Apple may be having some regrets this afternoon. Having refused to settle an eBook price-fixing case brought by the Department of Justice, it took a big legal hit today when a federal judge in Manhattan found the company guilty of conspiracy to restrain trade, and cleared the way for a second trial on damages. The court's full decision is here.
Just to recap, Apple -- and an alleged cartel of big publishers -- attracted the DoJ's notice by moving from a wholesale to an agency model for eBook sales. Under the wholesale model, the publisher sets the price to the retailer, then the retailer sets the price the consumer pays. Under the retail model, the publisher sets the price, and the retailer takes a commission.
The twist in this case was a "most favored nation" clause, under which Apple had the right to match lower retail prices set by a competitor (i.e. Amazon). This, according to the government, allowed the publishers to force an agency model on Amazon, under the threat of withholding new best-sellers from the Amazon store.
The result, the court found, was an almost immediate increase in the price of eBooks, with Amazon pressured to raise the retail price of the publishers' eBooks by an average of 18.6 percent (much more for bestsellers). Result? Happy Apple, happy publishers, swindled consumers.
In fact, it's not that simple. In the long-term, consumers may rue this result.
Certainly, there seems to have been ample evidence that the deal with the publishers, negotiated by Steve Jobs, included an agreement to set higher prices. In an email, Jobs had told James Murdoch of News International (HarperCollins' parent company):
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.
But the irony is that the result of these antitrust proceedings seems likely to be the inadvertent creation of a monopoly. Although Apple's share in the US eBook market improved marginally following the adoption of the agency model, Amazon is estimated to control about 65 percent of that market, with Barnes & Noble is second place at 25 percent.
In another much-quoted email, Jobs said he was "not sure [Apple] can be competitive," absent the model now outlawed by the court. With Barnes & Noble beset by problems, it's easy to imagine the eBook market contracting dramatically. And if Amazon is the only major retailer left standing, it will have a stronger hand than ever to exploit the wholesale model, driving furious bargains with publishers, while actually maintaining -- or even raising -- retail prices.
Apple will seek to appeal the decision, of course (the publishers settled before the case came to trial), but if it loses, the cost could be high. The 33 states which joined the DoJ's action are seeking triple damages for "overcharging customers." Even so, handing over the eBook market to the tender mercies of Jeff Bezos may mean that the victory for consumers will be short-lived.
— Kim Davis , Senior Editor, Internet Evolution