Apple fights off ebook suit with anti-Amazon defence

Apple is a liberator, not an oppressor – that’s according to Apple, at least. The Mac-maker turned device-and-content shop has dismissed the US government’s decision to prosecute on the grounds that it rigged ebook prices by claiming the iBookstore has freed consumers and publishers from the tyranny of Amazon.

According to Apple:

The DOJ’s accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry. Since then customers have benefited from ebooks that are more interactive and engaging. Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.

The US Department of Justice (DoJ) says Apple fixed ebook prices with five publishers, driving up prices. The department further alleges that Apple then pushed that price on to Amazon. The DoJ alleged that under the 2010 Apple Agency Agreement, newly released ebooks were all released at a set price that ranged between $12.99 and $14.99 – instead of the $9.99 that had been charged by Amazon. However, the department has not yet uncovered any kind of e-trail or paper trail that proves such a deal was inked.

Three publishers, HarperCollins, Hachette and Simon & Shuster settled with the DoJ on the morning the suit was filed, tearing up the agreement with Apple. Hachette and HarperCollins have also reached financial settlements of $52m with 15 US states and the Commonwealth of Puerto Rico, which all filed legal action in the state of Texas.

Penguin Group and Macmillan, along with Apple, are still fighting.

Apple is no stranger to fielding legal hardballs – just look at its enthusiastic participation in the smartphone and tablets patent mudfight – and its heavy-handedness over trifling cases such as using Steve Jobs’ image or celebs making fun of its ads. Its decision to fight was never in doubt.

But will Apple prevail this time and what's at stake here?

The DoJ is prosecuting Apple under section one of the US Sherman Act, a piece of law that regulates restraint of trade and that can see corporate felons fined up to $10m by the government. It was the law the DoJ used to sue Microsoft over bundling of Windows and Internet Explorer in the 1990s. In its response, Apple zeroed in on the antitrust aspect while plenty of commentators asked why the Feds had decided to prosecute Apple when it was Amazon that held the market.

Circumstantially, things look promising for Apple. Amazon's dominant market share of ebooks has fallen since Apple and the publishers signed the Apple Agency Agreement in January 2010. Amazon was reported to have had 90 per cent of ebooks in 2009 but that's now fallen to 60 per cent. Barnes & Nobel's share is between 25 and 30 per cent now, with Apple grabbing the rest.

The DoJ also has a mixed history on taking on tech companies: IBM, Microsoft and AT&T are the milestones. The government filed against IBM in 1969, saying the mainframe-maker was abusing its dominant market position but dropped proceedings 12 years later arguing the case was “without merit".

The Microsoft case reached a dramatic climax when the ruling judge ordered the world’s largest software company to break itself up. But that never came to pass, as the DoJ lost on appeal and case was shunted into the sidings of some rather meaningless oversight. The entire time the case was taking place, Microsoft continued to build new versions of Windows and IE.

Only on A&T has the DoJ made a mark: AT&T's domestic local business was broken up following a settlement that lead to the creation in 1984 of regional phone companies – the baby Bells. But market forces have since undermined the case, as the Bells re-constituted the company in the 1990s and 2000s to either rejoin AT&T or create America’s largest wireless company, Verizon.

Just the facts, ma'am

Based on its statement, Apple will likely adopt a defence that is classic tech sector speak – and which borrows heavily from Microsoft versus the DoJ. That defence is that its actions did not hurt but in fact helped innovation. Tech companies like to counter that they have improved the computer experience for ordinary end users while creating opportunity for partners.

Like Microsoft, Apple will discover that "innovation" is a weak and subjective basis for defence and one the Feds aren't interested in attacking too hard.

The reason is because the crux of the case is antitrust under the Sharman Act, and whether Apple held a dominant position that it abused, hurting customers, competitors and - thus - the market. Under US law, it is not illegal to be a monopoly. The problem comes if a monopolist tries to consolidate its position using, say, price-fixing or threats.