

Judge rules Apple conspired to raise prices on e-books - sigzero
http://www.reuters.com/article/2013/07/10/us-apple-ebooks-idUSBRE9690GE20130710

======
pico303
The judge was absolutely correct to rule this way. Some people cry
"miscarriage of justice", but you need to look back on what happened when the
iPad and iBooks came out.

Amazon ruled the ereader/ebook marketplace, because it was the first company
to offer both a reader and electronic books together, so you could order books
right of the reader. A page from Apple's playbook, a la the iPod.

At the time, ebooks were sold like print books, where the retailer set the
price. This is how most retail works, and let Amazon drastically discount
their ebooks so they weren't taking any profit, just to move Kindles. The
publisher had no say over the price of the book, so a Kindle owner could get
ebooks cheaper than print (which, if you think about it, makes perfect sense).
The publisher didn't make any less, so the only one paying the price was
Amazon (and they took a hit on their stock for it, if I recall). The
publishers were forced into this model by Amazon because there was no other
resource for ebooks, and everybody loved their Kindles so to deny that market
meant your competition would kill you if you didn't play along.

Apple came along with the iPad and that gave publishers an out. If you go back
to that time and read the articles on this, Apple actively worked with
publishers to change the model to one that was better for publishers and
Apple, but worse for consumers. They created a new kind of contract that let
the publisher set the price of the ebook, which is really unheard of in
retail, except for maybe video game sales. At its heart, it's really an anti-
competitive practice, though that may seem counterintuitive. Look at it this
way: it's a great way to break into a marketplace controlled by a stronger
competitor without really competing. You force your competitor to raise their
prices and thus reduce the attractiveness of what they offer, and suddenly you
have a share in the market without having to compete with better products or
prices.

I also don't understand pro-Apple stance on this issue. I'm a huge fan of
Apple products, but I was not a fan of this change in the ebook market. My
guess is this opposition is coming from people that don't buy a lot of ebooks
on either the iBook store or Amazon, or ever experienced the Kindle store
prior to this change in the market. It used to be that ebooks on Amazon were
priced around or less than the price of a paperback. Now they tend to cost the
same or more than the hardbound edition. How is this a good thing for
consumers? You now have publishers in control of the ebook market the same way
they're in control of the video game market, through price fixing and
predatory pricing models, and retailers have no say in the matter.

~~~
skygazer
Maybe I'm daft, but it doesn't add up to me. Perhaps you can point out the
flaw in my thinking? Apple already had a marketplace, the App Store, that let
sellers set their own prices — Apple just wanted their hefty 30%, regardless
of consumer price. It seems that was and is acceptable to the law and the
world at large. In fact, before iBooks, publishers were already selling their
books as stand alone apps under this model. When Apple created iBooks, they
continued this existing model in their newly created ebook marketplace — that
seems entirely natural and unprovocative. It can't be that the agency model is
only illegal for books.

It seems to me if an offense was committed, it was committed by publishers in
renegotiating their Amazon contracts, in unison, towards the agency model. How
is Apple implicated?

~~~
dragonwriter
> It can't be that the agency model is only illegal for books.

The agency model wasn't the illegal thing, it was just the one part of the
mechanism of the used for the illegal price fixing conspiracy.

> It seems to me if an offense was committed, it was committed by publishers
> in renegotiating their Amazon contracts, in unison, towards the agency
> model.

The publishers were, indeed, charged with conspiring in the price fixing
scheme. All of the charged publishers _settled_ with the DoJ rather than going
to trial. Apple wasn't singled out, it just seemed that way because they were
the only defendant left when the trial started.

> How is Apple implicated?

Apple is implicated as a member of the publishers' horizontal price-fixing
conspiracy who sought to advance, encourage, and profit from that conspiracy.

------
DannyBee
This is no surprise, the judge is essentially constrained to rule this way,
given the evidence.

