Eddy Cue, Apple's senior V.P. of Internet Software and Services , center, exits Manhattan federal court following his testimony in the e-book pricing trial on June 13. (Louis Lanzano/AP)

Apple trial defense: A guilty verdict would send chills across Internet industry

The Justice Department on Thursday concluded its antitrust trial against Apple over alleged price-fixing of digital books, with a federal prosecutor saying the creator of the iPhone and iPad engaged in an “old-fashioned, straightforward” conspiracy and Apple’s lead attorney warning that a ruling against the company “will send shudders throughout the business community.”

U.S. District Judge Denise Cote’s ruling in the Justice Department’s first major antitrust trial in more than a decade is expected to have broad consequences for the Internet economy. The Justice Department’s action against Apple, which it calls the “ringleader” of a cartel with book publishers to raise e-book prices, shows the Obama administration’s desire to create clear rules for powerful Silicon Valley firms that have been largely unbridled of regulations.

On Thursday, for instance, the Federal Trade Commission said it would launch a probe into patent-holding companies that may use lawsuits to unfairly edge out competition, a problem particularly seen in the high-tech industry.

The suit against Apple and five publishers focused on the book-publishing business, which is undergoing a dramatic transformation as consumers increasingly turn to e-reading devices. And the business deals struck between Apple and publishers are also echoed across many industries as Internet companies race to provide videos, radio and other media offerings over the Web.

“All across the digital economy, we see companies trying to dampen competition with business practices that were clearly recognized as illegal in the physical economy,” said Mark Cooper, a director at the nonprofit Consumer Federation of America.

All five publishers in the trial — Penguin, HarperCollins, Simon & Schuster, Hachette and Macmillan — have settled.

“When an antitrust case goes to trial, especially after every party but one has settled in the U.S. and Europe, the outcome is strongly precedential,” Cooper said.

Cote did not comment about her thinking during closing arguments for the three-week trial at U.S. District Court in Manhattan. The court’s judges typically take two months to arrive at a final decision after trial.

With such weight on the case, Apple’s attorney, Orin Snyder of Gibson Dunn, vigorously argued to the judge that the company’s deals with publishers were legal. And Apple portrayed itself as the underdog, trying to jump into a market dominated by Amazon.

“The government is taking perfectly sensible business agreements to infer sinister conduct,” Snyder said in closing remarks. “If Apple is found liable . . . that precedent will send shudders throughout the business community.”

Apple has promised a dogged legal battle and is prepared to appeal if Cote rules against it. Some experts say the case could reach the Supreme Court.

At the heart of the lawsuit are two allegations by the government: Apple wanted to lift prices for e-books, and it facilitated a conspiracy with publishing houses to achieve that goal. “Apple directed and oversaw a conspiracy to raise e-book prices and prevent low-price competition,” Justice Department attorney Mark Ryan said in his closing remarks.

Some experts wonder whether Apple’s determination is worthwhile. The company could face financial damages. The publishers that settled with the government agreed to $122 million in damages to states that had joined the federal suit. Cote has wide latitude to restrict future business practices. After Microsoft settled its antitrust cast with the Justice Department a dozen years ago, it had to open its campus to auditors, who were stationed in its Redmond, Wash., offices to ensure proper remedies were carried out.

The trial revealed much about the highly secretive company. Testimony by Apple executives and e-mails by Steve Jobs, Apple’s late co-founder and CEO, show the business tactics the company pursued to break into a market dominated by Amazon.

At first, Jobs didn’t want to sell digital books through the iTunes bookstore, according to two days of testimony by Eddy Cue, senior vice president of Internet software and services. But convinced that the iPad would create a rival platform to Amazon’s Kindle, Jobs became deeply involved in the creation of iBooks, from the way pages turn to the look of the iBooks retail platform, Cue said.

The Justice Department called Cue the “chief ringleader of the conspiracy.” Prosecutors presented evidence of Cue racing to clinch deals with the biggest publishing houses in six weeks between December 2009 and the launch of the iPad on Jan. 27, 2010. According to the evidence, Cue made more than 100 calls to top publishing executives to coordinate a change in how e-books were priced. He flew to New York and sent numerous e-mails to Penguin, HarperCollins, Hachette, Simon & Schuster and Macmillan.

Jobs was intimately involved in the formation of iBooks, and Cue kept him closely informed throughout his negotiations.

“Steve was nearing the end of life when we launched the iPad. . . . I wanted to be able to get that done in time for that because it was important to him,” Cue said, in a rare personal note.

To achieve that goal,Evidence presented during the trial showed that Apple went along with frustrated publishers who wanted to change the way the digital books industry functioned. The book publishers wanted to have more control over prices offered to consumers and proposed an “agency model” in which they could determine retail prices and Apple got a 30 percent cut of sales. At the time, Amazon had about a 90 percent share of digital books and set prices at $9.99.

Key to Apple’s agreement to the new model — and at the center of the Justice Departments’s case — were so-called Most Favored Nation clauses that ensured Apple would get matching rates offered to rivals. Justice Department attorneys argued that the MFN clause in e-books contracts kept prices artificially high because Apple’s rivals weren’t motivated to drop prices below the $12.99 to $14.99 range targeted by iBooks and publishers.

Apple’s Cue agreed that some prices went up, particularly for best sellers and new releases, which publishers were holding back from Amazon because of its price cap.

“Wow, we have really lit the fuse on a powder keg,” Jobs wrote in an e-mail to Cue, dated Jan. 30, 2010.

But Apple has argued that average e-book prices have gone down. Some economists brush off that notion, saying the most desired books have increased in price.

In his closing arguments, Ryan urged the judge to focus on evidence that he argued demonstrated a conspiracy. “The issue in this case is collusion,” he said. “We have no quarrels with the agency model. We have no quarrels in general with MFNs.”

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