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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 from attorney Orin Snyder in his closing arguments for Apple Thursday in the U.S. Department of Justice's antitrust, e-books price-fixing case against the company.

The DOJ brought the case against Apple and five of the largest book publishers in the U.S. for allegedly conspiring to 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.

The DOJ and Apple both made closing arguments Thursday before Judge Denise Cote. The five publishers have already settled the case for a cumulative $164 million, leaving Apple to defend its practices. 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 Apple had with the five publishers as typical negotiations that accompany any business deal. At no point did Apple try to coordinate the activities of the publishers to fix prices. "The evidence does not show this," Snyder told the court, arguing that the DOJ made its case on "overreaching" interpretation of documents.

Snyder focused on the timeline between December 2009 and January 2010 to rebut the DOJ's assertions. He noted there was "turmoil" in the e-book market at the time, and that Apple executives, who had no prior knowledge of the market, were speaking with publishing heads just to hear their concerns. He offered multiple examples of disagreement between Apple and the publishers, in an effort to show that the parties were not acting in unison to fix prices.

The case stems from contracts Apple made with the publishers in 2010, just before it launched the iPad. In January that year, each publisher -- HarperCollins, Penguin, Hachette, MacMillan, and Simon & Schuster -- agreed to let Apple sell their books under a relatively novel business model, in which Apple would charge the prices the publishers had set and keep a 30 percent commission.

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 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," the DOJ charged in its complaint.

According to the testimony of Apple Senior Vice President Eddy Cue, publishers immediately wanted to move 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 Amazon pricing electronic versions of best sellers at $9.99, less than the online retailer paid for them in many cases. The publishers worried that Amazon, which had 90 percent of the e-book market at the time, was lowering the perceived price of books in consumers' eyes, and laying plans to cut publishers out of the picture and to deal with authors directly. The publishers 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 using the same model for iTunes and its 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 further 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 on how much publishers could charge for electronic books. It prohibited publishers from withholding best-selling titles from electronic release, and from 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 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 preference as to whether the publishers signed other retailers such as Amazon to an agency model. He showed various pieces of correspondence that Cue and Jobs had had with publishers to back this point.

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

Immediately after the contracts took effect in April 2010, and publishers moved all their retailers to the agency model, 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 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 highlighted the many talks Cue had with publishing executives as evidence they were coordinating activities, Snyder asserted that the 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 asked rhetorically, referring to how 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 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 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 attempted to conceal their communications. In addition, it had to show that consumers were harmed by the collusion.

Whether the DOJ 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 believe its case relies too heavily on inference.

For the government's summation, DOJ director of litigation Mark Ryan challenged Snyder's idea that difficult negotiations between Apple and the publishers constituted proof there was no conspiracy.

"Sure, there was some dispute ... about what the price should be," he said. "But disagreement among a cartel doesn't mean there isn't a cartel." He urged the court to look beyond the discussion of the agency model, MFN and other details, and to focus on how book prices immediately changed after the agency agreements went into play.

Ryan described the events of early 2010 as "the publishers acting as a group, and Apple bringing that group along." There was a "fairly brazen price-fixing element to this," he said.

He discounted the fact that Apple was a new entrant -- and not yet a powerhouse -- in the e-book market, asserting that the Sherman Antitrust Act, the law on which the suit is based, made no distinctions for new entrants. "There is no court decision saying that because you are new you can organize the suppliers of the market. This is not a defense," Ryan said.

Ryan also noted that Apple, in its talks with book publishers, stressed how moving to the agency model would solve "the industry's" problems with Amazon. Less often did Cue and Jobs talk about how it would help an individual publisher.

Cote asked if Apple, in talking about the Amazon issue, wasn't just making a sales pitch. Perhaps Apple recognized the difficulties publishers were having and proposed a solution like any new business might, she posited. Ryan countered that part of Apple's pitch was to help all the publishers confront Amazon in unison, which was an antitrust violation.

Apple put the MFN in place with one goal in mind, Ryan argued: to get Amazon to move to the agency model. Without Amazon doing so, Apple could not compete on price. But it was essential for the major book suppliers to act in unison to get Amazon to agree to an agency model, or so the publishers thought at the time. In a free market, Ryan said, each publisher would work out their issues with Amazon independently.

It was the "collective force" of the publishers that prompted Amazon to adopt the agency model and stop offering $9.99 best sellers, Ryan said.

"Apple was simply indifferent to customers paying higher prices," Ryan said.

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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