Some people are arguing about amazon, but again, that is irrelevant legally.

As I wrote 43 days ago here:

"A finding about Amazon will be completely irrelevant to Apple's conduct in
this case. The question is whether Apple committed horizontal price fixing.
Amazon's possibly illegal conduct is going to be completely irrelevant in
that, as horizontal price fixing is still per-se illegal. They could prove
Amazon hurt the market a lot. They could prove whatever they like. As long as
the DOJ proves they committed horizontal price fixing, it's game over. Now,
the supreme court may, in the end, decide horizontal price fixing should be
analyzed under the rule of reason instead of being a per-se violation, but
that's completely irrelevant to the current state of the law, and in fact,
Apple's behavior. SCOTUS is not going to change the doctrine because they
think Apple did the right thing here, they will change doctrine because they
think the doctrine was wrong in general. However, that doctrine is the current
state of the law, and what this case, and the appeal, will be analyzed under."

This is exactly what happened. From the decision:

    
    
      "In sum, the Plaintiffs have shown not just by a 
      preponderance of the evidence, see Herman & MacLean v. 
      Huddleston, 459 U.S. 375, 390 (1983), but through compelling 
      direct and circumstantial evidence that Apple participated 
      in and facilitated a horizontal price-fixing conspiracy. As 
      a result, they have proven a per se violation of the Sherman 
      Act."
    
    

I think, sadly, there is a good chance the supreme court will change
horizontal price fixing to be under the rule of reason, and then we will
finally all be screwed (The rule of reason analysis is why you see so much
vertical price fixing these days, since it is no longer a per-se violation)

Note that the judge, being prescient, also wrote part of the decision to
explain why she believes Apple would also be guilty under the rule of reason
(IE if it was not a per-se violation). This portion of the decision takes into
account Amazon's conduct.

This was done so that if the supreme court declares horizontal price fixing to
be subject to the rule of reason, they won't need a new trial.

~~~
tunesmith
Can you explain the distinction between horizontal price fixing and vertical
price fixing with an example?

~~~
DannyBee
dragonwriter's explanation is a good one.

Vertical price fixing is also rarely naked "price fixing" (IE directing a
price to sell something at), it's usually resale price maintenance:

Two fake (I think!) examples:

Microsoft tells amazon they can't sell the xbox 360 for less than 399.99
(minimum resale price maintenance)

Microsoft tells amazon they can't sell the xbox 360 for more than 299.99
(maximum resale price maintenance)

Horizontal, on the other hand would look like this:

Microsoft and Sony agree that they will not let anyone sell the xbox360 or
playstation 3 for less/more than 399.99.

Your local gas stations get together and agree they won't undercut each
other's prices anymore.

(IE they've made a horizontal agreement not to compete on price)

~~~
akandiah
> (IE they've made a horizontal agreement not to compete on price)

So it'd be a cartel-like behaviour?

~~~
DannyBee
In the sense that price fixing is one of many cartel behaviors, yes.

Cartels do plenty of other antitrust related behaviors too (bid rigging,
gouging, etc)

------
k-mcgrady
Could someone explain how they came to this judgement? It doesn't make any
sense to me. For example:

>>"The U.S. Department of Justice said this conspiracy was designed to
undercut online retailer Amazon.com Inc's (AMZN.O) dominance of the fast-
growing e-books market."

How can they undercut Amazon's dominance by charging more?? It might make them
look better to publishers but not consumers. From my perspective Apple looked
at the market (Amazon), realised their pricing wasn't sustainable, and agreed
to a more sustainable model with publishers. I could understand the problem if
Apple tried to raise prices and had a monopoly on ebooks but the fact
consumers could just download the Kindle app to an iOS device and get the
lower prices (and Apple was new to the market) rules out that argument.

~~~
JimmaDaRustla
Apple (Jobs) were bullying publishers into contracts and abandon Amazon.

The best part is how Apple decided that the Publisher sets the price, and
Apple gets 30% regardless of profit margin. Apple also stated that they were
able to price match anyone who undersold them, and they STILL get 30%, pushing
losses onto the Publisher. At least with Amazon, they ate the loss due to
their price fixing.

Edit: Fixed last paragraph

~~~
darkchasma
Exactly how would Apple bully a Publisher? Jobs went and pulled down the CEO's
pants?

~~~
ceejayoz
"Lower the price or we won't sell your books"?

