Apple and the DOJ face off over e-book prices
Apple and the U.S. Department of Justice head to a Manhattan court Monday to begin a trial over whether the Cupertino, Calif., electronics giant colluded with several major publishers to fix pricing on e-books.
Things already have gotten complicated: the DOJ’s lawsuit originally targeting Apple and five major e-book publishers. The publishers have since settled, leaving Apple the sole, staunch holdout.
The trial, which is expected to last three weeks, has brought out a trove of evidence consisting of e-mails between executives, including late Apple CEO Steve Jobs. They include details of negotiations and strategizing, and general insights into the media business.
All that, plus the jabs from both sides since the complaint was first filed, have created a complex narrative about how Apple and various major publishing companies do business.
To get a better understanding of what this means for the publishing business and for you as a consumer, CNET put together this FAQ.
Editors note: This is a living document and will be updated as new information arrives.
Why is the Department of Justice suing Apple?
In April last year, the Justice Department sued Apple, along with five of the six largest book publishers in the U.S., accusing all parties of conspiring to set digital book prices and break Amazon’s hold on the market with its Kindle e-book reader.
Justice Dept. files suit against Apple, publishers
April 11, 2012
DOJ announces settlement with three publishers
April 11, 2012
Simon & Schuster settle suit with state AGs
May 17, 2012
Macmillan settles with DOJ
February 8, 2013
Penguin settles state e-book suits for $75M
May 22, 2013
June 3, 2013
Apple, which was preparing for the launch of the first iPad in early 2010, partnered with the publishers to implement a so-called agency model. This is where publishers set prices, which differs from the wholesale model, where retailers set prices. Specifically, the DOJ accused Apple of acting in concert with these other publishers to raise the price of e-books from $9.99 to between $12.99 and $16.99 for new titles.
The DOJ says Apple and the publishers forced Amazon to also move to an agency model and “have caused e-book consumers to pay tens of millions of dollars more for e-books than they otherwise would have paid.”
What’s Apple’s counterargument?
Apple responded to the DOJ complaint by saying it was “fundamentally flawed as a matter of fact and law” and that there was no conspiracy to set digital book prices. The company has argued that Apple’s iBookstore launch in 2010 fostered innovation and competition by breaking Amazon’s monopolistic grip on the publishing industry and by allowing publishers to set their own prices in the iBookstore.
Who else was involved? And what happened in those cases?
Apple is the only remaining defendant in the DOJ’s case. Lagardere SCA’s Hachette Book Group, News Corp.’s HarperCollins Publishers, and Simon & Schuster (owned by CBS, the parent of CNET) agreed to settle with the DOJ as soon as the suit was filed last April. Pearson’s Penguin reached a settlement in December, and Macmillan, formally known as Holtzbrinck Publishers LLC, settled in February.
All agreed to immediately lift restrictions they had imposed on discounting and other promotions by e-book retailers and to stop sharing “competitively sensitive information” with competitors for five years. They also will be prohibited from entering into new agreements with similar restrictions for two years and will implement antitrust compliance programs that include regularly reporting to the Justice Department on any communications they have with other publishers.
What’s at stake?
The biggest risk for Apple in the DOJ trial isn’t money; it’s oversight into the company’s other operations. The Justice Department isn’t asking for monetary damages but wants Apple to admit wrongdoing and change its procedures to make sure that wrongdoing doesn’t happen again. The publishers already have ended their pacts with Apple as part of their settlements, but Apple could pursue similar deals in its other businesses, such as music and TV. If the antitrust case sets a precedent that Apple’s business dealings are illegal, it could have a sort of chilling effect on its other operations.
“This is the model they want to use throughout their ecosystem,” James Grimmelmann, a professor at New York Law School. “They don’t want to have their fixed commission model undermined when it comes to apps, movies, and music…. To them it’s a much larger issue than books.”
Also, the government could seek more oversight into Apple’s affairs, much as it did during Microsoft’s antitrust suit more than a decade ago. In that instance, the DOJ set up a “technical committee” of three people who were based at Microsoft’s headquarters and had full access to Microsoft’s staff, documents, system, and facilities for five years to make sure the software company complied with its settlement.
However, legal experts said it’s unlikely the DOJ would want the kind of oversight at Apple that it sought at Microsoft.
