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Apple Loses Its Fight With the Feds

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A battle over the e-book market has been brewing for years. After the U.S. Department of Justice launched an antitrust suit against Apple (NASDAQ: AAPL  ) and the major book publishers, alleging that the companies all participated in a price-fixing conspiracy, Apple was the only one who decided to fight it out with the Feds.

The one and only
Every single one of the publishers decided to settle, paying over $166 million combined, in order to avoid a lengthy and costly legal battle, despite maintaining innocence. Apple stuck to its guns, arguing that it didn't do anything wrong as it doesn't set the e-book prices. At the D11 conference in May, Tim Cook reiterated Apple's stance on the matter, "We're not going to sign something that says we did something that we didn't do, so we're going to fight."

U.S. District Judge Denise Cote has now sided with the DoJ, saying, "Apple played a central role in facilitating and executing that conspiracy," adding that the colluding would have never happened if it weren't for "Apple's orchestration."

The DoJ had already shown that publishers were meeting behind closed doors to discuss a collaborated move away from Amazon. Apple wasn't directly a part of these conversations, and the company's legal defense maintained that it was not aware of these secret meetings. That might not pass the sniff test, though, as clearly all publishers needed to pressure Amazon simultaneously for a broad shift to the agency model to succeed.

Most favored Apple
Apple offered publishers the agency model in the e-book market, as publishers loathed the wholesale model that (NASDAQ: AMZN  ) was using to become a loss leader in the e-book market. Apple argued that it was "indifferent" to whether or not publishers forced Amazon to adopt the agency model, but the Mac maker had included a most-favored nation, or MFN, clause that allowed it to match the lowest competing e-book prices.

The MFN legalese within these contracts conveyed the idea that Apple just wanted competitive prices, but it could also be considered a roundabout way of forcing publishers to force other e-book sellers to adopt the agency model. For example, if a publisher sold an e-book under the wholesale model to Amazon for $13, and Amazon turns around and sells that title for a loss at $9.99, the publisher still gets $13. If a publisher offered the same title through Apple's iBookstore under the agency model where it keeps a 70% cut and Apple is allowed to match Amazon's $9.99, the publisher only gets $7 -- just over half as much.

The MFN clause key to Apple's strategy, but alone doesn't prove that the Mac maker was guilty of price-fixing and collusion. Emails told a different story, though.

That's what he said
Steve Jobs penned some particularly incriminating emails that the DoJ presented. Jobs suggested to NewsCorp's James Murdoch that HarperCollins "throw in with Apple," but predicted that Amazon would eventually try to pay even less for books because "they have shareholders too."

In a separate email, Jobs notes that Amazon had sold an estimated 1 million Kindle e-readers in the roughly 18 months it had been on the market, and Apple's "new devices" (referring to the then-unreleased iPad) would outsell the Kindle within "the first few weeks." He warned that sticking with Amazon would mean "sitting on the sidelines of the mainstream ebook revolution."

When more competition is bad
After everything was said and done, the net result was a precipitous increase in e-book prices throughout the market, as shown in the DoJ's closing arguments.

The entire situation is extremely peculiar, in part because of Amazon's disruptive ways. On one hand, this is perhaps the first time that the DoJ has filed suit against a company entering a market to challenge an incumbent with a near-monopoly position. The DoJ almost always prefers more competition to less competition. On the other hand, most companies leverage monopoly positions to raise prices instead of lowering prices to take a loss. Amazon threw out all the traditional business school books in that regard.

Instead, the DoJ is focusing on the rising e-book prices, which was a detriment to consumers even if there was technically now more competition in the e-book market. Cote has ordered a trial to determine damages, but Apple has already said it intends to appeal the ruling. Investors don't appear overly concerned with the ruling. After a brief dip, shares promptly recovered.

Overall, Jeff Bezos is surely pleased with this ruling.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies like Apple and Amazon. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Read/Post Comments (14) | Recommend This Article (28)

Comments from our Foolish Readers

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  • Report this Comment On July 10, 2013, at 3:39 PM, jdmeck wrote:

    So it's okay for Amazon to be a monopoly that forces companies out of business, keeps books off the market and causes people jobs, but not okay for Apple to work for fair pricing and compensation that would expand the market and opportunities. What the hell has happened to this country?

    If I was a publisher I would refuse to sell through Amazon and tell them to f off.

  • Report this Comment On July 10, 2013, at 4:25 PM, ScottAtlanta wrote:

    Even your title wording is biased...."loses it's fight with the Feds."