~~~
JimmaDaRustla
It was more like "Let us sell your books at higher prices, or lose money to
Amazon and piracy."

~~~
threeseed
The publishers had the choice to go with Amazon but decided against it because
they made more money with Apple.

So in what way is this bullying again ?

~~~
JimmaDaRustla
I don't think you understand the concept of price fixing - The intent is that
Apple is making the decision for the Publisher's by proposing an offer that
isn't in the sense of "pros vs cons", but rather "right vs wrong". Of course
most Publishers agreed because it was for the greater good of their company,
and the only one hung up with the bad rep is their ring master.

"You can either join us, or we'll collectively squash you."

------
mullingitover
I'm shocked, SHOCKED, that a company that was colluding with competitors to
suppress their workers' wages[1] would also collude with publishers to rig the
ebook market.

[1] [http://www.inquisitr.com/486164/google-intel-and-apple-
under...](http://www.inquisitr.com/486164/google-intel-and-apple-under-
investigation-for-hiring-collusion/)

~~~
astrodust
Contracts of that sort have been around for decades. The enforceability of
them is somewhat questionable.

~~~
mullingitover
At least in California, I was under the impression that there was really no
question--they're totally unenforceable unless you plan to pay your employee
full wages for the entire duration that they're not allowed to work for the
competition.

But this wasn't about no-compete clauses, this was about the companies having
an off-the-books agreement not to give unsolicited job offers to the
competitors' employees.

------
srik1234
Apple is absolutely wrong with Most Favored clause. Even if they did not
conspire with publishers directly, publishers effectively had the same
opportunity and re-did their contracts with Amazon. The most concerning thing
is that current law is granting amazon an unequivocal monopoly status.
Lossleader strategy is employed to the extreme by amazon. Laws need to address
that. At some point Amazon will raise prices. Current situation is essentially
a loss for consumers and publishing industry.

~~~
fpgeek
There are plenty of other companies that can check Amazon. Consider Google.
They make they can easily out-discount Amazon, they're also cross-platform
and... and now that the Google Books scanning cases are turning in their favor
they may soon have an huge new asset Amazon (and others) will have some
trouble matching or beating.

~~~
srik1234
I'm sure other cash rich companies can mimic amazon strategy. Apple,google,
microsoft, samsung certainly can. That is not good for industry though.
Startups will have unbelievably tough time competing with Amazon. I cant
remember any startup in recent times that ventured into ebook sales.
Innvoation from other startups in ebooks creation, consumption is hard to come
by, when amazon is playing a lossleader strategy forever.

~~~
fpgeek
First, no one has proven that Amazon was ever playing a true loss-leader
strategy in ebooks, as opposed to losing money on bestsellers and making it up
on the backlist.

Second, the existing DoJ settlement specifically allows publishers to police
this. One of the terms the settling publishers are allowed to insist on is "no
losing money on my catalog overall". That's more than enough to prevent truly
anti-competitive discounting.

Third, yes, startups will have a hard time. But they had a hard time with the
agency model too - which restricted their maneuvering room in significant
ways. For instance, with a publisher-specified price you weren't just
forbidden from charging "too little", you couldn't charge "too much" either.
That means models where startups charged a premium for ebooks in order to
support other services their target readers wanted were no longer possible.

------
mmuro
Wow, I'm a little surprised at this considering the arguments Apple's legal
team made.

Seemed pretty clear to me there was nothing that Apple did to force Amazon to
raise their prices.

