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June 6, 2013

Intent of DOJ murky in case against Apple

By Patrick Elder

Apple is hoping to avoid having a big bite taken out of it in the U.S. Department of Justice’s federal antitrust case, which began on Monday, June 3. But is this trial simply a government ploy to milk Apple for money, or do they truly have a case against the technology giant?

The Department of Justice (DOJ) is claiming to have evidence of a scheme in which Apple’s co-founder and former CEO Steve Jobs conspired with five publishers – Hachette Livre (Lagardère Publishing, France), Harper Collins (News Corp., U.S.A.), Simon & Schuster (CBS Corp., U.S.A.), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of inter alia Macmillan, Germany) – to have them fix prices. All five publishers have already settled out of court.

The evidence in which the DOJ is so confident is a string of emails between Jobs and News Corp. CEO James Murdoch in 2010. “Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99,” Jobs said in one of the emails to Murdoch.

In another email he seemed doubtful of the success of implementing what Apple has termed an “agency model,” yet the language used appears somewhat incriminating. “Heck, Amazon is selling these books at $9.99, and who knows maybe they are right and we will fail even at $12.99,” Jobs wrote to Murdoch. “But we’re willing to try at the prices we proposed. We are not willing to try at higher prices, because we are pretty sure we’ll all fail.”

Traditionally, publishers would sell physical books to retailers at half their cost, allowing for sales on the part of the retailer. This business model was upended with the emergence of e-books. Amazon began selling most e-books at only $9.99, causing much grief amongst publishers. Apple sought to help publishers with the agency model, in which publishers would set their own minimum price.

It is all too easy to misconstrue this case as being an admonishment of the agency model. If Apple were to let the companies they entered into an agreement with set prices of their own accord, no laws would be broken. After all, other e-book retailers such as Kobo operate under a similar model, allowing publishers to set prices – and even opening up their platform to self-publishers.

The agency model becomes a price-fixing scandal when publishers do not allow other retailers to sell for lower prices. According to the DOJ, this is exactly what Apple conspired with publishers to accomplish. If true, Apple should feel the full brunt of the law – or at least face a hefty fine when settling.

However, it appears Apple does not feel the weight the DOJ claims is behind its evidence. Apple claims the email passages are taken out of context. They’ve even gone so far as to take credit for saving a market that, according to Apple, was headed down a path to destruction.

“The market was in disarray and was headed for change,” Apple attorney Orin Snyder said. “Apple should be applauded, not condemned.”

Through statements the DOJ has made, it is clear that a part of their quarrel with Apple is the high price imparted on consumers. In his opening statement DOJ lawyer Lawrence Buterman said that prices jumped 50% when Apple entered the market in April 2010.

“Overall, average prices of e-books went up, costing consumers millions of dollars,” Buterman said. “This dramatic price increase was no accident. Apple knowingly and actively participated in a scheme to raise e-book prices.”

Snyder attempted to disabuse the DOJ of this notion by correctly citing that the average e-book price has fallen since Apple entered the market. The global average ebook price has dropped 8% year-over-year in the first quarter according to Kobo ebook sales data presented by chief content officer Michael Tamblyn, who presented the data on May 30 at the International Digital Publishing Forum in New York.

However, further data from Tamblyn shows that while the price of e-books has fallen, it was not because of Apple’s entry into the e-book market, but in spite of it. According to Tamblyn self-publishers should be taking credit for this drop in price, not Apple.

Government lawyers also cited this quote from Jobs: “Yes, the customer pays a little more, but that’s what you want anyway.” While it is certainly alarming for consumers to hear such a frank appraisal of the purpose of a highly profit-driven company, the act of desiring higher prices and greater profits is not in itself a crime.

Regardless of the state of e-book prices, it is disconcerting to hear the DOJ continue to seemingly sell this case as a fight for lower prices. Apple’s steepening of prices is not a crime unless it is found they conspired with publishers to fix those prices. No matter how much the government wishes for consumers to be able to purchase a plethora of cheap e-books, it is not their duty, nor their jurisdiction.

The outcome of this case will come down to how Jobs’ emails can be interpreted. According to Keith Hylton, an antitrust expert and professor at the Boston University School of Law, there is precedent for the use of emails as deciding evidence in an antitrust case.

“In the Microsoft lawsuit, Justice built a large part of its case of e-mails from Bill Gates and other people. So this is really common stuff,” Hylton said. “But the key question is how do you interpret what Jobs said. That is a fair question.”

Apple’s credibility was dealt a serious blow when the U.S. International Trade Commission ruled that it had infringed upon several Samsung patents. This decision came the day after the beginning of its antitrust trial, and while not strictly relevant to the legal proceedings of that case, may cast a more suspicious light on Apple’s arguments.

Apple will continue to deny allegations of involvement in the conspiracy by clinging to the somewhat vague nature of the DOJ-cited passages of Jobs’ emails. Without proper context to evaluate Apple’s claims of the DOJ’s out-of-context recitation of the emails, it is nigh on impossible to conclude which side has the upper hand in the case. As Snyder argued on the first day of trial, “what the government wants to do is reverse engineer a conspiracy from a market effect.”

If this is a government crusade against the pratfalls of increasing market prices, then it is a misguided mission. However, should the evidence against Apple prove to be as substantial as the DOJ claims, Apple will face its just deserts.