Apple’s Ebooks Antitrust Trial Comes to An End: Will Apple Win?
Thursday, August 20, 2013, the Justice Department’s civil case against Apple for antitrust violations in the ebook markets ended with both sides giving closing arguments. This was a bench trial in the the federal court in Manhattan where Judge Denise Cote will decide who won. The gist of the case is that the United States Department of Justice (DOJ) claims that Apple engaged in an illegal arrangement with book publishers to raise the price of ebooks and force all ebook resellers, particularly Amazon, to go to an Agency model. Under the Agency model the publishers set the retail price, rather than the then existing wholesale model, where retailers, like Amazon set the price. DOJ claims that this consipired agreement to go to the Agency market resulted in ebook prices being raised, and thus this is a price-fixing case.
I didn’t attend the closing arguments but I do get a sense of what was argued as both the DOJ and Apple released the closing summation slides. Both sets of slides are extensive and you can see below what they are.
Apple’s Closing Slides
DOJ also presented its own closing slides.
DOJ argued that Apple acted as the “ringleader” in arranging the publishers to switch to an agency model in selling books to the Amazon, the dominant ebook seller before the iPad was launched in early 2010. DOJ claimed that Apple facilitated the agreement among publishers as Apple entered the ebook book market with the launch of the iPad and the iBook Store.
So what happened?1
DOJ’s Case And Argument
So the gist of DOJ’s case was that Apple was the “ring leader”” of a price-fixing conspiracy involving the major book publishers. The government claims that in the days and weeks before Apple launced the iPad in 2010, Apple reached out and convinced the publishers to go to an Agency model and raised prices above the $9.99 that at Amazon was charging. DOJ claims that Apple wanted to enter the e-book market but that Apple did not want to compete on price with Amazon’s very low pricing of $9.99 per e-book. DOJ claims that Apple sought a common agreement among four or five of the major publishers that supplied e-books to Amazon and the other e-book resellers. DOJ claimed that Apple convinced the book publishers to altre their practice of using a wholesale sales model where the reseller sets the price of the book to going to an Agency model where the publisher sets the price of the book and the reseller just takes a percentage of the price. DOJ claims that after the iPad was launched with the iBook Store and the illegal agreement in place, the price of ebooks increased as publishers made Amazon go to an Agency model and then raised the price of books that Amazon, Apple and other ebook resellers charged consumers. DOJ claims that Apple and the publishers used a “most favored nation” clause to fix prices. DOJ claimed that while the MFN clauses purported to give Apple the lowest price offered by publishers to other resellers, it caused the publishers to have uniform pricing. Significantly, prior to this trial, the other defendants, the publishers, each settled with DOJ without admitting or denying the charges but consenting to the relief sought by DOJ.
To bolster its case and head off Apple’s defenses, DOJ in its closing argued that Apple’s witnesses like Eddy Cue are not credible because they changed some testimony in the trial from what they previously testified in discovery.2 DOJ also argued that the price hike caused by Apple’s conduct wasn’t justified by an increase in competition, such as Apple innovating.
One of the more remarkable slides used by DOJ, and one that the Judge may find not believable, is slide 109 which has the heading: “Apple Admits the iBookstore Was Not Innovative.” The slide goes on to cite testimony that Amazon offered eBooks with embedded audio and video before Apple launched the iPad in 2010. Similarly, DOJ in that slide cited testimony that the Kindle app that came out on when the iPad was launched allowed for customization of fonts and that Apple copied Amazon’s implementation of allowing book pages to change from white to sepia.
I say that slide is “remarkable” because it seems somewhat absurd to say that Apple did not innovate. DOJ is seeking to undermine Apple’s claim of innovation by separating Apple’s creation and launch of the iPad from the launch of the iBook Store. Together, the iPad and iBook store were clearly a major innovation in ebooks as prior to the iPad ebooks were almost entirely dominated by Amazon and its simplistic Kindle which showed ebooks in black and white with no or little other media or content. The iPad clearly transformed the look and feel of ebooks. In fact, with the launch of iBooks Author by Apple, it is easy for anyone to create multi-media iBooks. Anyone who has used an iPad and read a book on it knows that it is much more innovative than Amazon’s Kindle. Is is right for DOJ in its argument to separate the iBooks Store from the iPad? DOJ seems to be arguing that what the court should look at is the innovation by Amazon, which scrambled to get the Kindle App on the iPad at launch, with the software functions of the iBook Store. But the innovation was Apple launching the iPad platform as a means for Apple to launch ebooks and other apps and media that compete with Amazon’s ebooks and other media.
