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DOJ compares Apple and publishers to oil cartels; now sit back and wait for the verdict

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The three-week U.S. vs. Apple trial, in which the government accused Apple of conspiring with book publishers to fix ebook prices, is over — and now time to wait for Judge Denise Cote’s verdict.

Following Apple attorney Orin Snyder’s summation Thursday morning, in which Snyder argued that a ruling against Apple would have a “chilling effect” on commerce and content markets in the U.S., DOJ attorney Mark Ryan argued on Thursday afternoon that the case was a simple antitrust suit — Apple’s conduct was “a per se violation of the Sherman Act,” an “old-fashioned, straightforward price-fixing agreement” that caused ebook prices to go up. (See the DOJ’s summation slides embedded below.)

As several people watching the proceedings fell asleep (and even Snyder at certain points took off his glasses and appeared to be closing his eyes), Ryan argued that by setting price bands for ebooks in the iBookstore, Apple intended to raise ebook prices: “Ceilings became floors” because publishers priced at the top limits of the caps. Ryan also said Apple’s argument that its negotiations with publishers were hard-fought didn’t matter — “[Why is it] that difficult negotiations cannot surround a conspiracy?…You can pick up a paper and see Venezuela and Saudi Arabia” arguing over what oil prices should be, but it “doesn’t mean they aren’t members of a cartel.”

Ryan said, “I’d like to have a brief discussion about credibility,” then introduced a series of slides headed “Credibility” where the government sought to show that Apple’s witnesses were not reliable. Throughout the case, he said, the witnesses were “reaching for answers” and there was “constant retraction of testimony.” (In particular, he said, Simon & Schuster CEO Carolyn Reidy repeatedly changed her answers to a question after being shown her deposition.) “The court is well within its rights to credit none of a witness’s testimony” if some of that testimony is faulty, Ryan said; the court should not “hunt and peck” through testimony to pull out the true parts.

Judge Cote occasionally responded to Ryan’s arguments with questions. At one point, she said that even if the publishers and Apple had agreed that ebook prices should go up, that wasn’t enough to find a conspiracy. Ryan responded that in fact the DOJ believes that would be sufficient evidence, but that it wasn’t what the government is arguing; rather, the idea that Apple also helped publishers force Amazon (s AMZN) into agency agreements is a key part of the government’s case. Apple designed its MFN to ensure that all retailers would have to move to agency, Ryan said, even though Apple couldn’t specifically require that in a contract: “They knew they had to find a way to put in contract language what the aim of the conspiracy was.”

Judge Cote also suggested, in response to Ryan’s argument that Apple wanted higher ebook prices, that because Apple was trying to launch the iBookstore quickly and it knew that publishers were unhappy with Amazon’s $9.99 bestseller pricing, it would logically offer them higher as a “sales pitch.” There was nothing wrong with a sales pitch, Ryan responded, but Apple was wrong to collude with the publishers.

Judge Cote asked Ryan why the agency agreements publishers reached with Apple were so different from the agency agreements publishers reached with Barnes & Noble (BKS). “Why didn’t Barnes & Noble also do something illegal?” Ryan responded that “I’m not here to say that Barnes & Noble acted appropriately at all times” but that it didn’t agree to raise prices and didn’t “harness” publishers to act collectively.

And Judge Cote asked for Ryan’s response to Apple’s argument — summarized by Snyder in the morning — that ebook prices didn’t go up at the launch of the iBookstore, because without an iBookstore, publishers would have windowed the ebooks and so they would have not been available for sale at all. This argument, Ryan responded, assumes that Apple knows what would have happened in a truly competitive market. It’s “not so clear” that the publishers “would have been successful in withholding ebooks for any period of time,” he said, adding that Penguin and Macmillan were against windowing anyway.

The day ended with a brief and energetic presentation from Texas assistant attorney general Eric Lipman, who is representing the states in the case. He went through the ways that Apple’s move to agency pricing had been bad for consumers, noting that among other things Amazon had lost the ability to run ebook promotions like buy-one-get-one-free, and that it wasn’t able to include agency publishers’ books in the Kindle Owners’ Lending Library.

Judge Cote then thanked counsel and said they had both done an excellent job. It could be weeks or months before she reaches her verdict.

Here’s the DOJ’s slide deck:

Doj Summation

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2 Responses to “DOJ compares Apple and publishers to oil cartels; now sit back and wait for the verdict”

  1. I publish through the iBookstore. The DOJ lawyers don’t know what they’re talking about. Apple’s pricing bands exist to make it easier to price an ebook for a different currency. All I need do is put it in the same price band. That saves time, particularly when you’ve got several dozen countries to fuss with.

    In comparison, when I publish print books through Amazon’s CreateSpace, I have to klutz around with exchange rates to make sure my return is roughly the same in each country. Even though CreateSpace sells in far fewer countries, all that calculating takes more time.

    Throughout this dispute, the DOJ lawyers have shown a woeful ignorance of the ebook market. It’s hardly an OPEC-like oil cartel. At times, particularly when the Big Six publishers have been involved, it’s more like a Three Stooges film.

    Publishing is not an industry that’s used to change. It changed little from the 1930s until about 2000, when Amazon became a major online book retailer. Having to adapt to online sales plus a new digital product (the first real change in half a millenium) has been hard for traditional publishers. Cutting them some slack and giving them time to adjust makes far more sense that federal lawsuits.

    Both the agency model (iBookstore) and subscriptions (Netflix) are naturals for digital distribution while the wholesale/retail model isn’t. Whatever this particular court rules, the agency model will remain.

    –Michael W. Perry, Hospital Gowns and Other Embarrassments