Apple E-book Cartel Case in EU and USA

In 2007, Amazon launched Kindle and announced '$9.99' as the price at which readers could read their favourite books, whether a recent launch or evergreen classics. It was a temptation readers could not resist and Amazon soon emerged as the dominant player in the e-books market with a 90% market share. Other players such as Barnes & Nobles's Nook had to sell below average cost to remain competive and stay in the market. Amazon's emergence as the dominant player meant it could dictate terms to the publishers. In the language of competition law, it provided Amazon with a dominant position in the e-books market.

Initially the e-books market used the traditional model that pre-existed with the printed books wherein, the publisher sets the wholesale price and then the retailer decides the selling price. The Kindle used this traditional model to set the famous $9.99 price point. Under this model, The publisher has the choice to decide how much profit or loss it wants to make on a given title and once it sells the book to the retailer, the latter sets the final price.

I-pad's introduction in early 2010 set to change all this. As was later shown by the Antitrust authorities, the best selling biography of Late Steve Jobs contained alluding reference to the change it sought. The icon successfully managed to bring together the five major publishers in the industry and suggested that the model be transformed to the 'agency' one from the then existing traditional model.

Agency model, simply put, means that the publisher sets the retail price and the retailer thereby losses his freedom to set the final price as he now gets only a fixed percentage of the price(thirty percent for the retailer in the present case). The offer was tempting for the publishers as it could re-shift the axis of power back to them from Amazon, as the latter had become stronger due to its 90% plus capture in the e-book market. As for Apple, that first roped in these publishers into shifting the industry gear to Agency model, the excitement was the opportunity to capture the fast growing e-book market and create a market for i-Pad. For the publishers and Apple the cartel was a win-win situation. The results are there to be seen. From its launch in 2009 till 2012, Apple quickly gained a market share of 10% of the US market(one of the most important e-book market in the world) and this is expected to reach 25% in next two to three years. It is noteworthy to mention that at present the market has three main competitiors in the US e-book: Amazon's Kindle, Barnes and Noble's Nook and Apple's iPad.

Apple's and the top five publishers cartel to raise the e-book prices and shift to the Agency model invited competition law concerns on both sides of the Atlantic. Kindly note at the outset that in the US Antitrust and in the EU & India, it is referred to as Competition Law and thus, the terms are used interchangeably.

In the US, the Antitrust authorities alleged that Apple and the six larget publishers of the US violated Section 1 of the Sherman Act, thereby restraining competition in the sale of e-books as they agreed to shift gears to the Agency model, whereby the publisher would set the price and thus, end the $9.99 dominance created by Amazon. Why was this a point of concern for the Antitrust authorities? As the objective of competition law is to protect consumers and not competition, thus any action that violates the interest of consumers is a concern for Antitrust/ Competition authorities. As the Agency model sought to increase prices, it meant that consumers would be forced to pay a higher price, thereby harming the interests of the Consumer and reducing the Consumer surplus; thus making it an anti-trust concern. Moreover, the publisher also sought to slow down the migration from print to e-version and by raising the prices of e-books, they sought to achieve this objective. The action visibly has direct impacts on both the static competition (by increasing prices) as also dynamic competition(by slowing the migration to e-books).

In the EU, Apple along with Hachette, HarperCollins, Holtzbrinck and Simon & Schuster had settled last December(2012) with the Commission, at the outbreak of the controversy. Penguin, from the Pearson group of UK soon followed suit with a proposed list of settlement in April 2013. As per the proposal, Penguin proposed to end the contract for Agency agreement and not enter into any such Most Favoured Nation clause for the next five years. Further, if Penguin enters into any new agency agreement, the retailers will be free to set the retail price for the next two years, provided that the total amount of discount provided by the retailer is not greater then the total amount of commission that the retailer obtains from the publisher. The Commision has invited public consultations on its website as on 19^th April 2013 and as per the procedure, interested parties are invited to submit their comments on the proposed settlement within one month.

In the US, the five defendants publishing companies viz Hachette, HarperCollins, Macmillan, Penguin and Simon and Schuster had earlier settled the charges and only Apple decided to go ahead with a legal trial in the US. It is important to note that Random House was not mentioned as a defendant in the law suit, since, considering the evidence available it was found that Random was coerced to participate in the cartel. Earlier when it had refused to participate, Apple prevented Random House's e-book application from appearing on Apple's App Store. It was only when the House contracted with Apple on Jan 18, 2011, that it was allowed to present its e-applications on i-store. Hence, Random's role in the controversy was a forced one as opposed to a voluntary act.

Like its move in EU, in the US too, HarperCollins, Simon & Schuster and Hachette settled with the government at the beginning of the investigation. Penguin, Macmillian and Apple chose to fight charges; however, evenutally Penguin fell out considering its proposed merger with Random House. Macmillian followed suit and settled in February'13. As per the settlement, the publishers undertook not to impose any restrictions on promotions and discounts by e-book retailers. The settled defendants also promised not to enter into any such new agreements until December 2014. Further, any new proposed e-book ventures must be notified to the Government in advance and further, any similar most-favoured-nation clause that was entered earlier along with Apple is prohibited for the next five years.Apple, on the other hand adopted and sticks to its strategy to go for a full-blown trial. It is interesting to see how Apple's strategy in US differs from that in the EU, notwithstanding the fact that the subject matter of the controversy remains same. This could perhaps be attribtuted to the different legal and economic principles followed across the Atlantic. As part of the government filing before the commencement of the procedings on 3^rd June 2013 in the district court of New York, the US Department of Justice, has submitted an email from Mr Jobs to Mr Murdoch at Harper Collins, that incited the later to be a part of the proposed cartel. The e-mail makes an interesting reading. For instance Mr Job argues, “Throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.” This email is significant in augmenting Apple's role as from one of the participants in the cartel to one of a “ringmaster”. Subsequent circumstantial evidence substantiate the Apple's alleged role. Just two days following the (in)famous email, the News Corporation owned Harper Collins signed the agreement to adopt the new pricing model. Apple, in the meanwhile maintains its claim of promoting innovation and competition in the market.

As the curtains fall and trial begins in NY DC in June, it would be interesting to follow the developments and see if the two sides of the Atlantic choose to converge or diverge in their opinion on Apple. If its another GE-Honeywell divergence or Oracle/PeopleSoft unwitting convergence, only the court can tell. And this time the ball is in the US Courts.

PS: Both GE/Honeywell and Oracle/PeopleSoft were Merger cases; but the present is a cartel case and thus, within the meaning of Article 101 TFEU and Section 1 Sherman Act.