As it defends itself from the U.S. Department of Justice allegations of e-book price fixing, Apple recently pointed to the diverse contract terms it made with five major publishing houses as evidence against purported conspiracy. A follow-up report to yesterday’s proceedings from AllThingsD says that Apple lawyer Orin Snyder brought up the negotiated terms multiple times during the bench trial now in front of U.S. District Court Judge Denise Cote.
The composition of Apple’s agreements with five of the biggest book publishers in the world is central to the Justice Department’s antitrust argument, which holds that the companies worked together to falsely inflate prices of e-books in the iBookstore. At the core of Apple’s pricing strategy was a so-called “most favored nations” clause that allows publishers to set e-book pricing, but precludes them from selling the same content to other retailers at a lower price. According to the DOJ:
[Apple's MFN] was not structured like a standard MFN in favor of a retailer, ensuring Apple that it would receive the best available wholesale price. Instead of an MFN designed to protect Apple’s ability to compete, this MFN was designed to protect Apple from having to compete on price at all, while still maintaining Apple’s 30 percent margin.
Penguin Books CEO David Shanks, whose company is one of the five involved in the case, said there was some concern over market leader Amazon’s wholesale pricing model. The online retail giant’s strategy is counter to Apple’s “agency model” in that it puts pricing power in the hands of book resellers by allowing them to sell content at or below cost. Shanks said the following referring to Amazon’s strategy:
What transpired was by having e-books now at $9.99, it was cannibalizing hardcover editions, which sold on average at $26.
The trial is set to continue for the next three weeks, so we’ll have to see how things unfold.