“This is a much more straightforward set of practices at issue than how Google designs its search engine and how Microsoft designs its operating system and browser,” said Daniel Crane, a law professor at the University of Michigan’s law school.
While money isn’t the biggest issue, it remains a concern in the e-books case. If Apple is found to be in the wrong, plaintiffs in civil suits against the company can recover triple the amount of damages determined at trial. Current suits brought by various state attorneys general and a class-action group of consumers don’t specify the damages sought, but Apple could face damages of hundreds of millions of dollars.
The Consumer Federation of America estimated early last year that e-book price fixing would cost consumers more than $200 million in 2012 alone (PDF). Penguin, which settled with the states and consumer plaintiffs earlier this month, agreed to pay $75 million in damages, while Macmillan will fork over $25 million. Apple likely would pay more than those amounts.
And don’t forget the hit Apple’s reputation could take. The company already has faced some negative press related to corporate tax policies, and a trial where it’s portrayed as the bad guy wouldn’t help.
How long is this expected to go on?
The trial is scheduled to span approximately three weeks. Each side has 29 hours to present its case, including summation scheduled for June 20.
Who’s deciding it?
The trial doesn’t have a jury. Instead, it’s being decided by U.S. District Court Judge Denise L. Cote, who — prior to serving as a U.S. district judge — served a brief tenure as a special assistant to the Assistant U.S. Attorney General of the Criminal Division at the DOJ.
Cote has most recently been in the news for facing the wrath of more than a dozen banks who are attempting to overturn a series of rulings in 2012 pertaining to mortgage securities. On the technology side, Cote tossed a case brought by ASCAP against Verizon and AT&T in 2008, which sought royalties for ringtones whenever they were downloaded or played.
Why is this being argued in Manhattan?
The U.S. headquarters of each publisher involved in the case is located in the Southern District of New York, and many of the publishers’ e-books have been sold in New York.
Could this be settled out of court?
Apple has staunchly defended its actions, saying it did nothing wrong. CEO Tim Cook said on May 28 that the company never had any plans to settle with the government, and it recently rejected a proposed settlement. “We’re not going to sign something that says we did something that we didn’t do, so we’re going to fight,” Cook said at the D11 conference.
That, however, doesn’t rule out the possibility that Apple could work out a settlement before a verdict is reached in the trial, or before arguments even start, say legal experts familiar with the case.
“The question is what it is exactly that they’re waiting for,” said Chris Sagers, a professor of law at Cleveland State University’s Cleveland-Marshall College of Law.
Making matters worse for Apple, Judge Cote said in mid-May that she thinks evidence will establish that Apple indeed colluded with the publishers to fix e-book prices. Those comments likely made Apple more willing to consider a settlement, though Cote said her viewpoint was “tentative” and that she was basing it only on the evidence she had examined so far, which includes e-mails and correspondence from December 2009 to January 2010.
Meanwhile, the publishers that settled also have maintained their innocence, but they determined that the “potential penalties became too high to risk even the possibility of an unfavorable outcome,” as Macmillan CEO John Sargent said in February. Also, their settlements forced them to end their deals with Apple.
What does this mean for consumers who buy e-books?
It’s unclear, but it’s unlikely that e-book prices will suddenly jump in price. The book publishers’ settlements gave retailers the flexibility to once again discount digital books. Where consumers could benefit is the class-action suits filed on their behalf that come after the DOJ trial. Any damages could potentially trickle down to customers.
What does this mean for publishers and writers?
The major publishers have already struck deals with the Justice Department as part of their individual settlements that require them to lift restrictions on discounting e-books to various retailers, including Apple. Those publishers are also required to give the DOJ a heads-up for joint ventures with one another, and they’re kept from making agreements with one another to price items at the same level.
For writers, additional sanctions as part of a DOJ win could “wipe out the publishing industry as we know it,” and make it “much harder for young authors to get published,” Democratic New York Sen. Charles Schumer in wrote in an op-ed piece (subscription required) in The Wall Street Journal last July.
“The suit will restore Amazon to the dominant position atop the e-books market it occupied for years before competition arrived in the form of Apple,” Schumer wrote. “If that happens, consumers will be forced to accept whatever prices Amazon sets.”
However, others have argued that the publishing industry will adapt to the digital pricing model, much like the music industry has done.