Judge's Apple Price-Fixing Ruling Likely To Impact All Retail

When a federal judge on Wednesday (July 10) slammed Apple (NASDAQ:AAPL) on an e-book antitrust case, finding that Apple had conspired with five major U.S. publishers to drive up e-book prices and overcome low prices that had been set by Amazon, it opened the door to potentially huge changes for all retailers who deal with any kind of media providers (videos, books, games, music, etc.). 

"Understanding that no one Publisher could risk acting alone in an attempt to take pricing power away from Amazon, Apple created a mechanism and environment that enabled them to act together in a matter of weeks to eliminate all retail price competition for their e-books," wrote U.S. District Judge Denise Cote. "The evidence is overwhelming that Apple knew of the unlawful aims of the conspiracy and joined that conspiracy with the specific intent to help it succeed."

What Apple did was negotiate with major publishers about ebooks. By permitting them—indeed, encouraging them—to raise prices, it put pressure on Amazon to raise prices. This was especially the case when some publishers told Amazon that if prices were not permitted to increase, they intended to withhold their e-books from Amazon until hardcover had been on the market for quite some time.

At the heart of the case were Apple's favored-nation contract clauses, which forced publishers to match the lower prices of rival e-book sellers. Amazon has gotten into trouble in Germany for including similar favored-nation clauses with merchants selling within its marketplace.

Is this going to be the beginning of the end for such clauses? Do they indeed get too close to price-fixing for regulators'—and judges'—comfort?

Apple was quick to issue a statement that it had done nothing wrong. "Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations. 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. We've done nothing wrong and we will appeal the judge's decision."

A U.S. Justice Department statement applauded the judge's ruling. "Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so. This decision by the court is a critical step in undoing the harm caused by Apple's illegal actions," it said.

No one would dispute that Apple is an aggressive competitor (for that matter, Amazon's no wallflower, either). But it's not clear where they crossed the line. Apple made a persuasive case that a conspiracy didn't exist as they had to argue and convince publishers to cooperate, which paints a very different picture.

Apple e-book executive Eddy Cue, for example, testified about his struggles with many of the publishers, something that didn't feel at all like they were all working together against Amazon. "I struggled and fought with them about many, many things," Cue testified. "If they had been talking to each other, I would assume I would've had a much easier time getting those deals done."

Apple was taking a cool 30 percent of every sale so it had every business incentive to encourage pricing to be as high as possible. Apple didn't quite have to twist publishers' arms to get that done, with some publishers wanting to charge even more. The publishers already didn't like the Amazon pricecap.

In short, if Apple's actions were price-fixing, a lot of retail chief counsels are going to have to rewrite an awful lot of contracts.

For more:
- See New York Times story
- See Wall Street Journal story
- See judge's full decision

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