In a stern rebuke to its electronic books sales strategy, a
federal judge found that Apple Inc. (AAPL) colluded with five major
U.S. publishers to artificially drive up the prices of e-books in
the months ahead of the technology company entering the market in
2010.
In a civil antitrust lawsuit, the Justice Department claimed
that Apple agreed with the publishers in January 2010 to allow them
set a higher price for bestsellers and new releases in response to
the publishers' "Amazon problem": a $9.99 price point for those
books on Amazon.com Inc. (AMZN) As a result, prices for e-book best
sellers rose to $12.99 and $14.99, the government claimed.
The publishers have all since entered into settlements with the
Justice Department, as well as in a separate lawsuit by a group of
state attorneys general.
"The plaintiffs have shown that the publisher defendants
conspired with each other to eliminate retail price competition in
order to raise e-book prices, and that Apple played a central role
in facilitating and executing that conspiracy," U.S. District Judge
Denise Cote said in a 160-page ruling. "Without Apple's
orchestration of this conspiracy, it would not have succeeded as it
did in the spring of 2010."
When it entered the e-book market in 2010, Apple agreed to shift
to a so-called agency model in which publishers, rather than
retailers, set the price of e-books. As part of its deals with the
publishers, Apple received a 30% commission on each book sold and
the publishers had to match the price of Amazon or other
competitors if the competitor's price was lower.
In May, the judge indicated that she believed the government
would likely be able to prove its case, but stressed that she
wouldn't make a final decision until all of the evidence had been
presented. A three-week trial in the matter ended June 20 in
federal court in Manhattan.
Because Apple was found liable for violating U.S. antitrust
laws, a hearing will now take place in a separate lawsuit brought
by state attorneys general, who are seeking to recover damages on
behalf of consumers who paid higher prices for e-books.
Apple last year separately settled an antitrust case with the
European Commission over e-book pricing but didn't admit any
wrongdoing.
In closing statements in June, Mark W. Ryan, a Justice
Department lawyer, said Apple's agreement with the publishers
created price caps for best sellers and new releases, but
publishers quickly adopted those prices--$12.99 to $14.99--as the
going rates for e-books.
"This is an old-fashioned, straight-forward, price-fixing
agreement," Mr. Ryan said.
However, Apple argued at trial that it engaged in hard-fought
negotiations with the publishers and denied that it engaged in any
collusion.
Apple, a new entrant into the e-book market, wasn't prepared to
sell e-books if it couldn't get new releases at the same time as
physical bookstores and wanted to be competitive on price, said
Orin Snyder, a lawyer for the technology company. Publishers,
unhappy with Amazon's $9.99 price, had begun withholding some best
sellers from Amazon's bookstore for a period of time.
"It's like opening a record store in the 1960s and not having
the Beatles records," Mr. Snyder said.
The three-week trial featured testimony from top executives at
the publishers and Amazon, as well as Eddy Cue, a senior Apple
executive who worked closely with Steve Jobs, the company's former
chief executive and co-founder who died in 2011.
Mr. Cue testified that Apple clashed with the publishers
repeatedly about pricing as the company rapidly tried to negotiate
agreements with the publishers before the iPad was unveiled in late
January 2010. Mr. Cue said that HarperCollins, for example, wanted
to set a $18-to-$20 price for best sellers and new releases and
withhold books from Apple's online book store: both nonstarters for
Apple. HarperCollins is owned by News Corp (NWS), publisher of Dow
Jones Newswires and the Wall Street Journal.
"I struggled and fought with them about many, many things," Mr.
Cue said. "If they had been talking to each other, I would assume I
would've had a much easier time getting those deals done."
David Shanks, chief executive of Penguin Group (USA), separately
testified that Penguin tried to get Apple abandon a price-matching
provision and caps on pricing. "I did not get the deal I wanted,
but I wanted to be sold to Apple's customers," Mr. Shanks said.
Penguin Group is owned by Pearson PLC (PSON.LN).
However, Russell Grandinetti, vice president for content for
Amazon's Kindle e-reader device, testified that the publishers gave
him an ultimatum if the company didn't switch to an agency model:
they would withhold newly released books from its digital bookstore
for months.
In emails introduced as evidence, Mr. Jobs seemed to gloat after
published reports in January 2010 that Macmillan and Amazon were
separately clashing over pricing following the Apple deal.
"Wow, we have really lit a fuse on a powder keg," Mr. Jobs wrote
in an email from Jan. 30, 2010.
In a group email at Apple the next day, Mr. Jobs said: "We have
definitely helped stir things up in the publishing world."
Write to Chad Bray at chad.bray@wsj.com and Joe Palazzolo at
joe.palazzolo@wsj.com
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