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Apple Found Guilty of Conspiring to Fix Prices in E-Book Trial [Updated]

ibooks_iconReuters briefly reports that a U.S. federal judge has found Apple guilty of price fixing in the lawsuit brought by the U.S. Department of Justice and state governments.
A federal judge on Wednesday ruled that Apple Inc conspired to raise the retail prices of e-books, and said a trial for damages will follow.

The decision by U.S. District Judge Denise Cote in Manhattan is a victory for the U.S. government and various states, which the judge said are entitled to injunctive relief.
The government had argued that Apple served as a "ringmaster" in conspiring with publishers to raise prices of e-books as part of an effort to change the business model of the industry and weaken Amazon's dominant position in the market. All of the publishers ultimately settled the case, but Apple fought to the end, insisting that it could not admit to doing something it did not do.

A separate trial will need to be held in order to determine damages to be levied against Apple.

We've uploaded the full 160-page decision by Judge Denise Cote for those interested in reading more.
The question in this case has always been a narrow one: whether Apple participated in a price-fixing scheme in violation of this country’s antitrust laws. Apple is liable here for facilitating and encouraging the Publisher Defendants’ collective, illegal restraint of trade. Through their conspiracy they forced Amazon (and other resellers) to relinquish retail pricing authority and then they raised retail e-book prices. Those higher prices were not the result of regular market forces but of a scheme in which Apple was a full participant.
Update 7:13 AM: Unsurprisingly, Apple has announced that it will appeal the decision.
Apple spokesman Tom Neumayr says Apple didn't conspire to fix e-book pricing and would continue to fight the "false accusations." He says Apple brought much needed innovation and competition into the market in 2010.

Top Rated Comments

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17 months ago
Excellent!

A win for the consumer!
Rating: 49 Votes
17 months ago

Excellent!

A win for the consumer!


A win for the consumer, up until the point at which Amazon finishes driving out any and all competition.
Rating: 38 Votes
17 months ago
I always felt it was pretty clear that Apple was guilty.
Rating: 36 Votes
17 months ago
What? You mean Apple is greedy? Eye opener!
Rating: 30 Votes
17 months ago
Where did she get her law degree at? Night School with Luis Tully?

A publisher setting the price for an eBook in the iBookstore is no different than me, as a developer, setting the price for my app in the App Store.

#EpicFail
Rating: 25 Votes
17 months ago
This was OBVIOUS after the email from Jobs was released. I am not typically a fan of the word "greedy" to describe companies since they are in business to make money. Unfortunately Apple takes it to a new level, but they have been successful at it.

My guess is that they will pay less than they already paid their counsel.
Rating: 24 Votes
17 months ago
Unfortunate. A victory for Amazon in its quest for world domination.
Rating: 19 Votes
17 months ago

Unfortunate. A victory for Amazon in its quest for world domination.


In providing cheaper ebooks to consumers? OH NO.

I guess I forgot that in your eyes Apple "dominating" the world is good, but some other company like Amazon that doesn't price gouge the ever loving hell out of every product it sells is just pure evil.
Rating: 18 Votes
17 months ago
If you looked at the evidence (emails, time and date stamps, sequence of events, etc) there was little to no doubt this would not end well for Apple.
Rating: 17 Votes
17 months ago
This is worth a repost.



This is the top comment on this topic @ r/technology.

http://www.reddit.com/r/technology/comments/1fisj9/us_takes_apple_to_trial_over_ebooks_pricefixing/

[–]competitionroolz 2581 points 1 day ago*x2
Hi, all. Long time lurker, first time poster. I am an antitrust lawyer (among other things) and have followed this case closely, because it is interesting. Lots of the information in this thread is not accurate, probably because the coverage of this case fails in large part to capture its nuances. I am accordingly going to try to explain what is up.

Allow me to set the stage. Back in 2009, eBooks were sold using the traditional retail model, i.e. publishers sold them to resellers (like Amazon) and the resellers sold them at whatever price they chose. Amazon chose to sell them cheaply (at $9.99), even sometimes below cost, because they wanted everyone to buy Kindles and they thought cheap eBooks were the best way to make that happen. Even though the price at which Amazon sold eBooks to consumers did not directly affect the price the publishers received for those eBooks, the publishers still hated the cheap price, primarily because it threatened the paper book industry, i.e. if eBooks were cheap, people would more readily switch to that format instead of buying paper books (I believe publishers made more money off paper books).

Around this time, Apple was looking to introduce this neat new product called an “iPad” which, among other things, could serve as an eBook reader. The then-living Steve Jobs also hated what Amazon was doing, because it led to a perception that $9.99 was the proper price for an eBook and this limited the price at which Apple could sell eBooks through the iBookstore, meaning Apple made less money. As such, both Apple and the publishers had tremendous incentive to prevent Amazon from selling discounted eBooks.

