The Department of Justice last year accused Apple (AAPL) and five major book publishers of conspiring to fix prices in the e-book market. The publishers settled, but Apple—which the government has described as the “ringmaster” of the conspiracy—refused to do so. So the company is sending lawyers to federal court on Monday, when they’ll begin a trial expected to last several weeks. Between terrified old media, clashing tech titans, and Steve Jobs speaking from beyond the grave, it’s already getting pretty complicated. Here’s what you need to know:
In 2009 Apple was developing an application that could sell e-books on the then-unreleased iPad. At the time, Amazon (AMZN) dominated the e-book market, accounting for 90 percent of sales. It used a wholesale model, reselling books it bought from publishers, generally at about half the retail price. Even when that meant a loss to Amazon, the company was willing to take a hit on books to sell Kindles, worrying publishers that Amazon was putting irreversible downward pressure on book prices.
Several publishers wanted to switch to an agency model, in which they’d set the prices and resellers would take a commission. They considered doing this on their own, but ultimately organized it around the iPad. Under the deal Apple struck with Hachette (MMB:FP), HarperCollins (NWS), Macmillan, Penguin (PSO), and Simon & Schuster (CBS), the publishers also agreed to ensure that Apple’s bookstore always had the best price. This is the price-fixing part of the government’s case.
The Department of Justice has helped build its case with several of Jobs’s comments at the time, including a prediction that Amazon’s e-book prices wouldn’t be lower than Apple’s, and this quote from Walter Isaacson’s biography, in which Jobs is addressing publishers: “We’ll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.”
What’s at Stake?
The conventional wisdom has Apple facing an uphill battle in court, especially since the publishers all settled. Apple isn’t facing any monetary penalties from the trial itself, but if it loses here it’ll likely face similar lawsuits elsewhere. And amid the controversy surrounding the company’s tax avoidance strategies, a federal judgment sounding off on its anticompetitive behavior would be another ding.
A larger question is the future of e-book pricing. When the lawsuit against Apple was announced, it was widely interpreted as carte blanche for Amazon to gobble up more market share by slashing prices. This hasn’t happened. The average price of the top 100 best-selling books on Amazon’s Kindle store rose to $8.85 last year, from $8.20 a year earlier, according to Michael Norris, an analyst at market researcher Simba Information. Other calculations have shown declines in average prices, driven in part by the proliferation of free or nearly free self-published books. The business is still young enough that the pricing structure is still fluid, says Norris.
Who’s the Villain?
While this is a case where a handful of powerful companies allegedly colluded to make consumers pay higher prices, there’s been some sympathy for the defendants, largely because Amazon’s dominant market share is also seen in many corners as anticompetitive. That company’s strategy has been to change the shape of the markets it plays in by eschewing profit for scale, and what it might do with that power has caused no small amount of hand-wringing in the past several years. Apple has been successful in cutting into Amazon’s dominant position since it launched its bookstore, though. There would be relief in many corners for a future in which a single powerful company didn’t hold such outsize power over e-books.