Apple might still win this e-books fiasco

August 8, 2013

(Brian Snyder/Reuters)

Apple may now have been convicted of anti-competitive behavior by a federal judge, but that hardly means the story's over. The Justice Department is out for blood, and in a hearing Friday, the court will consider whether to grant the government's demands for Apple's punishment. What should we expect?

While Apple may be forced to swallow some unpalatable terms at first, there's only so much force the Justice Department can reasonably apply. Meanwhile, Apple can rest easy knowing it's already shaken up the e-book industry forever.

Ankur Kapoor, an antitrust lawyer at Constantine Cannon, thinks the government will mostly get what it wants: A five-year ban on Apple signing any e-book deals with publishers under what the company calls its agency model, which allows publishers to set the price of their e-books while Apple, the retailer, takes a 30 percent cut.

The publishers would still be free to make those types of deals with other retailers after a two-year cooling-off period, meaning Apple could spend as many as three years watching book manufacturers link up with other retailers using the very model that Apple had pioneered — without being able to use it itself. (If you have a sad trombone, play it now.)

In addition, the Justice Department wants Apple to submit to internal and external auditing. The government is also calling for the court to prohibit Apple from entering into any contract, with virtually any content provider, that may be "likely" to increase prices in that relevant content industry.

"What the government is trying to do with this proposed relief," said Kapoor, "is to — can I say 'get a second bite at the apple' "?

But Kapoor said that even if the judge sides with the government on everything else, he doesn't see the wider ban on negotiations being approved. More likely, the judge will either curtail the decision so that it applies only to e-book negotiations, or she'll tell the Justice Department to go back and revise the language to be more specific.

Either way, Apple is expected to appeal the ruling almost as soon as it comes down. And it might have a shot. Kapoor says that while Apple had clearly approached publishers individually with the same idea, whether there were communications between all the publishers and Apple, together, wasn't conclusively proven.

"The antitrust laws require a conscious commitment to a common scheme," said Kapoor. Citing the judge's opinion, he said that Eddy Cue, Apple's senior vice president for Internet software and services, called one wavering publisher and then called each of the other publishers. "And the others called the first publisher," Kapoor said. "And the next day, the deal was finalized. The testimony was that Eddy Cue was corralling the other publishers to convince the last publisher." But Kapoor doesn't believe that proves the government's case for conspiracy.

Whatever happens on Friday, over the long run, Apple might still come out ahead. By introducing the agency model, Apple had begun to chip away at rival Amazon's e-book business, which relied on a traditional wholesale relationship with the publishers. Amazon's market share has gradually slipped over time, to the point where Apple's iBookstore now controls 20 percent of the e-book market.

Given that the government is seeking only a temporary ban on agency-model deals, it's fair to assume that the business model will make its return eventually. And since its advantages are what the publishers wanted all along, Apple or not, it's unlikely we'll ever return to a wholesale-only world.

Brian Fung covers technology for The Washington Post.
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Brian Fung | August 8, 2013