Did Apple Rob Your Library?

The U.S. Department of Justice is much like erstwhile brokerage firm E.F. Hutton once was. When it talks, people listen. So when the DOJ

this week filed an antitrust suit against Apple and five major book publishers for fixing prices in the electronic book (e-Book) publishing market, the industry noticed. These are myriad moving pieces to this complex and evolving puzzle. Here are a few key takeaways.

1. The Lawsuit. DOJ filed suit against Apple and five book publishers, alleging restraint of trade and collusion in setting artificially high e-Book prices after Amazon established what the publishers—and Steve Jobs—viewed as an untenable price of $9.99 per book. Within 24 hours, 16 States also brought suit. Three of the publisher defendants—Harper Collins, Simon & Schuster, and Hachette Books—have already settled. The lawsuits against Macmillan and Penguin Group will proceed for now. As Jacqui Chang of Ars Technica notes, the remaining publishers are trying to salvage the so-called e-Book agency model, which allows publishers to set e-Book prices rather than sellers (such as Apple, Amazon, Barnes & Noble, and others). Steve Jobs explained the agency model in simple (and damning) terms below.

2. DOJ Alleges Collusion “at the highest levels” of Apple. The Justice Department’s filing alleges that collusion occurred among the publishers and those “at the highest levels” of Apple to solve the so-called “$9.99 problem.” The highest levels? That term no doubt means different things in different organizations; at Apple, it meant the late-CEO Steve Jobs, arguably the greatest technology innovator of the past century. In this case, however, Jobs was at the epicenter of this debacle. According to respected biographer Walter Isaacson, Jobs told him the following about the alleged price scheme:

We told the publishers, “We’ll go the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” [The publishers] went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.

Isaacson’s brilliant Steve Jobs, released October 2011 by defendant Simon & Schuster, is available for Kindle for $14.99 (otherwise $35.00 in hardcover). Amazon will likely lower the price to below $9.99, as I argue below.

3. Apple Will Probably Settle The Case Quickly. Many observers believe that Apple will settle quickly and as quietly as possible (a key qualifier), as I wrote on Wednesday. Reuters reports this morning that Apple and the two remaining publisher defendants are already negotiating a settlement With three publishers off the table—and very possibly for reasons other than mere aversion to litigation—Apple may see the writing on the wall, especially given Jobs’ statements. According to Dan Balto, a former attorney in DOJ’s Antitrust Division and Policy Director of the

Federal Trade Commission, which promotes consumer protection and the elimination and prevention of perceived harmful, anti-competitive business practices,

This is one of the most compelling complaints I’ve ever seen. . . . Government enforcers fantasize about this kind evidence, but this is beyond their fantasies.

That’s certainly a strong view. Not so fast, however. Forbes contributor Geoffrey Manne, a highly respected specialist in antitrust law and policy, technology policy, and regulatory affairs, argued persuasively this week that Apple can in fact defeat the DOJ’s e-Book Antitrust Suit. His market-based arguments are certainly worth a look.

4. Amazon must be doing backflips. The federal government just handed Amazon the opportunity to expand and solidify its position in the e-Book market. This is a big deal. E-Books sales have exploded since Amazon first brought us its Kindle in 2007. E-Books now account for a whopping 25 percent of all titles sold in the United States and comprise a market that that exceeds $1 Billion. Forbes contributor Peter Cohan notes:

When you realize that the e-Book market in total is only as big as the amount that Facebook paid for Instagram, you could conclude that it may not be that important. But the $1 billion e-Book market is expected to triple by 2015, according to Forrester Research, and 21% of American adults have read at least one e-Book in the last year, according to the Pew Research Center.

Amazon’s principal competition in this market was—and still is—Apple, which sells e-Books through its own channels and allows people to read Amazon Kindle books on Apple platforms such as the iPad and iPhone. With sales of both Apple (iPad) and non-Apple tablets soaring and replacing the PC paradigm, this is and will remain a huge market. For now, Amazon controls the market’s pricing structure, a highly enviable position to be in.

5.  Amazon Will Set The Price of E-Books Below $9.99.  Gone are the days when one might have purchased Isaacson’s biography of Steve Jobs for $14.99, an artificial price determined by defendant Simon & Schuster. Gone too are the days when Amazon charges $9.99 for an e-Book. It no longer needs to. I’m guessing that Amazon would much rather capture platform-agnostic market share at lower prices than continue its current direction, which has already yielded a 60 percent share in the e-Book market. (On an ironic note, one has to wonder when Amazon itself may have to start worrying about market share-based antitrust issues that could result from the DOJ’s suit this week.)

6.  Consumers Win. Cohan reports that Apple stands to lose $252 million in e-Book sales by 2015. For Apple, that’s relatively small fry. But that’s just sales. Connecticut and Texas, two of the 16 states filing a separate lawsuit, reached agreements with Hachette and HarperCollins to provide $52 million in restitution to consumers, using a formula based on the number of States participating and the number of e-books sold in each state. That certainly didn’t take long. Other States in the case may sign onto the agreement. Either way, one can expect more States to file suit in the coming days, although it should be noted that given Apple’s extraordinarily deep pockets, there is no need for plaintiffs to rush settlement

In the meantime, of course, consumer class actions were filed long before DOJ’s entry into the fray, and I would venture that they will be far less willing to settle than the Department of Justice. Why? Because even given as much as we know, this is a highly fact-specific case, and we simply don’t have all the facts. Was there collusion? It appears highly likely, but we can’t yet be certain. Are the current estimates of damages to consumers accurate? We don’t know at the moment. It’s critical to remember that settlements sweep such questions—and, of course, the answers thereto—under the rug.

My guess is that a highly motivated class action lawyer will uncover these facts and reap on behalf of his clients a significant windfall. Pete Yost of the Associated Press reports:

Susan E. Kinsman of the Connecticut attorney general's office said it's too early to say how consumers can go about getting refunds. But there could be millions of people applying.

[U.S. Attorney General Eric Holder] told a Justice Department news conference that "we believe that consumers paid millions of dollars more for some of the most popular titles" as a result of the alleged conspiracy. Pozen said the scheme added an average of $2 to $3 to the prices of individual e-Books.

Connecticut Attorney General George Jepsen said the individual book markups went as high as $5 and the total cost to consumers was more than $100 million since April 2010, when the scheme allegedly took effect.

Until then, the question remains: Did Apple Rob Your Library? We don’t yet know, but for now the presumption is certainly against it.