    Like Apple were an underdog being bullied by "big government." What a it sits of 140? billion dollars and steals billions a year in overseas tax shelters. Poor innocent Apple.

    Apple Guilty: Price fixing and Monopoly.

    There's your title.

    Apple played a central role in facilitating and executing that conspiracy," adding that the colluding would have never happened if it weren't for "Apple's orchestration."

    Your hero a thug. I guess that's the new image Apple is going for.

  • Report this Comment On July 10, 2013, at 4:27 PM, ScottAtlanta wrote:

    Didn't Madoff and the Enron Guys lose their fight with the feds too?

  • Report this Comment On July 10, 2013, at 5:35 PM, Goldbugg wrote:

    Apple may be sitting on 140 billion in cash, but the Feds are printing nearly that amount every month...

    Big Government > Apple.

  • Report this Comment On July 10, 2013, at 5:53 PM, xetn wrote:

    "Apple stuck to their guns.." and now they have a gun to their belly to pay up. Either way, you pay.

    (I'm glad they fought.)

  • Report this Comment On July 10, 2013, at 6:18 PM, Emperor2 wrote:

    Your title should be "Apple loses FIRST ROUND of it's fight with the Feds". As that world famous philosopher Lawrence Peter "Yogi" Berra once said, "It ain't over til it's over."

  • Report this Comment On July 10, 2013, at 6:26 PM, ttocsmij wrote:

    So, basically, the government wants everyone to raise their prices on ebooks. Uh ... yeah, typical for the new paradigm where corporate super-pacs rule over voters. Don't bother. Monopoly or not, the money has to come from somewhere. Every dime spent on this frivolous (IMHO) case will come out of the Consumer's hide NOT any Apple bank accounts or CEO pockets. In other words, HIGHER prices. If you don't realize that, then go back to school and take a couple business economics courses. 8-) In other words, folks. Just business as usual and lawyers getting richer.

  • Report this Comment On July 10, 2013, at 10:14 PM, toshay wrote:

    reply to: Scott in Arizona....

    It is not illegal to hold money off shore!

    Apple would be happy to bring their profits back to America if the Government got wise and lowered the 35%tax penalty!

  • Report this Comment On July 11, 2013, at 7:45 AM, jdmeck wrote:

    The corrupt government is usual.

  • Report this Comment On July 11, 2013, at 10:23 AM, starfish36 wrote:

    What a sign of the times! Poor little Apple is found to have played a "central role" in a price fixing conspiracy and your subscribers blame the "corrupt" government for doing its job. Folks, price fixing is not a benevolent act; it is a crime, and when not stopped, it costs consumers plenty. The government was doing the right thing to enforce the antitrust laws. You might have noticed that the other companies settled early. Apple decided to take on the government, and it lost. Next time, perhaps Apple can operate within the law.

  • Report this Comment On July 11, 2013, at 12:12 PM, SkepikI wrote:

    The ebook revolution with "self publish" options and lots of embedded players jostling for profit and position are the real stories here...not just APPL and Publisher collusion APPL Amazon competition and Government APPL collision.

    The actual cost and delivery effort of an ebook is miniscule. What Publishers, Authors and Middle men (which is all Amazon and APPL really are) is who gets what cut for their value. Publisher value is headed for zero or next to it and so they are painfully aware of where they are headed. What to do? Why form a cartel with a powerful middle man to put the screws to the dastardly upstart that is causing this problem...

    Its very hard to say where OUR (readers and customers) interests are in this free-for-all. I am not so sure the government has OUR interests at heart here. Stay Tuned...

  • Report this Comment On July 11, 2013, at 3:08 PM, jasenj1 wrote:

    Amazon is the big winner here.

    1) Amazon was selling ebooks at a loss to hamper competition. Using their online store to monopolize the ebook market.

    2) B&N was already in negotiations with the publishers to switch to the agency model from the wholesale model.

  • Report this Comment On July 15, 2013, at 12:10 PM, zaab55 wrote:

    Side question.

    Every single one of the publishers decided to settle, paying over $166 million combined, in order to avoid a lengthy and costly legal battle.

    Too who? Were does the money go?

  • Report this Comment On August 05, 2013, at 8:27 PM, SilmarilTelerin wrote:

    Hey Apple, you just become the new Hank Rearden.

    It’s time to start a New America.

    Have your people contact my people.

    John Galt Take Me With You . com

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