Apple's game plan beat the trustbusters

Most companies finding themselves staring at the business end of a government cannon might consider it time to talk compromise. Apple is not most companies. One day after the Department of Justice sued Apple and several book publishers for allegedly colluding to fix e-book prices, Apple publicly dismissed the government's claims as empty and false. Instead, Apple stayed with the script and described the 2010 launch of the iBookstore as a force for "innovation and competition," one that also helped break what it called "Amazon's monopolistic grip on the publishing industry." "Since then customers have benefited from e-books 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," Apple declared. Those were fighting words, and the message to the DOJ was plain: Bring it on. Apple might regret the utterance. IBM in the 1980s and Microsoft in the 1990s got bogged down in long, hard, and inconclusive antitrust struggles with the government that distracted both companies as changes took place in the technology industry. But Apple has clearly reached the conclusion that this battle won't cost it dearly, either in time or resources. So without settling, how does Apple plan to defend itself even if this does wind up turning into a multiyear court battle? The answer, several experts say, will be to try and present a different picture of the e-book market and play up Amazon's unassailable dominance. Obviously, it's hard to imagine Apple seriously painting itself as the underdog in the world of digital goods given its stellar success in digital music and mobile applications. But legal experts say Apple should remind a judge and jury that when it first tried its hand at e-books in 2010, Amazon had a 90 percent share in the e-books market. That offers Apple's attorneys a chance to make the case that no competitor could undercut that type of dominance. "Apple trying to compete against Amazon is a good thing," said Gus Hurwitz, a fellow at the Center for Technology Innovation and Competition at The University of Pennsylvania Law School. "It's the sort of thing we want to encourage so long as it's in ways that are complying with the law." The relationship of competition Fair competition is at the very heart of the Justice Department's case against Apple and the publishers. The government accused the publishers of illegally holding private meetings to fix e-book prices, and later teaming up with Apple to crack Amazon's dominance of the market. Bundling all the companies together in one complaint has its own problems, though. Indeed, Hurwitz noted that Apple is not a competitor with e-book providers. "If e-book publishers decided to collude and break the law, that's not Apple's problem. They were free to break the law and come to Apple as a cartel," he said. "That's not illegal on Apple's part." The relationship between Apple and the publishers is crucial as far as antitrust laws are concerned, says Joseph Bauer, professor of law at the University of Notre Dame. Bauer noted that under the very first section of the Sherman Anti-Trust Act -- which Apple and others are alleged to be violating -- there is a marked distinction between business relationships, which are broken into two categories: vertical and horizontal. Where horizontal covers the behavior between or among competitors, vertical is that behavior between suppliers and customers. "Historically, the antitrust law has been much harsher in dealing with horizontal behavior," Bauer said in a phone interview Friday. "At its core, the allegations by the DOJ are against the five publishers who allegedly conspired to adopt uniform pricing policies. That might be different, and only slightly less problematic from actually having agreed on price." Adding complexity to the situation is how antitrust law deals with e-books as a business. As the DOJ notes in its complaint, the named publishers compete with one another in a business made up of six major providers of trade books. "They publish the vast majority of their newly released titles as both print books and e-books," the filing reads. According to Hurwitz, that very factor makes e-books a so-called "multisided market," wherein two or more distinct groups of participants are brought together by an intermediate platform. "E-books are multisided markets, and antitrust law doesn't yet have a good handle on how to deal with pricing situations in multisided markets," Hurwitz said. "It is very possible that increasing prices on one side of a multisided market can benefit the market as a whole. By increasing prices you get a wider range that will ultimately benefit everyone in the marketplace." What happened instead was the "agency" model, where publishers set e-book prices to retailers, who get 30 percent while the publisher keeps 70 percent. While the DOJ has focused part of its complaint on the deals Apple made with publishers to assure that it would always get the lowest wholesale price given to others, the grander idea of the agency model was for the companies to compete on experience -- be it shopping for e-books, or reading them on devices. Historical similarities Sometimes experience isn't enough. Bauer points back to an antitrust case against retailer Toys "R" Us by the Federal Trade Commission from the late 1990s that found the toy retailer to be breaking the law after having made vertical agreements with toy manufacturers to keep them from selling to warehouse club stores, where those same goods it might be selling were being sold at a smaller markup. "The bottom line was that Toys 'R' Us' competitive position was enhanced. And action was brought against all of them," Bauer said. "But the important part against Toys 'R' Us was for orchestrating that agreement between the toy companies." "If the evidence shows that analogously what Apple did was help to orchestrate, organize, or implement the agreement among the publishers, then we are transforming what would be the initial, problematic horizontal agreement among the publisher competitors into something where you have another firm which is intimately involved with making that conspiracy a reality," Bauer added. Not to be dismissed, the evidence against Apple and the named publishers could change, and potentially strengthen if the claim goes to trial. "There's often a difference between what gets put into a complaint and what you can prove in trial," Bauer said, "The DOJ will be able to compel all of the defendants to produce documents; they will be able to take depositions of folks who were involved in this -- both the representatives of the five defendant publishers and representatives of Apple -- and presumably even third parties who might have information." That information could then be added, or used to take away claims from the original complaint, Bauer said. In the meantime, some of the additional publishers named in the DOJ complaint -- and even Apple -- could end up settling, according to Ronald Cass, the president at Cass & Associates, and former vice chairman and commissioner of the U.S. International Trade Commission. "Obviously when the Department of Justice is collaborating with that many attorneys general, there is some effort on its part to try to hold a pretty big hammer over the head of the people who are accused to get them to settle quickly," Cass said. "When that doesn't happen, sometimes things don't go quite the way the Justice Department would like."