~~~
jvm
> An MFN provision will frequently appear in contracts between wholesalers and
> retailers and it ensures that the wholesaler will provide the retailer with
> the best wholesale price. But Apple adopted it in the agency model to
> require that the publishers adjust e-book prices in the iBookstore to match
> the lowest price offered by any other retailer — regardless of whether the
> publisher controlled the pricing in that retailer.

That last sentence means that publishers basically had to force Amazon onto
the agency model, or else lose money selling on Apple's store. And their
intention was clearly to force Amazon onto the agency model causing Amazon's
consumer prices to increase.

------
aroch
What I find highly annoying about this trial is Judge Cote had already formed
her opinion prior to trial... in a statement to reporters she essentially said
she thought Apple was guilty before hearing any evidence.

This is, essentially, a sham trial in which the USG was always going to win.

~~~
rayiner
It wasn't a statement to reporters, it was a statement in a preliminary
hearing. It was basically the judge telling the parties: "look, this is where
I think it's going to go" so the parties could use that information in
settlement talks and possibly avoid the expense of a trial.

See: [http://tech.fortune.cnn.com/2013/05/24/apple-ebooks-
antitrus...](http://tech.fortune.cnn.com/2013/05/24/apple-ebooks-antitrust-
judge).

"Asked during a preliminary hearing Thursday to share her thoughts about the
Department of Justice's case against Apple (AAPL) in the long-awaited e-book
antitrust trial, U.S. District Judge Denise Cote said this, according to
Reuters..."

In bench trials, where the judge is making the decision anyway, the judge does
not sit as a tabula rasa absorbing the evidence until the very end of the
trial. Like anybody would do, they read the materials in the pleadings and
some of the evidence and form an initial opinion. It is not uncommon for them
to share this opinion with the parties as the case progresses so that the
parties can settle before things go any further.

------
morgante
Yet another miscarriage of justice. The entire line of logic seems to have
been that because Apple's actions led to increased prices it _must_ be a
conspiracy.

Amazon was, and is, the monopolist using classic monopolist tactics (lock-in,
undercutting prices, etc.) to retain a monopoly. Of course once their monopoly
was ensured they'd pivot to make a true profit if pesky Apple hadn't
interfered: [http://www.nytimes.com/2013/07/05/business/as-competition-
wa...](http://www.nytimes.com/2013/07/05/business/as-competition-wanes-amazon-
cuts-back-its-discounts.html?pagewanted=all)

I can't help but feel that this was driven by politics/optics (to your average
person, _of course_ lower prices is better).

~~~
fpgeek
Put Apple to the side for the moment and just look at the publishers. Did they
conspire? I think it is obvious that they did.

At the time of the agency switch it was obvious something fishy was going on
with the whole Amazon v MacMillan "buy button" battle. The DoJ's investigation
uncovered plenty of evidence about what that was: a conspiracy among
publishers to force Amazon to the agency model. And all the publishers settled
before getting to trial, which certainly supports the strength of the DoJ's
evidence and case.

Now consider a publisher conspiracy. The DoJ's argument against Apple is that
they were the enforcer that made the publisher conspiracy possible. You may
agree or disagree with the judge about whether or not the evidence supports
that argument, but it is a serious, carefully-thought-out line of logic either
way.

------
pinaceae
Amazon 1 : Consumers 0

and another great ruling. let's wait for that monopoly around ebooks to fully
develop until it's too late.

~~~
Kylekramer
This angle of "why prosecute Apple when Amazon has the monopoly" is just lazy.
Monopolies, which Amazon does not even have and is unlikely to gain, aren't
illegal. Conspiring to raise prices is illegal. Amazon just has the potential
to abuse consumers (maybe, possibly, in the future) due to their entirely
legal success. Apple already did abuse consumers.

