Apple fights off ebook suit with anti-Amazon defence

Integration versus bundling

The market-share stats are in the government’s favour. While Apple’s share of the ebooks market is smaller than that of Amazon, its reader device – the iPad – is dominant. Admittedly, the iPad is a multi-function unit while Amazon’s Kindle does just one thing. Apple has 54 per cent of the tablet market compared to 16 per cent for the Kindle Fire.

In the 1990s and 2000s, Microsoft became the number-one supplier of desktop operating systems with Windows on PCs. Once it had entrenched its position, Microsoft then tried to spin up a successful browser business and sink Netscape by telling PC-makers they couldn't get Windows unless they accepted IE too.

Sure, Microsoft could argue innovation through integration of Windows and IE, but Microsoft was sunk when emails emerged showing how PC-makers like Gateway had been bullied into accepting IE or risking getting cut off by the software giant. The wriggling of Microsoft’s execs under oath over why and how far they’d integrated IE with Windows further helped undermine Microsoft's case.

When it comes to Apple, the DoJ could argue Apple has followed Microsoft by claiming innovation through integration when it actually what it was doing was using "bundling" to uphold its dominant market position.

Buy a book from Apple’s iBookstore and you are stuck on an Apple iDevice. Publish a book using the iBooks Author software and the book remains equally stuck – unless you export to PDF. Apple might argue iPads make the books beautiful with integrated sale and download and liquid page turns, but government lawyers aren't known for their appreciation of such finesse.

Monopolist Amazon, it might be argued, is the one whose technology changes have helped the market: its reader software works on different manufacturers' devices – Windows, Mac, iPad and iPhone, Android and Windows Phone.

And this is where it will start to get really tricky for Apple.

Amazon might be the number-one provider of ebooks, and you might not like that because it's got a mental and transactional choke point on the internet, but Amazon has had a commoditising effect that has helped shoppers. Often you'll find goods of all kinds for sale that are cheaper on Amazon than on other stores. In many ways, Amazon has become like the Wal-Mart of the web, by forcing down prices and giving merchants a huge addressable market.

The same cannot be said for Apple, a company with a track record of building expensive hardware, delivering closed systems, and of signing a deal that favour suppliers and hurt consumers and the competition by pushing up prices.

To win, of course, the DoJ will need to prove collusion actually occurred – that talks and meetings were held and agreements signed. The DoJ filing here certainly lists emails, meetings and 56 phone calls between Apple and the book publishers mentioned on the Agency Agreement. There’s even mention of a letter from Apple CEO Steve Jobs to one publishing executive telling him if he didn’t sign the Apple Agency Agreement he had two choices: keep paying $9.99 to Amazon or “continue with a losing policy of delaying the release of electronic versions of new titles".

The DoJ will need to produce actual words on paper or email or sworn statements – as it did against Microsoft – otherwise its case is circumstantial. In the based-on-a-true-story flick on lysine price-fixing – The Informant! – James Epstein, lawyer to Matt Damon's whistleblower, says: “Four white guys in suits getting together in the middle of the day - that's not a business meeting, that's a crime scene." Without hard proof on the DoJ's part, it is just a business meeting, not a crime scene.

Saved by the Bells

Strangely, it might be that the economics of the market – or politics – will save the day for Apple.

As far as politics goes, we should remember that the DoJ is headed by people appointed by politicians elected to the White House. So, while Microsoft was prosecuted under a Democrat president and attorney general, it was the Republican Party of George W Bush and Richard Ashcroft that oversaw the settlement. They wanted a settlement reached quickly, and it was: in November 2001, one year after the Republicans took power.

The US is now in another election year, with Americans going to the polls in November. Barack Obama’s approval numbers are slipping and should the Republican party succeed – possibly under the leadership of Mitt Romney, who claims to be “business-friendly” – then priorities will certainly change once more.

When it comes to economics, whether or not Apple wins in the courtroom will prove irrelevant for the future of ebooks and readers. AT&T was broken up, but the Bells reformed to re-constitute and compose two of America's largest fixed and wireless phone and internet service providers: AT&T and Verizon. With no tablet competitor to the iPad on the horizon, it may be Apple continues to cream the tablet-as-ebooks niche but just not make quite as much money as it would like.

In this scenario, it will matter more to Apple as a matter of honour whether, like Microsoft, it wants to go down in history as a convicted monopolist.

Ultimately, the entire case is likely to become a futile exercise in government trying to shape the market through legal intervention. As surely as the Bells reconstituted and as Microsoft's IE domination was eroded by the unexpected rise of Firefox and then Google's Chrome, Apple’s ebooks monopoly could also be undermined by the some unexpected factor. ®