In a 154-page decision issued today (PDF) the judge ruled that Apple did conspire with publishers to raise e-book prices in an attempt to break Amazon’s hold on the market.
“Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010,” Cote wrote in her opinion.
This is a big win for the Justice Department, which brought the suit against Apple and the “big six” publishers in 2011. All of the publishers settled, leaving Apple as the sole defendant when the case went to trial.
It’s also a big win for Amazon, which remains the dominant player in the e-book market amid this legal turmoil.
The saga isn’t over, though. There will now be another trial to determine damages in the case, including possible injunctions against Apple. Following that, Apple plans to appeal, according to a statement.
“Apple did not conspire to fix ebook pricing and we will continue to fight against these false accusations. When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon’s monopolistic grip on the publishing industry. We’ve done nothing wrong and we will appeal the judge’s decision,” spokesman Tom Neumayr told AllThingsD.
The summary of findings from Cote’s decision follows.
The Plaintiffs have shown that the Publisher Defendants conspired with each other to eliminate retail price competition in order to raise e-book prices, and that Apple played a central role in facilitating and executing that conspiracy. Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the Spring of 2010.
There is, at the end of the day, very little dispute about many of the most material facts in this case. Before Apple even met with the first Publisher Defendant in mid-December 2009, it knew that the “Big Six” of United States publishing -– the Publisher Defendants and Random House (collectively, the “Publishers”) — wanted to raise e-book prices, in particular above the $9.99 prevailing price charged by Amazon for many e- book versions of New York Times bestselling books (“NYT Bestsellers”) and other newly released hardcover books (“New Releases”). Apple also knew that Publisher Defendants were already acting collectively to place pressure on Amazon to abandon its pricing strategy.
At their very first meetings in mid-December 2009, the Publishers conveyed to Apple their abhorrence of Amazon’s pricing, and Apple assured the Publishers it was willing to work with them to raise those prices, suggesting prices such as $12.99 and $14.99. Over the course of their negotiations in December 2009 and January 2010, Apple and the Publisher Defendants educated one another about their other priorities. Apple strongly hoped to announce its new iBookstore when it launched the iPad on January 27, 2010, but would only do so if it had agreements in place with a core group of Publishers by that date, could assure itself it would make a profit in the iBookstore, and could offer e-book titles simultaneously with their hardcover releases. For their part, if the Publisher Defendants were going to take control of e-book pricing and move ￼ the price point above $9.99, they needed to act collectively; any other course would leave an individual Publisher vulnerable to retaliation from Amazon.
Apple and the Publisher Defendants shared one overarching interest — that there be no price competition at the retail level. Apple did not want to compete with Amazon (or any other e-book retailer) on price; and the Publisher Defendants wanted to end Amazon’s $9.99 pricing and increase significantly the prevailing price point for e-books. With a full appreciation of each other’s interests, Apple and the Publisher Defendants agreed to work together to eliminate retail price competition in the e-book market and raise the price of e-books above $9.99.
Apple seized the moment and brilliantly played its hand. Taking advantage of the Publisher Defendants’ fear of and frustration over Amazon’s pricing, as well as the tight window of opportunity created by the impending launch of the iPad on January 27 (the “Launch”), Apple garnered the signatures it needed to introduce the iBookstore at the Launch. It provided the Publisher Defendants with the vision, the format, the timetable, and the coordination that they needed to raise e-book prices. Apple decided to offer the Publisher Defendants the opportunity to move from a wholesale model — where a publisher receives its designated wholesale price for each e-book and the retailer sets the retail price — to an agency model, where a publisher sets the retail price and the retailer sells the e-book as its agent.
The agency agreements that Apple and the Publisher Defendants executed on the eve of the Launch divided New Release e-books among price tiers. The top of each tier, or cap, was essentially the new price for New Release e-books. The caps included $12.99 and $14.99 for many books then being sold at $9.99 by Amazon.
The agreements also included a price parity provision, or Most-Favored-Nation clause (“MFN”), which not only protected Apple by guaranteeing it could match the lowest retail price listed on any competitor’s e-bookstore, but also imposed a severe financial penalty upon the Publisher Defendants if they did not force Amazon and other retailers similarly to change their business models and cede control over e-book pricing to the Publishers. As Apple made clear to the Publishers, “There is no one outside of us that can do this for you. If we miss this opportunity, it will likely never come again.”
Through the vehicle of the Apple agency agreements, the prices in the nascent e-book industry shifted upward, in some cases 50% or more for an individual title. Virtually overnight, Apple got an attractive, additional feature for its iPad and a guaranteed new revenue stream, and the Publisher Defendants removed Amazon’s ability to price their e-books at $9.99. A detailed explanation of how Apple facilitated this conspiracy and changed the face of the e-book industry follows.
Previously on GeekWire: E-books: Apple trial wraps up — now for the waiting game … Trial details hardball tactics by Apple, Amazon and publishers in battle for control of e-books … E-books: Apple’s federal court showdown starts today
Blair Hanley Frank is a technology journalist based in the San Francisco Bay Area. He has also worked for Macworld, PCWorld and TechHive. He can be found on Twitter @belril.