Judge rules Apple conspired to raise e-book prices

July 10, 2013

A federal judge ruled Wednesday that Apple conspired to raise e-book prices, handing the tech giant a bruising loss that could ripple throughout the industry and force companies to rethink how they meet consumer demand for digital products..

For 160 pages, U.S. District Judge Denise Cote scolded Apple for violating antitrust law and colluding with five of the nation’s top book publishers to ensure the successful launch of its digital bookstore in 2010. “Apple played a central role in facilitating and executing that conspiracy,” Cote said in her ruling. “Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did.”

The ruling was a stinging rebuke to Apple’s carefully cultivated public image of putting its customers first. The company’s tactics, Cote found, were motivated as much by its bottom line as its desire to introduce an innovative new product.

But the case may also have broad implications for the technology industry as tech giants, rather than traditional retailers, offer consumers more digital content — from books and movies to music.

Wednesday’s ruling will probably prompt Apple and other companies, such as Amazon, Google and Netflix, to rethink how they structure deals for multimedia content in the future, said Allen Weiner, a media specialist at the research firm Gartner. There is no industry standard for how companies deal with streaming video or a la carte television, he said. The same is true of other growing digital markets, such as streaming music or even digital textbooks.

“There’s a number of emerging media areas that have yet to find their way,” Weiner said. “Every little nugget like this Justice Department ruling is going to get people interested.

This ruling affirms that antitrust regulations apply even when dealing with new types of media, said Mark Cooper, director of research at the Consumer Federation of America, a consumer-advocacy organization. “All across the digital space . . . there’s a question of whether we need a different set of rules,” he said. “This shows that the current rules, they still apply.”

Apple will appeal the ruling, company spokesman Tom Neumayr said in a statement. “When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry,” Neumayr said. “We’ve done nothing wrong and we will appeal the judge’s decision.”

Apple’s lawyers framed the company’s actions as a reaction to Amazon’s dominance in the early years of the e-book market and said that their company was trying to break its competitor’s grip on publishers and consumers.

Yet Cote found that Apple’s solution, to strike a deal with publishers that gave it a cut of book sales, violated the law. She also objected to Apple’s requirement that publishers grant it “most-favored nation status” to ensure it received rates matching those offered to rivals. That directly led to higher book prices, she said.

Amazon’s market dominance didn’t justify Apple’s actions, she said. “Apple seized the moment and brilliantly played its hand,” Cote said in the ruling. It took “advantage of [publishers’] fear of and frustration over Amazon’s pricing, as well as the tight window of opportunity created by the impending launch of the iPad.”

She also rejected Apple’s argument that punishing it for actions it took while trying to break into a new market would prevent other companies from doing the same in the future.

“While a Court must take seriously a prediction that its decision will harm our nation’s economy, particularly when made by skilled counsel on behalf of an esteemed company, it is difficult to see how competition will be stifled by the ruling in this Opinion,” Cote said. Her ruling, she added, narrowly deals with Apple’s actions in 2009 and 2010 and “does not seek to paint with a broader brush.”

Consumers probably will not see any major changes to e-book prices in the short term, analysts said.

But the company could be compelled to pay damages. Cote said there would be a second trial to assess what Apple may owe to consumers who paid more for e-books while these agreements were in effect.

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Hayley Tsukayama covers consumer technology for The Washington Post.
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