So, what were the poor beleaguered publishers to do? Well, there was this other way of selling eBooks, called the “Agency Model.” As opposed to the traditional method of reselling eBooks described above (publisher sells to reseller, reseller sells to consumer at price it chooses), when a reseller sells an eBook pursuant to the Agency Model, the publisher from which the eBook originated controls the price at which the eBook is sold to the consumer. In other words, the contracts between the publishers and Amazon (for example) would require Amazon to sell that eBook at a price dictated by the publisher, thereby preventing Amazon (or anyone) from discounting eBooks.

There is a problem, though: if only one publisher begins selling books pursuant to the Agency Model, all that happens is that that publisher’s eBooks get more expensive and price-sensitive consumers switch to cheaper eBooks from other publishers. So the agency strategy only works if all publishers implement the strategy at the same time. It is the classic collective action problem: the benefits exist only if all parties move together, while the burdens fall on any party moving independently.

SPOILER ALERT: THIS IS WHERE THINGS GET ILLEGAL. Two things then (allegedly!) happen, one involving Apple and one not. The latter first: the publishers begin discussing among themselves agreeing to implement the Agency Model simultaneously, thereby making sure prices rise across the board. But they could not really make it happen until the second thing happened.

The second thing: Enter Jobs and the iPad. Jobs and Apple wished to switch the entire publishing industry to the Agency Model and, accordingly (also allegedly!) served as a go-between through which the publishers agreed to simultaneously switch to the Agency Model. In other words, Jobs went to publisher #1 and said “will you implement the Agency Model if publishers ##2,3,4, and 5 do?” Publisher #1 says “yes!” Jobs then goes to publisher 2 and says “Publisher #1 has agreed to switch to the Agency Model if you do. That cool?” Publisher #2 says “yes!” And so on. Pretty soon, Jobs has orchestrated an industry-wide agreement to impose the Agency Model.

The implementation of the Agency Model occurs essentially simultaneously with the introduction of the iPad. Amazon kicks and screams and fights, but succumbs to the model after some publishers just stop doing business with it until it agrees to do so. Now, the publishers have the ability to dictate the price at which Amazon and other resellers sell eBooks to consumers. They exercise that right to impose an across-the-board price increase on eBooks sold through all outlets. As a practical matter, this means the price for eBooks published by major publishers immediately jumps from $9.99 to $12.99 (in most instances).

Brief digression into antitrust law: What is critical to the wrongdoing here is the fact that there were agreements between the publishers pertaining to price. Because the publishers are competitors, the agreement was horizontal, meaning they occupy the same place in the distribution chain and sell to the same people. Horizontal agreements pertaining to price are the “supreme evil” condemned by the antitrust laws, and are the very most illegal thing competitors can do. This is because there is no possible competitive justification for a price-fixing agreement. What this means is that if Justice and the private plaintiffs can demonstrate the publishers agreed to put this agreement in place, the case is over and the publishers lose. So, the publishers, when caught, are up **** creek, and they all settle.

So, what about Apple? Because Apple does not compete with the publishers, its liability is premised on the fact that it orchestrated the agreements between the publishers. In other words, it is not really liable for any agreements it, itself, made. Rather, its liability (if proven) stems from the fact that it worked behind the scenes to make the horizontal agreements happen. It is a so-called “hub-and-spoke” conspiracy. Think of a wagon wheel. Apple is the hub. The publishers are the spokes. And the rim of the wheel is the illegal agreement. While Apple is not directly in competition with any of the publishers, by inserting itself as the hub through which the illegal conduct was facilitated, it incurred liability. I have not seen their pretrial statement, but I would guess their defense is that there may very well have been an illegal agreement between the publishers, but they did not make it happen.

That is the long and short of it. Couple of folks on here made reference to most favored nations clauses. This case really is not about those – they existed in the agreements, sure, and they were bad (and likely an enforcement mechanism), but the wrongdoing was the agreement on price.
Couple folks also made reference to monopolization. Also not an issue here. Apple is not, and never was, a monopolist in the eBooks market. The case is about horizontal agreement, i.e. good old cartelization & price-fixing.
It is interesting stuff, at least to me. I hope this explanation is helpful to some of you. Now I will go back to editing my brief.

TL/DR: This case is really just about a fancy new way of fixing prices, and everyone is guilty as hell.

Edit: To fix typos (typed Amazon where I meant to type Apple in last sentence of para 3; fixed there/there typo; similar etc.)

Edit: All of the above is based on allegations, not proof. Nothing will be proven until the trial is over, and if the government can't prove what they claim is true, they will lose. They might lose no matter what. Trials are scary, man.
Rating: 14 Votes

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