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The decision could have taken months, but U.S. District Judge Denise Cote took only a couple of weeks to rule that Apple (s AAPL) was guilty of colluding with publishers to set ebook prices, announcing her decision on Wednesday morning. (Here’s the full decision as a PDF.)
What does the judge say in her ruling?
Judge Cote came down on the side of the U.S. government, arguing in her 160-page ruling that the publishers — all of whom settled — conspired with each other to raise ebook prices and that “Apple played a central role in facilitating and executing that conspiracy. Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.”
Judge Cote also says that Apple and the publishers “shared one overarching interest — that there be no price competition at the retail level,” especially from Amazon, and thus enacted agency pricing. “Apple seized the moment and brilliantly played its hand,” Cote writes, providing publishers “with the vision, the format, the timetable, and the coordination that they needed to raise ebook prices.” Thus “through the vehicle of the Apple agency agreements, the prices in the nascent ebook industry shifted upward, in some cases 50% or more for an individual title. Virtually overnight, Apple got an attractive, additional feature for its iPad and a guaranteed new revenue stream, and the Publisher Defendants removed Amazon’s ability to price their ebooks at $9.99.”
What will Apple do now?
Apple plans to appeal, saying in a statement:
“Apple did not conspire to fix ebook pricing and we will continue to fight against these false accusations. When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry. We’ve done nothing wrong and we will appeal the judge’s decision.”
What will the court force Apple to do?
Judge Cote plans to schedule a separate hearing to determine damages and other consequences for Apple. These could be stayed pending appeal.
Because all of the publishers in the case have settled and have entered into new agreements with Apple, it is unclear what kinds of changes Apple could be forced to make. There are a few possible answers, however, in a government pre-trial brief. Publishers Lunch took a look through them last month and noted, for instance, that Apple might be prevented from including MFN clauses or price tiers in its contracts with any publishers (not just those who settled).
The DOJ also suggested that the court could require Apple to let retailers sell ebooks from their apps without taking a 30 percent cut on in-app purchases. This would be a major change in the way that Apple does business. Specifically, the DOJ writes (download the filing as a PDF here; relevant passage on p. 40):
“Additionally, the Court may require that Apple (a) permit all e-book reader apps currently in the App Store to remain in the App Store on the same terms and conditions as are generally available to other apps; (b) accept any new e-book reader app or any update to an e- book reader app unless Apple can demonstrate that the new e-book reader app raises greater security issues or creates greater stability issues than other apps sold in the App Store; and (c) permit other e-book retailers to sell e-books through their apps to Apple devices without having to pay an in-app commission.”
Of course, the fact that the DOJ might like these remedies does not mean that Judge Cote would agree to them.
What happens to ebook prices?
Consumers are likely to see few pricing changes when they are shopping for ebooks, because all five publisher defendants have already settled in the case and agreed to modified agency pricing agreements that forbid them from restricting retailer discounting for two years. Amazon and other retailers have been discounting books for months. Amazon could get more aggressive about price cutting, however; see below.
Will consumers get any money?
The states are seeking damages on behalf of consumers. In the states’ settlements with publishers, consumers who bought qualifying ebooks from Amazon, Barnes & Noble, Kobo or Apple between April 1, 2010 and May 21, 2012 received account credits, with payouts per book ranging from $0.25 to $1.32. Consumers might get more credits from Apple, though it is unclear whether those would apply only to books purchased from the iBookstore or would apply to ebooks purchased from other retailers as well.
What will Amazon do?
Despite the publisher settlements that allow it to do so, Amazon hasn’t drastically slashed prices on those publishers’ ebooks, or offered any type of bundles or buy-one-get-one-free deals. Take a look at the New York Times bestsellers for sale in the Kindle store, for instance, and you’ll see plenty priced above the $9.99 price that was such a huge point of discussion during the trial.
With Judge Cote’s decision in, however, it’s possible that Amazon could get more aggressive about offering these discounts, which Apple and other ebook retailers might then try to match. Apple has matched many of Amazon’s discounts so far, but the practice isn’t in its DNA as it has been able to rely on MFNs for other types of digital content.