How Apple shook up the electronic book market

A Manhattan court is due to decide whether Apple helped fix the prices of electronic books

By , IDG News Service |  Legal

Apple didn't try to fix or raise the prices of electronic books when it entered into the market in 2010, according to Apple Senior Vice President Eddy Cue. Rather, he says, the company was only working to ensure a profit for itself.

"We're not willing to lose money in any business," Cue told the court, referring to Amazon's practice of 2009 to sell electronic books for less than what it paid for them.

But in doing so, the U.S. Justice Department contends, Apple violated antitrust laws by colluding with the five largest book publishers -- HarperCollins, the Penguin Group, the Hatchett Group, MacMillan, and Simon & Schuster -- to fix the prices of electronic books. As a result of their actions, the prices of electronic books rose in 2010, the DOJ contended.

While the five publishers have since settled with the DOJ out of court, Apple is defending its practices in a DOJ antitrust trial now under way at the U.S. District Court for the Southern District Court of New York, with District Judge Denise Cote presiding.

In its arguments, the DOJ portrayed Cue as the mastermind of the operation, the one who coordinated the actions of the publisher CEOs while keeping Apple's then-CEO, Steve Jobs, informed of the progress he was making. Last week, Cue took the stand to explain the reasoning that led Apple and the publishers to set up an entirely new pricing model for electronic books, called the agency model.

The agency model works differently from the wholesale model that publishers have been using for centuries. In the wholesale model, the book publisher sells the books to the retailer, and then the retailer can resell the book at whatever price it sees fit, usually at a profit. In the agency model, such as the one Apple uses for its App Store, the manufacturer sets the retail price and the retailer gets a certain percentage of the sale. In Apple's case, it would take 30 percent of whatever publishers intended to charge.

Does the DOJ have a case against Apple? While a move to the agency model may be legal, the work of coordinating competitors in a single market to agree on prices is not, said Keith Hylton, a professor at the Boston University School of Law. The complexity in this case is that the two issues are confounded, he said.

Agency pricing is similar to another mechanism, "resale price maintenance," in which the manufacturer sets the prices of its goods, Hylton said. The U.S. Supreme Court ruled in 2007, in a case concerning the pricing of leather apparel, that resale price maintenance was legal unless the practice was shown to be harmful to consumers.

The agency model, on its own, "doesn't even raise an antitrust issue, because the seller never owns the book," Hylton said.

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