~~~
DannoHung
Give me a call back when Amazon removes the drm from their file formats and
I'll give a flying fuck about what's legal or not.

~~~
fpgeek
To be fair, any book a publisher wants sold DRM-free, Amazon sells DRM-free.
Many publishers insist on DRM as a condition of sale. Your beef is with them,
not Amazon.

And by the way, DRM is at the heart of this ebook conspiracy. One of the
publishers' fears was that too many readers would be trapped in Amazon's
ecosystem by DRM, giving Amazon too much leverage. The correct response to
that problem is to drop the pointless, self-inflicted DRM (as some have
started doing in response to the antitrust cases). Instead, the publishers
chose to work with Apple to try and limit Amazon's power...

~~~
ernesth
> To be fair, any book a publisher wants sold DRM-free, Amazon sells DRM-free.

But only after threatening them that their books won't benefit from the latest
amazon technologies such as text-to-speech if they opt out of DRM!

~~~
fpgeek
Oh? I hadn't heard about that. It certainly sounds bad. Do you have a pointer
to more on this?

~~~
ernesth
Yes, in french unfortunately:
[http://lexbrage.tumblr.com/post/13212628647/amazon-
bragelonn...](http://lexbrage.tumblr.com/post/13212628647/amazon-bragelonne-
drm)

"Nous avons rencontré [Amazon] recemment pour comprendre cet ajout de DRM sur
nos titres et en quoi consitait cette DRM un peu spéciale. [...Elle] embarque
également une couche software qui active les fonctionnalités de l’ecosystème
Amazon. La liste est variée mais passe du “Text to Speech” au “Facebook
Connect” et toutes les prochaines évolutions d’Amazon. Et croyez moi, elle
vont être nombreuses dans les mois à venir."

Quick translation: we (the publisher bragelonne) have met with amazon to
understand why they added DRM to our books without our consent and what
purpose this DRM served. [...] It contains a software part that enables
various amazon features such as Text-to-speech or facebook connect as well as
the many future evolutions.

------
bjustin
Even if Amazon never got into selling ebooks, Apple would have wanted the same
terms: a 30% cut of the sale price, and sane pricing for ebooks. It matches
their terms for music[1] and they take the same 30% cut for apps.

I wonder what would have happened if Apple never mentioned or alluded to
Amazon in licensing discussions. It seems like mentions of Amazon are included
in all of the damning evidence.

[1] I don't know about TV shows and movies, but I imagine it is the same for
them as well.

~~~
josephlord
I think as long as they were acting as the conduit for pricing information and
plans between competitors they were in a risky position (or were at least
putting the competitors in a risky position). The talk about their ability to
raise/increase prices looked fairly incriminating to my eyes.

What I wonder is if they could have achieved the same result with less
explicit talk about what the other publishers were doing and without
discussing it as an opportunity to raise prices but to set whatever prices
they wanted.

------
jljljl
_" At trial, the Justice Department said it wanted to block Apple from using
the agency business model for two years, and to stop the company from entering
contracts that insure it will offer the lowest retail prices."_

Does anyone know if this just applies to ebooks? Or might this ruling impact
their ability to apply agency model and "most favored nation" contracts across
all their content marketplaces?

~~~
skygazer
From the ruling, it appears Apple is in trouble for knowingly and actively
providing a venue for conspiring publishers to conspire, which is illegal.
Interestingly, the judge points out there's no evidence that Apple wanted to
raise prices at all. But there wasn't anything inherently wrong with the
agency model or MFN clauses, except in relation to the publishers intent to
increase prices.

