Defending the Apple way

One of the biggest questions hanging over the U.S. Justice Department’s ongoing litigation against Apple over an alleged price-fixing conspiracy in the ebook market is why Apple hasn’t simply settled the case and moved on.

All five of its co-defendants and alleged co-conspirators have already settled with the federal government and have entered into consent decrees barring them from doing business with Apple in the future on the same terms as in the past. Even if Apple were to prevail at trial it could not restore the status quo ante because those consent decrees would still be in force. Worse, those erstwhile co-defendants are now preparing to testify against Apple.

So why press on alone? Why risk a potentially long and costly trial, where any dirty laundry will be aired in open court, with no certainty of prevailing in the end?

The answer, as implied if not quite spelled out in a 51-page pre-trial filing released this week, is that Apple fears that acknowledging wrongdoing in the ebook case, even implicitly, could constrain its ability to enter new media markets in the future, particularly markets that are highly concentrated, such as book publishing and, not incidentally, television.

The crux of the government’s case against Apple, as spelled out in its own lengthy filing released this week, is that it acted as the “ringmaster” of a conspiracy among the publishers to raise the price of ebooks above what Amazon was selling them for.

“Apple knew that the [agency pricing] plan it was proposing involved a ‘dramatic business change’ for publisher defendants,” DOJ said in its filing. “Accordingly, Apple kept each publisher defendant aware that it was orchestrating and coordinating a common approach for all of them.”

But what the government calls a conspiracy in restraint of trade, Apple calls standard operating procedure for entering a concentrated media market.

“Apple’s terms reflected Apple’s digital business principles it had consistently implemented when successfully entering (or creating) other digital content markets, including its revolutionary iTunes Store and App Store,” Apple said in its filing. “These core business principles, and not a conspiracy with publishers, drove Apple’s negotiating strategy and contract terms.”

In other words, this is how we do it. And if we can’t do it that way, we can’t do business.

Whether Apple’s actions in the ebook market amount to illegal price fixing is a question of fact and of law that the court will have to sort out. But Apple’s own description of its actions reveals the risks associated with its strategy.

The locus of that risk is that there is always an instrumental quality to Apple’s involvement in any media business. While Apple is the largest retailers of digital music, for instance, it’s not really in that business for its own sake. It’s in that business to make sure that users of its software and devices have a consistent and predictable experience when buying and listening to music. It does that in part by carefully controlling — if not actually fixing in a legal sense — the price of music tracks in the iTunes store.

Apple used the leverage given to it by the disruptive forces then ratting the music industry to create a market in which easy availability of music tracks at a consistent, low price added value to using Apple devices, rather than the other way around. By its own description, it adopted the same playbook for entering the ebook market:

Apple walked into a market in turmoil in December 2009. There was growing tension throughout 2009 between the major book publishers and Amazon, the leading retailer of books. Amazon dominated the e-book market; it accounted for 80–90% of all e-books sold. Amazon was selling many of the digital versions of New York Times bestsellers at $9.99—well below the prevailing wholesale prices; Amazon was purchasing books at wholesale for [redacted] meaning it was losing [redacted] per title [snip].

On December 9, 2009, Hachette, HarperCollins and Simon & Schuster announced plans to expand their windowing efforts of e-books, and the New York Times published a story on their unhappiness with Amazon. It was against that backdrop that [Apple senior executive Eddy] Cue had his first conversations with any publisher, on the very next day, about Apple’s interest in entering the e-book market [snip].

Mr. Cue emphasized to each publisher that Apple could be a transforming new entrant into e-book retailing, with a highly innovative reader, a proven track record of success, and an enormous customer base. Mr. Cue also made clear that Apple would not accept windowing, would not operate an e-bookstore at a loss, would need lower wholesale prices, and would need a broad selection of e-books.

In other words, we’ll bail you out of your troubles with Amazon, but we’ll set the terms and the terms are non-negotiable.

That’s the Apple way, and it’s worked remarkably well up to now. If it turns out to be illegal, however, then Apple has a bigger problem than just losing the ebook case.