Apple will today defend itself in a Manhattan court against a Department of Justice case accusing it of leading a cartel designed to force up prices of ebooks, Tim Cook having recently told the AllThingsD D11 conference that the case against it was “bizarre.”
The e-book case to me is bizarre. We’ve done nothing wrong there, and so we’re taking a very principled position. … We’re not going to sign something that says we did something we didn’t do. … So we’re going to fight.
At first blush, it does seem bizarre that Apple could be accused of leading a cartel in a market largely controlled by Amazon, but the claim here is that five leading publishers used their dominant position to force up prices – and that Apple put them up to it.
We tend to agree with AllThingsD that it’s tough to see how Apple can win the case when all five of its alleged ‘fellow cartel members’ have already held up their hands and settled with the DOJ, and where there is a clear paper-trail showing that Steve Jobs was instrumental in leading the changes that led to the price-fixing allegations …
A little background for anyone unfamiliar with the case. The long-standing pricing model for both paper and electronic books was the so-called wholesale model. Publishers sold in bulk to the retailers, and the retailers decided how much to charge. Because retailers were competing with each other, that kept prices down, with Amazon leading the away on ebook pricing with $9.99 bestseller deals.
What Apple – and specifically Steve Jobs – pushed for was a switch to what’s known as an agency pricing model, where publishers decided the price of their books, and retailers took a percentage cut. This maximised profits for publishers and retailers alike, but reduced price competition as the same book would cost the same wherever you bought it. Key to the success of the initiative was to persuade major publishers to tell Amazon that it would likewise need to switch to the agency model if if wished to continue buying from them, and for those publishers not to sell to anyone else at a lower price.
It’s alleged that Jobs wrote to five major publishers - HarperCollins, Penguin, Simon & Schuster, and Macmillan – and invited them to switch to the new model, and the DOJ seems to have some pretty compelling evidence of this, including an email from Steve Jobs to James Murdoch, a senior exec at the parent company of HarperCollins:
Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.
Jobs appeared to confirm the story in a comment to his biographer Walter Isaacson, saying that he told the publishers:
We’ll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.
US District Judge Denise Coote even took the unusual step of announcing that she believed that the DOJ would be able to prove its case.
Yet Apple seems confident it can win a case which it describes as based solely on hearsay.
“We strongly disagree with the court’s preliminary statements about the case,” Orin Snyder, Apple’s lead lawyer in the case, said yesterday in an e-mailed statement. “The court made clear that this was not a final ruling and that the evidence at trial will determine the verdict. This is what a trial is for.”
We’ll keep you advised …