Apple’s Defense and Summation
Apple’s defense, as illustrated by its 136 slides, is very compelling.3
Ebook Market In Turmoil
Apple begins its defense in slide 4 by hammering home the point that the ebook market was in turmoil when Apple entered at the end of 2009 as Amazon had 90% market share and was selling ebooks at below cost which caused the publishers to withhold some books from being offered by ebooks. More significantly, Apple argued that other market participants, like Barnes & Noble, were already seeking to go to an Agency Model even before Apple entered the market. The point being that Apple was reacting to natural market forces that were already in place in the ebook market, like the shift to an agency selling model.4
Apple hammered home to the Court that prior to Apple entering into agency agreements with the publishers, where the publishers agreed to make all their books available as ebooks, the publishers had “windowed” various books. Windowing was the practice of the publishers not making all their books available under the wholesale mode because resellers, particularly Amazon, were selling ebooks at too low a price. Apple was trying to show the Court that by negotiating the Agency model, Apple was also bringing innovation and competition to the ebook market as it extracted from publishers the requirement that windowing not occur: All books were made available by the publishers as ebooks. DOJ tried to counter this argument by pointing out that less than 40 books had been withheld. Apple pointed out, as in slide 4, that important and popular books like the books an Ted Kennedy, True Compass, had been Windowed in 2009. Apple’s point was it wasn’t he quantity of books but the quality of books that count in determining how significant was Apple’s ability to get rid of windowing. This is important to Apple’s effort to show its actions benefited and did not hurt the ebook market.5
Apple’s Meetings With Publishers
In the next group of slides, starting at slide 17 through 55, Apple sought to undermine DOJ’s claim that Apple facilitated and coordinated the publishers all agreeing to embrace the agency model and the MFN clause which acted as a minimum price for ebooks above Amazon’s $9.99 price. Apple repeatedly used slides showing the months of December 2009 and January 2010. Apple used graphics to show that DOJ was trying to show Apple as the center of web of calls to six publishers but Apple was Apple to show that the strands of the web are greatly reduced or eliminated when you take out calls that are under 1 minute and you take out calls after January 20, when the publishers were finalizing the contracts with Apple on the eve of the iPad launch. Compare slide 48 with slides 49, 50, and 51.
Apple Abandoned the Agency Model Requirement
A central part of Apple’s defense was that it didn’t pursue the Agency model as a requirement of its contracts with the publishes. Apple, through Eddy Cue, conceded that early on in the negotiations, Apple explored getting an agreement to have the industry go to an Agency model, but Apple abandoned that effort. Apple highlighted, what appears to be credible testimony by Eddy Cue, that seeking the Agency model requirement was not feasible because:
Apple couldn’t insure that the agency deal it negotiated with the publishers would be the same agency deal that the publishers negotiated with other resellers. 6
Apple decided that a MFN clause which guaranteed it would get the best price regardless if competitors used the wholesale model or agency model was the best route to go.7
Apple further attacked DOJ’s claim that Apple shepherded publishers to the agency model by showing that the quote that DOJ took from the Steve Job’s book by Walter Isaacson highlighted that Steve Job’s was concerned with stopping the publishers’ practice of windowing and also getting a MFN so that Apple could sell at the cheapest price. 8 In other words, Apple is sayng the book quote helps Apple, not the DOJ.
Apple also highlighted an email dated January 17, 2010, between the publisher HarperCollins and its parent company News Corp that showed that in recounting the deal points with Apple no mention is made of a requirement that all resellers in the ebook industry are required to go to an agency model with that publisher. The point being that Apple did not make such a demand to the publishers.9
Apple countered DOJ’s clam that the MFN was designed to fix prices by pointing out that its real purpose for Apple was to guarantee the lowest price for ebooks in the iBook Store. Apple argued that MFN agreements are standard in the industry and are used by resellers to get best price from their suppliers. Apple emphasized in its slides that it abandoned efforts to get other resellers to go to the agency model and decided that an MFN clause would be the best way for Apple to compete on price. 10
Apple spent a number of slides arguing that the MFN clause that it negotiated with publishers was a legitimate tactic to assure that Apple could provide the lowest price ebooks to its customers and compete with other resellers. This is a weird area of the law because DOJ is arguing that the MFN wasn’t about getting the lowest price but rather a clause that allowed the publishers to set a fixed price and force the publishers to go to a agency model with others, i.e. Amazon, and force Amazon to go to an Agency model.
Apple Heavily Negotiated with the Publishers.