------
JimmaDaRustla
Great article just posted by Ars: [http://arstechnica.com/tech-
policy/2013/07/how-apple-led-an-...](http://arstechnica.com/tech-
policy/2013/07/how-apple-led-an-e-book-price-conspiracy-in-the-judges-words/)

~~~
July413
Wow:

 _Random House, the largest publisher, resisted Apple 's call to adopt the
agency model in 2010. But the company capitulated a year later in order to get
its books on the iPad.

"Apple decided to pressure Random House to join the iBookstore," Cote wrote.
"As Cue wrote to Apple CEO Tim Cook, 'When we get Random House, it will be
over for everyone.' Apple had its opportunity in the Fall of 2010, when Random
House submitted some e-book apps to Apple’s App Store. Cue advised Random
House that Apple was only interested in doing 'an overall deal' with Random
House. By December, they had begun negotiations, and Random House executed an
agency agreement with Apple in mid-January 2011. In an e-mail to [Steve] Jobs,
Cue attributed Random House’s capitulation in part to 'the fact that I
prevented an app from Random House from going live in the app store this
week.'"_

For a second I thought I was reading about Bill's Microsoft not Steve's Apple.

~~~
fpgeek
The biggest tactical difference between Bill's Microsoft and Steve's Apple was
always in the level of market power each could exert at any given point in
time.

------
ianstallings
I don't like price rigging but reading the material around the case I don't
think it was unfair of Apple to try and charge more with its partners through
their own venue.

I'm gonna play armchair legal analyst here and say this is a smack down by the
government because Apple didn't want to settle and pay the fine. Because they
thought they were in the right. I tend to agree.

Let me clarify since people are already down voting because they disagree:
What if Walmart told Hasbro that it could sell its GI Joe action figures for
$5 more than K-Mart could? Then they went to negotiate an agreement to
purchase as many as possible. Would it not be in Hasbro's best interest to
sell as many as possible through Walmart? When K-Mart comes to negotiate it
will have to make a justification for why it can't charge more, that's how
markets work. K-Mart will either convince Hasbro to still sell the items for
cheaper or it will have to renegotiate.

Now throw in the fact that these were not real-life items. There is no
limitation on how many items each retailer can acquire. The number is
infinite.

Does it really seem so terrible now? Try not to appeal to emotion when making
the decision.

~~~
Kylekramer
The most favored nation clauses and the subsequent agency deals that were
pushed on competing ebook sellers by the publishers make it clear it wasn't
just Apple and partners working in their own venue to raise prices. It was a
tactic to use the iPad's launch as a moment of uncertainty that would allow
the publishers to raise prices across the entire industry.

Edit: To address your added analogy, I agree. Your proposed example does not
seem terrible. It is also not at all close to what happened with Apple and the
book publishers. It wasn't one company increasing prices successfully at one
store and then shopping the new deal to other stores. It was nearly the entire
industry swiftly pushing new deals designed to increase prices and break
Amazon's position of power in the industry. The increased prices weren't due
to the success of the prices in the iBookstore, but the legally binding
clauses and assurances from Apple and the other publishers that they would
present a united front. If Hasbro, Mattel, and every other major toy
manufacturer raised prices to K-Mart at the same time due to suggestions from
Walmart, I would object on intellectual and emotional levels. And I am sure
the DoJ would too.

------
faddotio
Commence with the cognitive dissonance!

~~~
skc
Already happening.

It's generally acceptable to describe Microsoft as a "convicted monopolist"
(despite there not having been a criminal case). One wonders if people will
also accept the labelling of Apple in such a manner when the dust finally
settles.

~~~
mitchty
What is this kind of reply, they've been convicted of monopoly behavior. Stop
rooting for companies like they are a sports team.

Here, Apple: convicted monopolist. Done. That was easy. I own a mac mini,
macbook pro, ipad, iphone5, 4s, etc.. and I'm a member of the developer
program to demonstrate my bias and proclivity to the platform. Doesn't mean
I'm pathologically tied to it (pathos in the debate sense).

------
antitrust
RIP "The Nice Guy Company"

Google 2010 Apple 2013

~~~
jusben1369
The idea that Steve Jobs ever spent a single day at Apple where he didn't play
extremely hard to win is kind of funny. He just overstepped the line here.

