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A man looks at his iPad while sitting in a cafe in central Beijing June 6, 2012. (DAVID GRAY/REUTERS)
A man looks at his iPad while sitting in a cafe in central Beijing June 6, 2012. (DAVID GRAY/REUTERS)

antitrust law

Landmark ruling against Apple changes the game for digital entertainment Add to ...

Apple Inc. lost a landmark price-fixing case that could change the way all digital entertainment is bought and sold.

The company behind the iTunes and iBooks online stores has been found guilty of breaking antitrust law by colluding to raise the price of e-books, which are bought online and read on tablets, smartphones, e-readers and other electronic devices. A New York district judge ruled on Wednesday against Apple in a case initially brought by the U.S. Department of Justice and several states last year.

Prosecutors alleged that Apple teamed up with five U.S. publishers – Macmillan, Hachette Book Group Inc., HarperCollins Publishers LLC, Penguin Group (USA) Inc. and Simon & Schuster Inc. – to effectively eliminate price competition in the e-books industry.

The implications of the ruling are immense. By the time Apple decided to enter the digital books industry in 2009, Amazon had already built a market position that Apple and some publishers claim was monopolistic. In order to compete, Apple sought to turn the e-books pricing model on its head. Instead of publishers selling books to online retailers, who could then charge whatever they wanted, publishers would now set the selling price and Apple would take a 30-per-cent cut. The company also signed a “Most Favoured Nation” agreement with publishers, which effectively allowed Apple to drop prices on e-books to match the lowest available price.

Prior to the 2010 arrangement, retailers had largely set prices for e-books. But under the so-called “agency model” introduced by Apple, the publishers themselves would set prices, and Apple would get a cut of the profits. By joining forces, the publishers were able to force the same model on Amazon, forcing the retailer to abandon its $9.99 policy for a higher price. Should Amazon have refused, the publishers could decide to keep new titles away from the retailer until after they had been available on the iBooks store for some time.

Publishers have since been trying to adjust to the shift from ink to electronic editions. E-books now account for 20 per cent of publishers’ revenues in the United States, up from 15 per cent a year ago, The New York Times reported, citing an industry survey. E-books hit 17.6 per cent of all book sales in Canada in the first quarter of this year, according to data compiled by BookNet Canada, an industry association.

Both elements of Apple’s arrangement with the publishers – revenue splitting and the retailers’ right to cut prices – have since become a vital part of how Apple and many other content-selling companies such as Netflix, BlackBerry and Google do business. But the court ruling puts them in jeopardy.

Peter Csathy, CEO of Manatt Digital Media Ventures, said the ruling, if it stands, could hurt companies that buy and then make available to consumers one type of content, such as online video site Hulu. Those companies, he said, need the price of content to be high enough to make a profit – something that’s more feasible with the generally higher and uniform prices set by publishers under the agency model. Meanwhile, Amazon can afford to sell e-books and other content at lower prices because their aim is to get consumers into their wider ecosystem of products and services.

“There is a lot at stake, and it may very well go beyond the realm of e-books and spill over into other forms of online media, including premium video,” Mr. Csathy said. “Smaller distributors of content may have a more challenging marketplace if Apple’s agency model is struck down.”

Apple and its supporters argue that the agency model arrangement helped bolster competition and that without such means, industries such as e-books can fall under the control of one massive player.

“Apple did not conspire to fix e-book pricing and we will continue to fight against these false accusations,” a company spokeswoman told The Globe and Mail. “When we introduced the iBooks store 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.”

When Apple struck its agreements with the publishers, all six companies were trying to weaken the online retailing giant Amazon, which at the time charged $9.99 (U.S.) for the e-book versions of many New York Times bestsellers.

“At their very first meetings in mid-December 2009, the Publishers conveyed to Apple their abhorrence of Amazon’s pricing, and Apple assured the Publishers it was willing to work with them to raise those prices, suggesting prices such as $12.99 and $14.99,” Judge Denise Cote wrote.

She added that both Apple and the publishers had reasons to want to eliminate price competition in the retail e-books market. Apple wanted to launch its iBooks retail platform and its iPad simultaneously, in January, 2010, because e-reading was, and still is, one of the iPad’s functions. Apple wanted an agreement with the publishers by the launch date that guaranteed a profit on e-books as well as early access to new titles. The publishing houses, on the other hand, needed to work together so that Amazon would not be able to retaliate against just one of them. “Apple and the Publisher Defendants shared one overarching interest – that there be no price competition at the retail level,” the judge wrote.

“The digital marketplace is an increasingly important component of the economy of most countries, and competition authorities are paying a lot of attention to that space,” said George Addy, a senior partner at the law firm Davies and a former head of the Canadian Competition Bureau. “The court ruling makes it clear that you can’t use unlawful means to overcome slow entry, second-tier innovation or to undermine a rival’s success.”

A trial to determine damages is now expected to follow.

Unlike all the publishers named in the initial complaints, Apple refuses to settle.

“We’ve done nothing wrong and will appeal the judge’s decision,” the Apple spokeswoman said.

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