Jun 19th, 2013, 9:25 pm


At the crux of the Apple ebook price fixing trial is the question of whether prices rose or dropped following the tech company’s entry into the digital book business.


The Department of Justice, which is alleging that Apple led a conspiracy with publishers to fix ebook prices, points to statistics that show a “dramatic” increase in the average price of ebooks across the board, costing consumers hundreds of millions of dollars.





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Apple, meanwhile, points to figures that show that price for ebooks in the “relevant market” of best sellers and new releases fell.


“It is a kind of lying with statistics issue here,” said Benedict Evans, an analyst who tracks the electronic publishing market for Enders Analysis. “Depending on which averages you pick and which samples you pick, the number will move.”


The Department of Justice and Apple will present closing arguments on Thursday in the three-week non-jury trial. Judge Denise Cote, of the US District Court for the Southern District of New York, who is presiding over the case, will need to determine which sets of data are relevant as she reaches a verdict in the coming weeks.


She issued a preliminary opinion last month that the government would be able to provide enough evidence to prove its case against Apple.


Before Apple entered the ebook market in 2010, publishers typically sold books to retailers such as Amazon through what was known as a “wholesale” model. Amazon would buy the books for about $10 and then sell them to consumers for $9.99 – essentially breaking even on the deal. At the time, Amazon controlled nearly 90 per cent of the ebook market, and publishers were upset with the $9.99 price point.


The DoJ alleges that publishers struggled to boost prices on their own and that Apple saw the chance to compete in the market by masterminding a scheme to help. Apple struck so-called “agency” agreements with publishers, where they set the price and Apple took a 30 per cent cut. Apple also created a “most favoured nation” clause, allowing it to match prices with other retailers.


Throughout the trial, government lawyers repeatedly pointed to a slide – created by Apple’s expert witness – tracking average ebook retail prices from February 2008 until March 2012. Prices hover between about $8 and $10 until April 1, 2010, the day that Apple launched its iPad and iBookstore. From that day, the average price for ebooks published by the companies accused of taking part in the alleged price-fixing conspiracy initially rose then settled at slightly higher price points. Meanwhile, the average price of ebooks for all publishers fell.


“There is no dispute that ebook prices rose after the switch to the agency model,” Lawrence Buterman, a DoJ lawyer, said during opening arguments. “The evidence will show that this is exactly what Apple and the conspiring publishers intended.”


Mr Evans points out that the ebook market changed dramatically during that period, ushering in a wave of short-form and independent publishers who sold ebooks at price points much lower than the typical cost of a new release or best seller.


Another issue, he says, is the fact that before Apple entered the market, Amazon sold a large number of headline titles below their listed price but that it is not clear whether the retailer was discounting all the digital books they sold.


Apple doesn’t deny that prices for some ebooks increased after it entered the market. Eddy Cue, Apple’s top dealmaker whom the DoJ called the “chief ringleader” behind the conspiracy, testified that prices for certain ebooks increased after the move to the agency model.


Rather, the company is arguing that prices of ebooks in the relevant market of “New York Times best sellers” and new released ebooks” decreased on average from $7.97 to $7.34 after Apple’s entry. Apple said that its experts culled “the biggest database ever assembled” of ebook pricing and spent thousands of hours sifting through the data.


Apple is also arguing that its entry into the ebook market boosted competition. Amazon’s market share has since fallen from about 90 per cent to about 60 per cent, with new entrants including Apple and Google stealing share. Apple also says that its entry sparked more output and new product innovation, such as colour, audio, video and other interactive elements.


“Prices went down in the aftermath of Apple’s entry,” said Orin Snyder, a partner at the law firm Gibson, Dunn & Crutcher, who is leading Apple’s trial team.


Indeed, the notion that publishers save significant money by publishing ebooks as opposed to printing physical books is a misconception, Mr Evans said.


The cost of printing physical books typically is about $1 or $2 per book. With ebooks, publishers pay a commission to resellers and also are saddled with other new costs, such as fighting piracy. That leaves the basic economics of producing a book about the same, regardless of whether it is a print or digital copy.


The five publishers are: Hachette, HarperCollins, Holtzbrinck, Simon & Schuster and Penguin – which is owned, like the Financial Times, by Pearson.


“The basic economic driver of novels is that authors spend three years writing it, tens of thousands of people buy it, and it has to be sold for a certain amount or the writer can’t feed himself,” Mr Enders said. “Authors’ mortgages don’t change when books go digital. Authors’ children’s clothes cost the same when books go digital.”


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Jun 19th, 2013, 9:25 pm