The official ruling has come in for Apple and their E-Books. A federal judge ruled on Tuesday that Apple was guilty of illegal price-fixing in collusion with five of the six major American publishing companies. The decision comes at the end of a string of cases against the publishers themselves that began with accusations of price-fixing in 2012 and forced each publisher into settling by the beginning of 2013. Apple took their case to trial – despite what many experts considered huge evidence against them – in an attempt to clear their name. Despite their (seemingly foolish) efforts, however, Federal Judge Denise Cote has ruled against the tech company in court, setting Apple up to pay potentially huge sums in damages.
Wait, Apple? Why would they need to do that?
When Amazon first released their e-reader, the Kindle, they utilized a strange business model. At first glance, they treated their e-books with the normal retail style. Amazon bought the rights to sell e-books from the publishers of those books, and then sold them to consumers for a profit. Except, apparently, Amazon wasn’t making a profit. It seems Amazon was selling their e-books for less than they bought them for, which meant they actually lost money for every e-book they sold! But this strategy made their e-books affordable and desirable, especially over the prices of new hardcover books, and that made the Kindle just as desirable. Amazon was banking on making enough money from sales of their hardware to be able to pay for the losses they incurred from the books themselves!
This particular strategy afforded two main benefits to Amazon: first, it allowed Amazon’s e-books to jump even more rapidly in popularity than they otherwise would have, growing the market and demand in the e-book industry as more and more consumers read, talked, and thought about buying themselves a Kindle. For a new industry like electronic readers (or tablets), this was immensely useful. But secondly, and perhaps more importantly, it stifled Amazon’s competition significantly. Most smaller companies wouldn’t be able to afford to sell all those e-books at the kind of profit loss that Amazon could, and that meant that it was nearly impossible for those companies to gain any kind of edge in the emerging market. Amazon was taking control of their market just as they were creating it.
Cue the iPad. In spring of 2010, Apple released their new product, taking the tech market even further beyond the smartphone, into the realm of tablets. Tablets are becoming ubiquitous these days, but just a few years ago the idea depended upon the success of e-readers. Apple was gambling that people would buy what was – in computing power terms – essentially a larger smart phone, so that they could read e-books on it the way they would on a Kindle or a Nook. The problem was Apple wanted to compete on hardware, but Amazon was winning on price.
The Evidence Mounts Against Apple
So the story goes, Apple sought out the major publishers who were already dissatisfied with Amazon’s behavior. The publishers wanted more money from the e-books, especially since e-books were starting to get more popular than the more expensive physical copies. And some of those publishers even thought that Amazon’s pricing was reducing the perceived value of books, making consumers less and less likely to ever purchase them for more, even the brand new hardcovers. Apple agreed.
Publishers wanted to keep the retail prices of their e-books high to keep the perceived value high, and to make more profit from individual sales. And Apple wanted to force Amazon’s prices higher to match their own $14.99 price, because if e-book prices were the same between the two companies, they’d have been forced to compete on purely the power of their hardware – and on that front, they thought the unassuming Kindle would almost certainly lose to the Big Bad iPad.
So the groups colluded to force Amazon to accept an agency model where the publishers got to set the price of books – not the retailers – and the retailers were simply given a percentage of the profit. They threatened to withdraw their products from Amazon completely if they didn’t accept those terms.
Apple has tried their best to dismiss the allegations, but they have a tough fight in front of them. Besides what appear to be mounds of email, phone call, and internal document evidence that points directly to the conclusion that Apple not only participated in but actively coordinated the price-fixing conspiracy, Apple has been incriminated by their very own, the late Steve Jobs.
As part of the launch of the iPad, then-CEO Jobs showed off the iBookstore functionality, and made a live purchase of a book for $14.99. Later, reporters asked him why anyone would want to buy an e-book for $15 when Amazon was selling them for $10. Jobs said (in the video right) that won’t be the case, and with a knowing glance and a pregnant pause said “the prices will be the same.” He continued, “Publishers are actually withholding their books from Amazon because they are not happy.” According to the opinion of the Judge Denise Cote,”with that statement, Jobs acknowledged his understanding that the Publisher Defendants would now wrest control of pricing from Amazon and raise e-book prices, and that Apple would not have to face any competition from Amazon on price.”
The size of damages and the parties to which they’ll be paid has yet to be determined, but Apple’s going to have to pay somebody, and probably a lot. Apple, of course, plans to appeal the decision, but with a 160-page opinion detailing almost every single way that Apple can’t make a case for themselves, it will be exceedingly difficult for them to find a way out of this. Rest assured, though, that this isn’t the last you’ll hear about this case. The story of these e-books is still being written.