Apple: E-book pricing verdict could have 'chilling effect'

The three-week antitrust trial wrapped up Thursday, with both sides presenting their final arguments.

NEW YORK -- Apple warned that a guilty verdict in its e-book price-fixing case could have a negative impact on how digital media deals are negotiated in the U.S, the company said Thursday in its closing arguments.

But the U.S. Department of Justice, which initially sued Apple and a handful of the nation's largest publishers early last year, said Apple and the publishers had two objectives when making their deals: raise e-book prices and restrain retail price competition to hurt Amazon.

Declaring that Apple violated antitrust laws and served as the ringleader in a conspiracy to change the digital book market would impact how the company and many others operate, said Apple's lead attorney, Orin Snyder. They would have to hold "hermetically sealed" meetings so no other companies know they're taking place, and all deals would have to have very different terms.

"That's not how it works," Snyder said during the final day of the trial. He noted such a ruling would have a "chilling and confounding effect not only on commerce but specifically on content markets throughout this country. ... That precedent will send shudders through the business community."

And Snyder also said during his two and a half hour summation Thursday morning that the U.S. Department of Justice didn't meet its burden of proof. He reiterated arguments Apple made repeatedly throughout the course of the trial -- namely, that it was acting alone and in its own best interests when reaching deals with publishers, not seeking to upend the digital book market.

In addition, Apple's negotiations with publishers were legitimate and common tactics used by many companies, including its rivals in the e-books market -- Amazon, Barnes & Noble, and Google, Snyder said.

"Apple loves $9.99 but not when they're not getting all the books ... and losing $3 on every book," Snyder said.

Justice Department attorney Mark Ryan, however, used Apple's own words in documents and court testimony to try to prove that a conspiracy took place. He noted that Eddy Cue, Apple senior vice president of software and services, testified in court that he knew publishers wanted to raise prices, he gave the ability to do it, and he provided reassurances the publishers needed so they didn't fear retaliation from Amazon. They were "consciously committed" to the scheme to raise prices, Ryan said.

"The price that had been set in a competitive marketplace was not the price they liked," Ryan said.

The Justice Department contends that Apple colluded with publishers to move to a sales model that inflated the prices of digital books and hurt consumers. The government says Apple was the ringleader in the conspiracy to move the entire e-book selling industry to an agency model, in which publishers set the prices, and away from the traditional wholesale business, which typically results in lower prices for the consumer.

The trial played out over three weeks in district court in Manhattan. Judge Denise Cote, who will decide Apple's guilt or innocence, didn't make a ruling Thursday, but a decision is expected in about two months.

Eddy Cue, Apple's senior vice president of Internet software and services, arrives at court in Manhattan with an Apple attorney on Thursday. Sarah Tew/CNET
Snyder appeared very comfortable during his summation and was clearly in his element. The court audience laughed at several comments he made, including remarks about publishers delaying the digital release of new, popular books like those about Edward Kennedy and Sarah Palin. Snyder gushed about Kennedy's book, which was mentioned many times during the trial, but he didn't have as much to say about Palin's tome.

"I didn't read it, but I'm told" it was great, Snyder said.

He argued that Apple was thrown in the middle of a market already in turmoil. Windowing, or delaying the digital release of new books by several months, was a particular concern for Apple when forming its deals. And that threat from publishers, not Apple's deals with the companies, caused Amazon to agree to different deals, Snyder said. Amazon CEO Jeff Bezos, in an internal e-mail presented as evidence, had called windowing an "absolute declaration of war."

"Amazon made the exact same, intelligent business decision to move to agency as Apple and Barnes & Noble," Snyder said. "They recognized that without all titles on their inferior e-reading device ... it would be a disaster, and its 90 percent share would plummet."

However, the Justice Department disputed Apple's characterization of Amazon's shift, saying that every Amazon executive and publishing industry witness testified that Amazon resisted changing deal terms.

"I think 'ultimatum' is the right word, not 'choice,'" Ryan said.

The Justice Department also argued that just because a market is in turmoil or a company is a new entrant doesn't mean it can make deals to set pricing or hurt low-cost rivals.

"Because you're a new entrant, you can fix prices?" Ryan said during his closing argument. "Where is that provision cited in the law of our country? ... Apple had a choice. It could enter the market and compete freely ... or stay out of the market."

Apple, meanwhile, said that were it conspiring with publishers, negotiations should have been much easier. But the Justice Department noted that entities working together could still disagree about certain elements of their deal. Ryan cited the example of oil-producing companies arguing about how much supply to release.

"The fact it might be hard to hammer out details of a conspiracy is no defense for a conspiracy," he said.

Both sides called into question evidence presented during the case. Apple said some Justice Department documents were misleading, and the DOJ questioned the credibility of Apple's witnesses, including Cue. Ryan noted that many gave different answers to the same question or would reverse their answer after being shown a document as evidence.

"There were many instances in this case where the clear impression from Apple witnesses was not the truth and the whole truth but reaching for answers" that helped Apple or caused the least damage, Ryan said.

An important point Apple made was that it never knew publishers were talking with each other and working together in any way. Cote asked Snyder several times during his closing argument if Apple believed the publishers, regardless of Apple's role, engaged in a conspiracy to raise prices.

Snyder said Apple didn't have an opinion on the matter, but he didn't contest that the publishers may have colluded with each other.

"I literally have no idea," Snyder said. "I don't know what they were doing ... Apple has formed no opinion on if publishers crossed the line."

Apple asked Cote to find in its favor and agree that the government didn't meet its burden to prove Apple knowingly colluded with publishers.

The Justice Department, meanwhile, asked the judge, if she finds against Apple, to require it to provide antitrust training to executives and be prohibited from pursuing agency agreements for two years. The Justice Department also wants Apple to allow third-party booksellers to reinstate hyperlinks to their stores, among other requirements.

"The principal purpose was not price protection," Ryan said. "It was to change the industry's business model."

 

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