| SAN FRANCISCO, July 10
SAN FRANCISCO, July 10 Apple Inc
couldn't have been too surprised on Wednesday when a judge
slammed the company for violating antitrust laws over e-book
pricing - the judge had warned in May that she believed the
government could prove its case.
Accused of playing a central role in a conspiracy with
publishers to eliminate retail price competition and raise
e-book prices, Apple says it has done nothing wrong.
But in addition to defending its honor, the U.S. tech giant
has strategic reasons not to settle and to continue fighting the
decision as it has said it will do.
Chief among those is preserving its negotiating power in
future content deals and its ability to control every aspect of
its online stores, including pricing.
Responding to aggressive forays by Google Inc and
Amazon.com Inc into online video and music services,
Apple is in discussions with Hollywood studios and record
companies. It may fear that caving to the Justice Department on
e-books will embolden its sparring partners, business and legal
A key issue is the use of the so-called most-favored nation
status - part of its agreement with publishers, which gives
Apple the right to match lower prices offered by a competitor
operating under the wholesale model such as Amazon.
Settling with the government would likely tie Apple to
increased oversight, along with legal restrictions of
most-favored nation clauses in the e-book market, said Chris
Compton, a California antitrust lawyer who represents tech
"Apple may have well felt they needed to protect their
ability to continue using that kind of clause in their other
product lines," Compton said.
Apple even got some favorable language in the ruling by U.S.
District Judge Denise Cote in New York, who stressed she did not
intend to issue a blanket ban on specific tools Apple employs -
like most favored nations clauses -- from a company's arsenal.
She also took pains to limit her opinion to the specific events
in the e-book market in 2010.
"It does not seek to paint with a broader brush," wrote
Cote. It is uncertain whether Apple would have got a similar
disclaimer had it settled with the Justice Department.
Apple used a most favored nation clause in one of its music
agreements, though the music had been purchased under a
wholesale model, Cote wrote.
Apple argues that its entry into e-books in 2010 injected
much needed innovation and competition into the market.
Daniel Crane, an antitrust professor at the University of
Michigan Law School, said the 2nd U.S. Circuit Court of Appeals
could take a very different view of the evidence, focusing more
on the fact that rival Amazon sold e-books below cost.
Before Apple entered the e-book market, Amazon's strategy
involved buying e-books at wholesale prices and then selling
them below cost to promote its Kindle reading device. This
damaged publishers by driving sales away from brick and mortar
Apple convinced publishers to enter into "agency
agreements," in which publishers were able to set prices and
then pay 30 percent commissions to the Cupertino,
Critical to those agreements, however, were the most favored
nation clauses. With Apple able to match any lower prices in the
market, publishers forced Amazon to adopt the agency model as
well, thus raising prices for consumers, according to Cote's
Evidence in the case included emails from Apple's late
co-founder Steve Jobs to News Corp executive James Murdoch that
the government said reflected Jobs' desire to boost prices and
"create a real mainstream e-books market at $12.99 and $14.99."
Cote called it "wrong" for Apple to contend that it acted to
stop Amazon's monopolistic practices, and Crane said Apple will
hit that argument hard in its appeal.
"That's very important to Apple case," Crane said.
Several publishers settled before trial and agreed to pay
more than $166 million combined to benefit consumers. They also
agreed to end their pricing agreements with Apple.
Apple is, however, in the enviable position of being able to
afford such a costly proceeding and hundreds of millions in
potential civil damages.
"This is not a bet your company case," said Crane.