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Steve Jobs' Draft Emails Play a Big Role in eBook Price Fixing Trial

by on19 June 2013 1625 times
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We have been following the Apple price fixing trial over the last few weeks and have been very interested in some of the coverage that has been coming out. One of the biggest things that we have noticed is a tendency from nay press outlets to try and skirt over the issues. In particular many news sites are more than willing to completely absolve Apple of all guilt simply because the most damning emails the DoJ is using were draft emails from Steve Jobs. What is unusual about this is that many of these same sites were not willing to do the same During the Samsung V Apple trial (and also the Intel Anti-Trust case). It begs the question; why does Apple get the free pass? Still press bias or bad reporting aside the fact that these emails are drafts is really irrelevant. They show knowledge or and/or intent to set prices and force them onto a competitor.

In its simplest terms price fixing is: “an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand”

Now the agency model that Apple helped convince five publishers (Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster) to adopt can be seen as this type of agreement. The argument is that they all reached this on their own as there is little to no contact or communication between these five. In a typical price fixing case there is a requirement to show collusion or conspiracy to set the price. If these publishers did not have open meetings or communication then how can they have colluded? Well there were emails that went back and forth between some of the executives that describe how they would not be willing to establish an agency model unless they knew others were involved.

Still these emails were not between executives of different publishing companies, they were with Apple. This puts Apple at the center of the case and shows that they were at the very least coordinating communication between the publishers. This makes them part of the gang and just as culpable as any of the publishers that drove prices up by 20% when they penned the deals with Apple. So now we have established that five book publishers using Apple as a coordination point colluded to set book prices at a certain level. Does this meet the definition of price fixing? Yep it sure does.

The draft emails from Steve Jobs, along with other verbal communication that have been entered as evidence also give the impression that Apple was a much more active player in plan than they (Apple) are claiming. With statements like “I can live with this as long as they move Amazon to the agent model too for new releases for the first year. If they don't, I'm not sure we can be competitive” these emails are a pretty big deal. It does not matter than Jobs’ final email did not mention Amazon, the text of the draft shows that he knew where he wanted to go and that he was aware of what the agency model would bring and that is enough.

In short Apple now falls inside a wider definition of price fixing: “Price fixing requires a conspiracy between sellers or buyers. The purpose is to coordinate pricing for mutual benefit of the traders.” This is something that was certainly done with Apple’s help. They were the medium that Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster were waiting on to make their move.

But it is all competition -
The other argument that people want to bring up is competition. They claim that Amazon had a 90% market share and as such they were driving prices down. Apple arrived on the scene to compete and brokered deals with publishers to ensure their success in the market. The created a competing product to Amazon and everyone benefited. Well, not really. You see Apple’s deal with the publishers increased prices of eBooks by 20%. Amazon had competition, but they were also willing to sell books at below cost which keeps them out of the hands of Anti-Trust. There was no injury to the consumer by losing money on the sale of the books and the publishers were also not losing money on this, they were just not making as much as they wanted. eBooks have no “manufacture” cost like a physical books does so the sale of these items is almost 100% profit. Yes there are costs associate with eBooks, but not the same cost as a traditional book.

These publishers were afraid that the rapid increase in eBook purchases at prices below the cost of physical books was going to hurt their business. They were also concerned that at some point Amazon would go direct to the authors with their self-publishing tools which would cut them (the publishers) out altogether. They wanted to move to an agency controlled price model, but were afraid that if they did Amazon would have enough power to cut them out which would be very bad.

Once again, this is where Apple comes in. Apple presented these publishers with an alternative on a very popular platform. The iPhone and iPad were selling like mad and Apple’s iTunes was a success. When presented with the option of selling through iTunes one a brand new and “exciting” new Apple product they jumped at the chance. Apple wanted a higher price for the books so that they were able to make more per unit. They also asked for a Most Favored Nation clause (not unusual, but important here) to make sure that they got the best prices for their new service. By establishing pricing levels with the publishers they created the environment for the agency model to become a reality.

Apple wants to claim that all they wanted to do was compete and ensure that they made money on a product. The problem is that they chose to work with publishers to setup a pricing structure that ensured an agency model would need to be created. Steve Jobs’ own words say:

“As I see it, [Conspiring Publisher] has the following choices:
1. Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.
2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.
3. Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started, there will be no stopping it. Trust me, I’ve seen this happen with my own eyes.
Maybe I’m missing something, but I don’t see any other alternatives. Do you?”

Amazon was not the only company affect by this as Barnes & Nobel were also selling books at $9.99 until Apple entered the game and helped these publishers establish their higher priced agency model. If Apple had not handed them an attractive alternative the new pricing model would never have been established. Again, the fact that they were thinking about doing it before does not matter. The industry price point was $9.99. Apple set their price levels at $12.99 and $14.99 and gave the publishers the ability to reset these prices for everyone. The Kindle was not as good a product as the more versatile iPad2 so the publishers knew they had a shot to get this rolling. The publishers did not go to Apple with these price points or with a most favored nation clause. Apple went to each of them in turn with this. Apple also did not have a problem letting each publisher know about some of their communication with others. This allowed these to know about a common effort to set the new standard.

In the end at the center of all of this sits Apple. They knew what they were doing when they started making these deals and also knew that it was pushing the limits of the law at the very least. Still they wanted a piece of the pie and were willing to do what they need to in order to get it. It does not matter that the evidence came from draft emails or parts of communication. These drafts actually are more damning in that they show there was both knowledge and possibly an effort to hide this by removing it from later communication. We have a conspiracy to set book prices 20% higher than what the market was paying. Apple is the central part of this as they gave Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster the leverage they needed to get this done and Apple knew that was what they were doing. What they (Apple) did not expect was for someone else to figure out that is what they did and to call them on it.

So you can see that there is a strong case to show that Apple was the “ring leader” in fixing prices on eBook. It does not matter if you like Apple or not, what matters are the facts at hand and right now they show that Apple knew what they were doing when they setup their iBooks store and reached out to publishers with a whole new pricing scheme.

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Last modified on 19 June 2013
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