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E-book trial: Why is Apple in court yet again?

Apple is on trial for colluding with five publishing companies to fix prices of e-books.  

By Contributor / June 7, 2013

A man leaves an Apple store with an iPhone and an iPad in his hands in central Beijing, China in April 2013.

Alexander F. Yuan/ AP/ File

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The Apple e-book trial, U.S. v. Apple, continued Thursday with testimonies from the Google director of strategic partnerships, Thomas Turvey, the VP of Kindle content, David Nagar, and Kindle’s general manager, Laura Porco.

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In the trial, Apple is accused of colluding with five publishing companies -- Hachette, HarperCollins, Simon & Schuster, Macmillan, and Penguin -- to raise the prices of e-books back in 2010, when the media giant first entered the market.

This means that Apple would have created a horizontal price-fixing, says Harry First, the director of New York University Law School’s Competition, Innovation, and Information Law Program. While it would be legal for the company to set a firm price independently with multiple companies, Apple allegedly set standard prices in simultaneous dialogue with five different publishing. 

“It’s a hub and spoke conspiracy,” Mr. First says. “Apple is in the center and then five publishers make up the spoke,” connected by Apple.     

In 2009, Amazon controlled 90 percent of the e-book market, according to Reuters. The company would buy books wholesale from publishers and then resell them at a baseline price of $9.99. Even though this retail model sometimes meant that Amazon lost money on book sales, the hope was that Kindle would be able to corner the e-book market before raising prices, says Jim Milliot from Publishers Weekly.  

Even though the model did not directly hurt publishing companies, which still received the same payment from Amazon regardless of how much money Amazon charged, publishers were concerned that Amazon’s lower prices would “devalue the price of the print book, causing the total revenue to shrink,” Mr. Milliot says. Overtime, consumers might turn to e-books, forgoing the hardcopies, taking away a profitable area of sales for the companies, he says. While this could be damaging to publishers in the long run, hardcopy books are only a fraction of Amazon’s assets, meaning that in the long run, Amazon doesn’t care about the damage it might do to book publishers, Milliot says. 

When Apple entered the market, it made agreements with the publishers to pay a commission on the books, raising the price of each e-book by several dollars from Amazon’s $9.99 flat-rate.

While publishers argue that Amazon’s $9.99 price fix would prove harmful to their industry, First says that the right answer isn’t necessarily turning to another large company, like Apple, and collectively raising market prices with other publishers.

“Competition is not about protecting producers,” First says. The publishers’ “problem and the problem of everyone else is that the world changes, technology changes, and if that advances the welfare of the consumer” by having lower priced books, then it seems fitting that publishers too will have to adapt. 

The big question from this case seems to be why Apple hasn’t settled outside of court as all five publishing companies have. Though no company admitted any wrongdoing in the settlement agreements, the five paid a total of $164 million in damages to resolve related claims by states attorney general, according to Reuters. There are two answers to this, says First, reputation and revenue. “Apple has a general reputation to protect, and their reputation is that they don’t roll over to litigation,” First says. 

A far-reaching impact of the case that can already be felt is frustration among publishers. 

“What it’s doing is airing out some dirty laundry and giving some industry insiders glimpses of what is going on behind the scenes” of negotiating book sales fees, says Milliot of Publishers Weekly. And will there be long-term impacts from the case? “In terms of changing the industry, not really," he says. "In terms of the industry feeling wronged by the government, absolutely."

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