After closing arguments, Apple's fate in e-book antitrust case goes to judge

Both Apple and the Justice Department made their closing salvos in a Manhattan courtroom

"Word games," an "overreaching narrative" and a "case of inferences" were a few choice phrases used by attorney Orin Snyder Thursday in closing arguments for Apple in the U.S. Department of Justice's antitrust, e-books price fixing case against the tech giant.

The DOJ brought the case against Apple and five of the largest book publishers in the U.S. for allegedly conspiring to limit price competition and raise prices in the e-book market in 2010 in an effort to stop Amazon from pricing their best-selling electronic books at US$9.99 each.

Both the DOJ and Apple are making their closing arguments Thursday before Judge Denise Cote, who will decide the outcome of the antitrust suit. The five large publishers also named in the DOJ suit have already settled for a cumulative $164 million, leaving Apple to defend its practices in court. Cote presided over the three-week, non-jury trial in the U.S. Southern District Court of New York in Manhattan.

For Apple's summation, Snyder characterized the interactions that Apple had with the five publishers as typical conversations and negotiations that accompany any business agreement. At no point did Apple try to coordinate the activities of the publishers in an attempt to fix the prices of electronic books for the market. "The evidence does not show this," Snyder told the court, arguing that the DOJ made this case solely on "overreaching" interpretation of electronic documents.

Snyder focused on the timeline between December 2009 and January 2010 to rebut the DOJ's assertions over what took place between Apple and the publishers. He noted that at the time there was "turmoil" in the e-book market and that Apple executives, who had no prior knowledge of this market, were speaking with publishing heads just to hear their concerns. He also offered multiple examples of disagreement between Apple and the publishers over the proposed contracts, this contention serving as proof that the parties were not acting in unison to fix retail prices.

The case stems from contracts that Apple made with the publishers in 2010, just before the company launched its iPad mobile computing device. In January of that year, each publisher -- HarperCollins, Penguin, Hachette, MacMillan, and Simon & Schuster -- agreed to let Apple sell their electronic books in a relatively novel business model, one in which Apple would sell their books at the prices the publishers had set, and reap 30 percent of the retail price.

This approach, called the agency model, differed from the standard decades-old wholesale model of book selling, in which the publisher, not the retailer, set the book prices. With the new agency approach, retailers "lost their ability to compete on price, including their ability to sell the most popular e-books for $9.99 or for other low prices," charged the DOJ in its complaint.

According to the testimony of Apple Senior Vice President Eddy Cue, publishers immediately expressed a desire to move electronic book sales to the agency model when he initially approached them in December 2009 to secure electronic book rights for the iPad.

The publishers saw the agency model as the solution to the issue of Amazon pricing the electronic versions of best selling books for $9.99, less than what the online retailer paid for these titles in many cases. The publishers worried that Amazon, which enjoyed a 90 percent share of the electronic book market in 2009, was lowering the perceived price point of books in consumers' eyes, as well as laying plans to cut publishers out of Amazon's book sales altogether and to deal with authors directly. The publishers had met throughout 2009 to discuss the issue, according to Apple.

Cue proposed the agency model to then Apple CEO Steve Jobs, who liked the idea, given that Apple was already using the agency model for its iTunes media store and the company's App store. So, in early January, Apple proposed an agency model agreement with all the publishers, in which Apple would in effect get a fixed 30 percent commission for each sale.

Apple also added a number of additional provisions to the contract. It established a tier of price points for books. Best sellers, for instance, could be priced at $12.99 and $14.99 and, later at the publishers' insistence, $16.99 and $19.99. Apple mandated caps, or limits to how much publishers could charge for electronic books. It prohibited publishers from both withholding best-selling titles from electronic release, and delaying the release of some titles in electronic form, a practice known as windowing.

Finally, Apple added what it called a "most favored nation" (MFN) clause. The MFN stipulated that the publishers must offer their electronic books to Apple at 70 percent of the lowest price offered on the retail market elsewhere. In this way Apple could match the lowest price of e-books elsewhere and still make its 30 percent cut.

The DOJ had argued that MFN was proof that Apple was trying to set the prices for e-books not just for itself, but for the entire industry. Snyder argued Apple was only looking out for its own best interest. Apple did not care what prices the publishers would charge, as long as Apple got its 30 percent cut. "If books were sold at $1.99, we'd make a ton of money," he said.

Snyder also pointed out that after Apple settled on the idea of including an MFN in its contract, it had no preferences as to whether the book publishers signed other retailers such as Amazon to an agency model. He showed a number of different pieces of correspondence that Cue and Jobs had had with publishers to back this point.

Five of the six largest book publishers all signed Apple agency contracts within a few days of one another in January (the sixth and largest publisher, Random House, abstained). Over the next few months, the publishers had set up other agency agreements with other retailers as well, such as Amazon.

Immediately after the contracts took effect in April 2010, and publishers moved all their retailers to the agency model, and prices of electronic books offered by both Amazon and Barnes & Noble increased by almost 20 percent, the DOJ calculated.

In his summation, Snyder made the case that the publishers, and even other retailers such as Barnes & Noble and Google, were already considering the use of the agency model before meeting with Cue. He noted for instance that Barnes & Noble had also approached the publishers in January 2010 with an agency model to sell e-books for its Nook reader. This was proof, he asserted, that the whole industry was about to undergo a transformation in how electronic books were sold to retailers.

While the DOJ had highlighted the many talks Cue had with publishing executives as evidence that they were coordinating activities, Snyder asserted that these meetings were simply introductory meetings and, later, individual contract negotiations. Snyder cast doubt on the idea of a price fixing conspiracy given that the publishers had already been in talks for more than a year about dealing with Amazon. "How can Apple be a ringmaster before the iBookstore was even a twinkle in Apple's eyes," he rhetorically asked, referring how up until late December 2009, Jobs wasn't even interested in entering the electronic book market.

At one point, Cote asked Snyder if Apple was aware that the publishers may have been colluding among themselves. "We don't have an opinion on that. It's not our burden" to disprove that type of assertion in court, he responded. He also pointed out that the contract negotiations between Apple and the publishers were far too contentious to be considered collusion. As of mid-January Apple didn't have any agreements with the publishers and each publisher had taken issue with different parts of the proposed agreement, such as the MFN clause, or the price caps. If there was a secret agreement already in place, the negotiations would have gone far more smoothly, he asserted.

When making its case, the DOJ had to prove anticompetitive behavior in a number of ways. It had to show that the publishers had conferred with one another in order to set up a new cross-publishing company pricing model that would limit retailer price control, and that Apple helped exchange information among the publishers. It also had to show that the publishers had attempted to conceal their communications. In addition, it had to show that consumers were harmed by this collusion.

Whether the DOJ has made its case sufficiently to Cote remains to be seen. Early reports indicated that she believed that the government had a strong case. Thus far, the DOJ has compiled a copious amount of email and other electronic documentation that it feels points to how the different parties worked with one another.

Legal observers, however, have doubted that the DOJ documentation is sufficient, and that its case relies too heavily on inference.

The DOJ will make its summation later Thursday.

Cote is expected to reach her decision within a few weeks.

Joab Jackson covers enterprise software and general technology breaking news for The IDG News Service. Follow Joab on Twitter at @Joab_Jackson. Joab's e-mail address is Joab_Jackson@idg.com

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Joab Jackson

IDG News Service
Topics: Apple, antitrust, legal, Civil lawsuits
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