In case you hadn’t noticed, the trial of Apple on serving as the ringleader for the agency pricing trust has just closed out its first week, with an expected two more to go. Fortune has a decent recap of the issues at stake, as well as some cogent analysis of why this case could very well go to the Supreme Court.
It appears the case may not be quite as cut-and-dried as Judge Cote’s pre-trial remarks suggested. Another Fortune piece suggests she may be beginning to see some things Apple’s way.
It appears the ruling is going to hinge on Apple’s “most favored nation” clause, the part of the contract that gives Apple the right to lower the price of an e-book if it finds the e-book on sale cheaper somewhere else. It seems there is a crucial difference between Apple telling publishers to force agency pricing on Amazon, and Apple simply structuring its contract so that publishers would be cutting their own throats if they didn’t force agency pricing on Amazon. Apple telling the publishers what to do is a no-no, but Apple putting a clause into its contracts to force them to do so and then whistling innocently after they agree to it is apparently okay.
The problem with the MFN is, if the publishers kept using the wholesale model with Amazon, in which they charged $10 to $15 wholesale for an e-book but Amazon kept selling it at $9.99 retail, Apple would mark its 30%-take agency-priced version of the book down to $9.99, too. So it would still be selling at the same amount on Apple, but they’d only get 70% of the money. In order to keep being able to sell at a “reasonable” price on Apple, they would have to make sure Amazon didn’t have the power to control its own price for the e-book.
The publishers reportedly fought tooth and nail against the inclusion of this clause before finally capitulating—a fact which on the face of it casts doubt on the idea they “conspired” to force agency pricing on Amazon from the outset.
This led to the spectacle of the man who crafted the agreement for Apple testifying in court, counter to all common sense, that “it never occurred to him […] that his MFN might force Amazon to go to the agency model.” It was just meant to make sure Apple could stay competitive, he explained. The article doesn’t mention whether a little glowing halo appeared over his head while he said it.
While it doesn’t seem like it should make any difference in the overall scheme of things whether Apple outright told the publishers to forcibly impose agency pricing or simply structured its agreement so they would have no other choice, apparently it does in the eyes of the law. Apple’s lawyer argues that any time a new competitor enters a market everyone else in the market is going to get squeezed, and no other antitrust case has ever been based on this kind of “sharpening another company’s incentives.”
The funny thing is, I’m pretty sure Amazon was itself using a most-favored nation clause before Apple, though only in self-publishing contracts (which basically used something similar to the agency model already in terms of the author getting a predefined split of the amount of the purchase price with Amazon). I know that it has certainly been using one since then even in its other deals (such as the one with Baen, which is why Baen is no longer able to offer its monthly bundles after their expiration date anymore).
Anyway, we have at least two more weeks of entertainment ahead before Judge Cote renders her verdict. I wonder if Bob Kohn is going to try to get in on the act again?
Bear in mind that the charge against Apple is collusion to raise retail prices — more exactly, conspiring with the publisher defendants (who have all settled in this case) “to raise retail e-book prices and to otherwise limit competition in the sale of e-books. … Apple facilitated the Publisher Defendants’ collective effort to end retail price competition by coordinating… Apple clearly understood that its participation in this scheme would result in higher prices to consumers.”
There is absolutely nothing illegal about the agency model per se. It’s simply a commission system, and completely reasonable for services and for non-physical objects such as e-books. The settlements with the five publishing houses not only permit continued use of the agency model, they provide incentives for continued use. All of the settling publishers continue to use the agency model.
Retail Price Maintenance, where a supplier demands a minimum retail price for its products, is also legal in the US since 2007.
Most Favored Nation agreements, where a company demands that a supplier give them the best available terms, are also fully legal. What’s wonky about the MFN in this case is that it doesn’t require that *Apple* would get the best available terms, but rather that the retail prices that Apple could charge would be the best available. This necessarily forced Retail Price Maintenance onto all other vendors. The kicker is that the DoJ intends to show that this was done with an explicit goal of raising prices to consumers.
Another serious concern in the allegations is that Apple “determined de facto retail e-book prices as a function of the title’s hardcover list price.” Apple was setting the maximum retail price that it would charge, while at the same time using the unusual retail-price MFN to set the minimum retail price that other retailers could charge. Apple was essentially telling the publishers exactly what price Amazon was to be allowed to sell e-books at. Not only that, it was demanding that all publishers sell e-books at the same prices (for a given hardcover price), thereby eliminating price competition between publishers.
Furthermore, the retail pricing that Apple demanded was, for many titles, above the retail prices that Amazon was currently charging. DoJ says they have evidence that this was an explicit goal for Apple: to force Amazon to raise its retail prices. The complaint alleges, “Millions of e-books that would have sold at retail for $9.99 or for other low prices instead sold for the prices indicated by the price schedules included in the Apple Agency Agreements.”
Finally, there is the collusion charge itself. DoJ says that they have evidence that Apple didn’t negotiate the contracts separately with each publisher — that the negotiations involved sharing what other publishers were and weren’t doing. At one point, DoJ says that Apple got Macmillan to call HarperCollins to get them on-board with the MFN.