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A federal judge's decision that Apple Inc.
colluded with U.S. publishers to artificially drive up the prices of e-books could have broader implications for how providers of electronic media—from music to books to movies—negotiate content deals.
The decision by U.S. District Judge Denise Cote on Wednesday is a setback for the Cupertino, Calif., company, whose quarterly revenue from its iTunes store has more than doubled since the introduction of e-books in April 2010. However, sales from iTunes store only account for less than 10% of the company's overall revenue—the bulk comes from the sales of iPhones, iPads and other products that are used to view electronic media.
Apple, for its part, insists it did nothing wrong and said it plans to appeal. "Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations," an Apple spokesman said. "When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon's monopolistic grip on the publishing industry."
Apple, which has a reputation as an aggressive negotiator, prides itself on not entering a new market unless it can be competitive on price, but not at a loss, and have access to new content at the same time as its rivals.
But in a stern rebuke to its strategy to sell electronic books, the judge said that Apple colluded with five major U.S. publishers to drive up the prices of e-books in the months ahead of it entering the market in 2010.
The decision opens the door for the U.S. Department of Justice to take a closer look at Apple's other business lines, legal experts say. The Justice Department has asked the court to adopt a variety of measures to ensure Apple doesn't engage in similar conduct in the future, including not entering "most-favored nation" clauses that would require publishers to match lower prices of competing e-book sellers.
"Under antitrust law, you cannot only prevent the unlawful conduct, but also prevent other conduct that can lead to a similar result," said David Balto, a former policy director at the Federal Trade Commission.
In its civil antitrust lawsuit, the Justice Department claimed that Apple agreed with the publishers in January 2010 to allow them set a higher price for best sellers and new releases in response to the publishers' "Amazon problem": a $9.99 price point for those books on Amazon.com Inc.
As a result, prices for e-book best sellers rose to between $12.99 and $14.99, the government claimed.
The publishers have all since entered into settlements with the Justice Department, as well as in a separate lawsuit by a group of state attorneys general.
Ankur Kapoor, an antitrust lawyer at Constantine Cannon LLP, said the ruling, which he disagreed with, should amount to a wake-up call for the technology industry.
"If you're a tech company and you looking to aggregate content, you have to be exceptionally conscious about how you talk to your suppliers," he said. "U.S. v. Apple has put these communications under a very fine microscope."
On Wednesday, French antitrust authorities announced they were looking into the influence Apple and other technology companies have over the sales of applications for mobile devices.
In her ruling, Judge Cote said the evidence was clear that Apple, despite its claims that it negotiated fiercely and separately with each publisher, was at the center of the conspiracy.
"Understanding that no one publisher could risk acting alone in an attempt to take pricing power away from Amazon, Apple created a mechanism and environment that enabled them to act together in a matter of weeks to eliminate all retail price competition for their e-books," U.S. District Judge Denise Cote said in a 160-page ruling.
"The evidence is overwhelming that Apple knew of the unlawful aims of the conspiracy and joined that conspiracy with the specific intent to help it succeed."
When it entered the e-book market in 2010, Apple agreed to shift to a so-called agency model in which publishers, rather than retailers, set the price of e-books. As part of its deals with the publishers, Apple received a 30% commission on each book sold and the publishers had to match the price of Amazon or other competitors if the competitor's price was lower.
At the time, Amazon was the dominant player in the market, accounting for between 80% and 90% of all e-book sales. However, the major publishers were concerned that Amazon was selling books at a loss in order to gobble up market share and had threatened to begin withholding some of their most popular books from the online seller.
Because Apple was found liable for violating U.S. antitrust laws, a separate trial on damages will now take place in a lawsuit against the company brought by 33 state attorneys general, who are seeking to recover money on behalf of consumers who paid higher prices for e-books.
The judge also is expected to schedule a hearing on a request by the U.S. for injunctive relief, which could include requirements that Apple not enter into another agency agreement to sell e-books for a two-year period and not retaliate or discriminate against competing e-reader apps in its online store.
"Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so," said Assistant Attorney General Bill Baer, who heads the Justice Department's antitrust division. "This decision by the court is a critical step in undoing the harm caused by Apple's illegal actions."
In May, the judge indicated that she believed the government would likely be able to prove its case, but stressed that she wouldn't make a final decision until all of the evidence had been presented. A three-week trial in the matter ended June 20 in federal court in Manhattan.
Apple last year separately settled an antitrust case with the European Commission over e-book pricing but didn't admit any wrongdoing.
In her ruling Wednesday, the judge also took Apple to task for comments by Steve Jobs, the company's former chief executive and co-founder who died in 2011. The judge said that "compelling evidence of Apple's participation in the conspiracy came from the words uttered by Steve Jobs, Apple's founder, CEO, and visionary."
"Apple has struggled mightily to reinterpret Jobs's statements in a way that will eliminate their bite," the judge said. "Its efforts have proven fruitless."
In emails introduced as evidence, Mr. Jobs seemed to gloat after published reports in January 2010 that Macmillan and Amazon were separately clashing over pricing following the Apple deal.
"Wow, we have really lit a fuse on a powder keg," Mr. Jobs wrote in an email from Jan. 30, 2010.
In a group email at Apple the next day, Mr. Jobs said: "We have definitely helped stir things up in the publishing world."
A digital book is displayed on an Apple iPad. The publishers have all since entered into settlements with the Justice Department, as well as in a separate lawsuit by a group of state attorneys general.
In her decision, the judge found that there was direct evidence that Apple engaged in a price-fixing conspiracy. As a matter of law, that means the Justice Department didn't need to prove that the price-fixing had any anticompetitive effect on the e-books market.
But the judge said the Justice Department would prevail on that argument as well, because the agreements "did not promote competition, but destroyed it."
The issue of whether there was direct evidence of price-fixing is likely to come up on appeal.
Keith Hylton, a professor at Boston University's School of Law, said Apple has good arguments on appeal, but the judge's highly detailed opinion may restrict the ability of an appellate court to go the other way.
He said the outcome may be similar to the Justice Department's lawsuit against Microsoft Corp.
The U.S. Court of Appeals for the District of Columbia was constrained by the judge's heavily fact-based opinion and upheld many of his inferences, Mr. Hylton said.
Write to Chad Bray at [email protected], Joe Palazzolo at [email protected] and Ian Sherr at [email protected]