Apple spent much of its summation pointing out that the evidence shows that Eddy Cue and other Apple executives were heavily negotiating which each publisher. The point Apple appears to have been making is that such extensive and difficult negotiations are not a sign of a conspiracy where Apple is the “ringleader.” Now here things are interesting, as the publishers already entered into consent judgments in which they are not contesting they entered into an agreement that affected pricing. Apple is basically arguing that even if they did that, it is clear Apple wasn’t the ringleader. DOJ countered that you can still have an illegal antitrust agreement even where there is extensive negotiations. 11
Similar Terms Offered by Apple to Publishers
Apple also argued that to the extent it offered similar terms to the publishers that that was to be fair to the publishers and it was a practice consistent in the industry.12
Other Resellers Went to Agency Model Not Because of Apple
Apple highlighted evidence at the end of its presentation showing that Amazon and Barnes & Noble were not strong-armed by Apple to go to the Agency model.13 Apple put in testimoy evidene showing that the Agency agreements were nogotiated by the publishers with other resellers, like Amazon. Apple also showed the Google also reached out to publishers when in entered the ebook market.
The Supreme Court’s Monsanto Decision
Apple finished its summation by pointing out that the law in Antitrust was controlled by an old Supreme Court decision called Monsanto. That decision holds where the government is trying to show an illegal conspiracy the evidence has to be such that it “tends to exclude the possibility that [the defendants] were acting independently.” Another words, even if it looks like the results show that Apple engaged in a conspiracy with the book publishers, if Apple can show it had independent lawful reasons for negotiating a certain way than there isn’t a violation. Apple’s slide 117 to 124 show quotes from Eddy Cue and some competitors where all stated that Apple, like competitors, had legitimate reasons to negotiate common terms with the publishers. Also these slides showed testimony that Apple had legitimate business reasons for the terms it offered.
Market Wasn’t Harmed
Apple’s final slides showed the expert testimony and data established that the ebook market was not harmed. Slide 126 showed that various data points evidence a healthy market post Apple entering the ebook market. The slide indicates “output increase of 615%” and “a price decrease from $7.97 pre-agency to $7.34 post-agency.” Apple also highlighted the innovation in multimedia with the iPad. Most significantly, Apple showed that Amazon’s market share went from 90% to 60% after Apple entered the market.14
Apple’s Clever Ending
Apple cleverly ended the slideshow with screenshots of the iPad and clear text stating “Apple did not participate in a conspiracy to violate the antitrust laws” and “Judgment should be entered for Apple.” Apple ended with this last slide:
See DOJ slides 41-45. Reviewing the slides, I can’t tell how significant were the inconsistencies in testimony by Eddy Cue and other witnesses or if the Judge Cote found Cue and others credible. Eddy Cue by all accounts, including by Phillip Elmer-Dewitt, came across as credible in his trial testimony. ↩
Apple’s slides are much better than DOJ’s slides. The design is much simpler and more compelling. For example, every DOJ slide has a blue heading bar with the DOJ seal. This takes up space on every slide. Why does DOJ need this? The Judge knows whose slides are being shown as they are being shown when the party that is arguing is speaking. Similarly, both Apple’s slides and DOJ’s slides have quotes from testimony or citation of text from documents. Counsel for Apple was careful to only use a limited amount of words on each slide so that the words were big and easy to see. DOJ’s slides often have too many words, which make the words small and hard to read. ↩
See also slide 12. ↩
See also slide 13. ↩
See slide 61. * Amazon and Barnes & Noble, as they sold paper books, had more power to negotiate better agency deals with the publishers.[^7] ↩
See slide 64. ↩
See slide 80. ↩
Se slide 81. ↩
See slide 87 ↩
See slides 90 to 100. ↩
See slides 101 to 104 ↩
See slides 106 to 115. ↩
One of the oddities of this case is that Amazon, not Apple, had the clear monopoly power at the time of the alleged violation. Amazon controlled 90% of the ebook market. Apple had no market share of the ebook market in early 2010 when it is accused of entering an illegal conspiracy. Yet, in this case, Amazon is portrayed as the victim and Apple is accused of trying to illegal harm Amazon’s 90% market share. Apple also showed evidence that Apple was selling ebooks at below cost, and at a loss. Historically, such low pricing is called predatory pricing and that itself could be an antitrust violation. So this is a strange case as even if DOJ proves that Apple engaged into a conspiracy with the publishers it feels like a conspiracy to stop another antitrust violation, Amazon’s predatory pricing. ↩