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Amazon Polishes Apple's case at E-Book Trial

By John P. Mello Jr. MacNewsWorld ECT News Network
Jun 7, 2013 5:10 AM PT

The antitrust trial pitting the U.S. Department of Justice against Apple over fixing e-book prices began this week, and it didn't take long for the company's lawyers to poke a hole in the government's case.

Amazon Polishes Apple's case at E-Book Trial

On Wednesday, they showed through questioning that a key element of the DoJ's case had less to do with Apple colluding with publishers to hike e-book prices than with standard business practices.

Apple cooked up a scheme with major publishers to increase the price of e-books, the DoJ maintains. All the publishers involved in case have settled with the Justice Department in agreements totaling some US$164 million.

A key indicator that a conspiracy was afoot, according to the DoJ, is something called the "Most Favored Nation" clause, which is typically incorporated in an agreement so a distributor won't be burned by a producer.

In Apple's case, the MFN clause in its agreements with the publishers required the book makers to set their prices for e-books sold in the iTunes store at the same rate as for any other distributor.

That agreement was a sweetheart deal between Apple and the publishers, the DoJ argues, but testimony for one of its witnesses from Amazon suggested otherwise.

Good for Apple, Good for Amazon

For most of his time in the witness chair, Amazon Vice President for Kindle Content Russell Grandinetti explained how one publisher, Macmillan, tried to strong arm Amazon to adopt a new model for e-book sales -- a model that Apple had already agreed to.

The new approach, called the "agency model," allowed the publishers to set the final price of a book sold through a distributor. That departed from the wholesale model used for print books. With that model, a distributor buys a book at a wholesale price and sells it at whatever price it wants to.

When Amazon started selling e-books in 2007, it set their price at $9.99, which contributed to its grabbing 90 percent of the e-book market by 2009.

Pressured by the publishers, Amazon agreed to the new agency arrangement, according to Grandinetti. As part of those agreements, Amazon also made sure they contained MNFs. That appears to undermine the DoJ's argument that the clause was exceptional and an indication of collusion between Apple and the publishers.

Nevertheless, as agency agreements were adopted, the price of e-books began to rise. At Amazon, they went up 18.6 percent; at Barnes & Noble, 19.9 percent.

Prima Facie Case

This early into the trial, legal experts remain divided on the strength of the adversaries' cases.

In conspiracy trials like this one, evidence builds over time, so not much can be made from the initial days of the proceedings, noted Yasha Heidari, managing partner with the Heidari Power Law Group.

"Based on what I've seen so far, it looks like there's a decent possibility of collusion," he told MacNewsWorld.

"It looks like the prosecution can make a prima facie case that something seems sufficiently odd to illustrate that there was a conspiracy or antitrust violation here," Heidari said.

"At this point in time," he added, "it seems that the Department of Justice has a much stronger case than the initial analysts thought they had."

Apple's defense may be colored by the fact that all the publishers decided to settle with the DoJ rather than duke it out with the department.

"There's some thought that the publishers wouldn't have been so quick to settle if they hadn't done something wrong," Heidari said.

"I would have expected that at least a couple of the publishers would have agreed to fight this thing," he added.

Unconvincing Argument

It's always difficult to judge the strength of a case at this state of the proceedings, but the DoJ's decision to hang its case on the Most Favored Nation clause weakens it, maintained Ronald Cass, former vice chairman and commissioner of the U.S. International Trade Commission and president of Cass & Associates.

"I don't see a really strong case being made that there was something that really hurts the public here. I don't see the antitrust case being made in a convincing way," he told MacNewsWorld.

"Without an agency model, you may get cheaper prices on some books, but that doesn't mean that's the right model for a publisher to follow," Cass continued.

"A publisher could remainder his books on the first day they're published," he added, "That's cheaper, but that's not going to get more books published. It's not going to get as many authors engaged in writing -- it's not going to do what is probably best for the public."

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