Apple handed defeat in e-books ruling - MarketWatch

By Dan Gallagher, MarketWatch

SAN FRANCISCO (MarketWatch) ? Apple Inc. was handed a defeat on Wednesday, when a federal judge ruled that the company ?played a central role? in helping publishers conspire to raise the prices of e-books.

The ruling stemmed from a lawsuit by the U.S. Department of Justice against Apple /quotes/zigman/68270/quotes/nls/aapl AAPL +1.57% ?and the five major book publishers. The publishers settled with the government; only Apple proceeded to trial over the matter.

Apple CEO Tim Cook shows the iPad mini on Oct. 23, 2012.

Apple shares were trading down a fraction by Wednesday afternoon at $421.80.

In her ruling, Federal Judge Denise Cote of the U.S. District Court of the Southern District of New York found that book publishers would not have succeeded in raising the price of e-books without the help of Apple, which secured deals with the publishers in the spring of 2010 to help support the launch of the first iPad tablet.

The ruling followed a bench trial that lasted most of the month of June. The trial included testimony from top Apple executives, including Eddy Cue, who runs the company?s Internet services business. Also included were three executives from Amazon?s /quotes/zigman/63011/quotes/nls/amzn AMZN +2.45% ?Kindle business and one from Google Inc. /quotes/zigman/93888/quotes/nls/goog GOOG +1.42% , though neither of the latter companies were a party to the case. Read the ruling here.

The iPad was considered the first e-book platform that could compete effectively with the Kindle from Amazon.com. Amazon launched its first Kindle in 2007, and had angered book publishers by selling e-books for the device at $9.99 and less. It was able to do so because e-books at the time were sold under what is called a wholesale model, where a retailer pays a publisher a fixed price for a book and then sets its own retail price.

Apple loses ruling on e-book pricing

A federal judge found Apple colluded with five major U.S. publishers to artificially drive up the prices of e-books in the months ahead of its entering the market in 2010. Ashby Jones discusses the details on MoneyBeat.

Apple offered the publishers a deal under what is called an ?agency model? that allowed the publishers to set their own prices, and give a percentage to retailers and third-party merchants like Apple.

?At their very first meetings in mid-December 2009, the publishers conveyed to Apple their abhorrence of Amazon?s pricing, and Apple assured the publishers it was willing to work with them to raise those prices, suggesting prices such as $12.99 and $14.99,? Cote wrote in the ruling.

The book publishers named in the case included Hachette Book Group, News Corp.? s /quotes/zigman/18008448/quotes/nls/nws NWS -1.52% ? HarperCollins, Holtzbrinck Publishers, Pearson?s /quotes/zigman/155525 UK:PSON +0.98% ?Penguin Group and CBS?s /quotes/zigman/393390/quotes/nls/cbs CBS +0.45% Simon & Schuster Inc.

News Corp. is also the owner of MarketWatch, publisher of this report.

The ruling painted the publishers as desperate to combat Amazon?s low prices. Realizing that they could do little on their own, emails submitted as evidence in the trial showed that top executives of the publishers met and communicated frequently to coordinate their strategies for dealing with Amazon.

One of these strategies involved ?windowing,? or delaying the release of a new e-book until the hardcover version had been on sale for several weeks. But the publishers became worried that such a strategy could ?alienate an entire portion (and a growing one) of our audience,? according to one of the emails cited in the ruling.

Enter Apple, which was preparing to launch its first iPad in early 2010. It sought the support of book publishers in order to launch the iBookstore to help provide content to the device along with its large iTunes business.

?Apple seized the moment and brilliantly played its hand,? Cote wrote in the ruling, noting how the company was ?taking advantage of the publisher defendants? fear of and frustration over Amazon?s pricing, as well as the tight window of opportunity created by the impending launch of the iPad,? which was first showcased at an event in January of 2010.

Apple's Eddy Cue at the Worldwide Developers conference last month.

Apple?s Eddy Cue, according to the ruling, was unwilling to allow e-books to be windowed, and wanted prices to be below those for physical books. In his meetings with publishers, Cue conveyed that Apple was willing to sell e-books for up to $14.99 each ? a notable premium to the prices Amazon was charging.

?As a master negotiator, Cue came well prepared for his meetings,? Cote wrote. ?He knew how to convey Apple?s conditions for entry and at the same time give the publishers an incentive for entering, almost overnight, into a partnership with Apple.?

Lastly, Apple pressed the publishers to end their wholesale agreements with other e-book retailers like Amazon, realizing that it would be at a pricing disadvantage with the iBookstore if Kindle books could still be bought for $9.99.

During the trial, Cue disputed that Apple was seeking to raise prices across the industry, insisting that the company was only seeking to build a competitive business for its own iBookstore.

?In this and several other aspects of Cue?s testimony, regrettably, he was not credible,? Cote wrote. ?The documentary record and the commercial context of the negotiations leave room for no other conclusion. Apple?s pitch to the Publishers was ? from beginning to end ? a vision for a new industry-wide price schedule.?

A trial on damages is expected to follow, though Apple is expected to appeal the ruling. A company spokesman told Dow Jones Newswires that ?Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations.?

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Dan Gallagher is MarketWatch's technology editor, based in San Francisco. Follow him on Twitter @MWDanGallagher.

Source: http://www.marketwatch.com/story/apple-handed-defeat-in-e-books-ruling-2013-07-10

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