from being squashed by a large player in an industry — even if that player has what amounts to a monopoly position. The key point is whether that particular company’s behavior alters or damages the marketplace in a way that harms consumers. And when it comes to that, the DoJ is on rock-solid ground.

As the Justice Department pointed out in its opening statement, the price of e-books climbed by as much as 50 percent in the weeks following Apple’s agreement with the Big Five publishers. Those two groups can — and have, on many occasions — make the argument that keeping prices higher than they would have been otherwise is in the long-term interests of the publishing industry (although that is also debatable), but that’s not what the DoJ or the court is interested in.

Apple-slide-two

Apple took a risk, and it lost

Apple’s only argument is that while e-book prices rose and stayed high for some time as a result of its actions, they eventually came back down — but the judge is unlikely to find that persuasive either. In effect, Apple would be saying: “Yes, we colluded with publishers, but our attempt to keep prices artificially high eventually failed due to other market conditions we were powerless to affect.” That’s admitting guilt, but hoping to get a pass anyway.

So why is Apple bothering to fight this case, even though it knows that it will probably lose? Some of it could be sheer bloody-mindedness, but the company may also be worried about the potential implications of the ruling as it pertains to what are called “most-favored nation” agreements, which give partners the right of first refusal when it comes to pricing. As Zach Seward notes at Quartz, these agreements are everywhere in the entertainment business, and if they amount to collusion then Apple could find it harder to strike deals in other areas.

The bottom line is that Apple engaged in risky behavior with publishers because it felt it had to do so in order to break Amazon’s iron grip on e-books, and offering higher prices to publishers if they cut a deal with the company seemed like the best way to do that. Apple may even have been correct in that assessment — but collusion is still collusion. The only question now is how large the judgement against the company will be in terms of damages.

Post and thumbnail photos courtesy of Shutterstock / tlegend

loading

Comments have been disabled for this post