Apple in court over price-fixing allegations

Accused of conspiring with publishers to raise prices.

Apple is in court today, accused of colluding with the "big five" American publishers to raise the price of eBooks. The US Department of Justice alleges that the six acted together to try and reverse Amazon's price cutting strategy, which was steadily eroding the amount an ebook was sold for.

Apple offered the publishers "agency pricing", a model where they would set the price and Apple take a cut. That's in contrast to Amazon's wholesale model: it pays a fixed cost to the publisher and then sets the price wherever it wants. Sometimes that meant it would raise it to get a share of the sale price well in excess of Apple's 30 per cent; more frequently, it meant it would aggressively cut it, selling the book at, or even below, wholesale price.

That drove the price of an ebook way down, leading publishers to fear that their profits were being permanently eroded. They existed in a world where, for the first few months of a books life, it was sold in expensive hardbacks, and they were trying to replicate that model online, charging up to £15 for an ebook. Instead, they saw prices plummeting to a level where they would be hard pressed to make a return at all.

So when Apple offered an agency model, the publishers saw a chance to start selling ebooks for more. And furthermore, they saw a chance to end Amazon's monopoly on the field, all while enable a competitor which might not be so agressive in downward pricing.

All of that is relatively uncontroversial. The issue is: did Apple and the publishers illegally conspire to raise prices for ebooks? Or was there no conspiracy, and it was just a natural offshoot of the agency model?

Steve Jobs, in his 2011 biography, suggests it may have been the former. He told Walter Isaacson, his biographer, that he went to the publishers and said "we'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway."

That's already perilously close to a conspiracy. If Apple were enticing some publishers by telling them that others had acquiesced, it could be an open and shut case. It's tricky now that he is no longer alive to explain his remarks.

There are actually three key legal issues for the court to assess. The first is the agency model itself: how does it apply to virtual goods? In a physical world, it involves the seller 'holding' goods owned by someone else, and taking a cut of their sales. Does that apply digitally, when there are no warehouses to run? Could the agency model itself be legally dubious? Without the need to maintain a standing stock, the distribution of risk is changed, and it certainly seems to represent a form of collusion.

The second involves the type of conspiracy which is alleged. Was it "hub and spoke" – Apple actively co-ordinating a united front on behalf of the publishers – or was it "conscious parallelism" – all of the publishers following each other's leads, actively trying to achieve a pricing strategy without any actual agreement. Both of those are illegal, and the Jobs quote suggests that if wrongdoing did occur, it was likely the former.

The third issue involves a specific clause in Apple's contracts, guaranteeing itself "most favoured nation" status. That lets the company guarantee that publishers will sell their books for no lower elsewhere than they do at Apple, strengthening the collusion aspects of the accusation. Such contracts aren't unusual – and are in fact commonplace in most negotiations such as these. For instance, Amazon makes heavy use of them in running its app store.

After all of that, it almost doesn't matter whether prices actually rose as a result. But analysis by the site Smashwords suggests they didn't. They can only look at a proxy of the data, because the real info is locked up by Apple and Amazon, but their preliminary research showed that average prices on the Apple iBookstore dropped 25 per cent in the first eighteen months. Whatever happened, the customer won in the end.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Geoffrey Howe dies, aged 88

Howe was Margaret Thatcher's longest serving Cabinet minister – and the man credited with precipitating her downfall.

The former Conservative chancellor Lord Howe, a key figure in the Thatcher government, has died of a suspected heart attack, his family has said. He was 88.

Geoffrey Howe was the longest-serving member of Margaret Thatcher's Cabinet, playing a key role in both her government and her downfall. Born in Port Talbot in 1926, he began his career as a lawyer, and was first elected to parliament in 1964, but lost his seat just 18 months later.

Returning as MP for Reigate in the Conservative election victory of 1970, he served in the government of Edward Heath, first as Solicitor General for England & Wales, then as a Minister of State for Trade. When Margaret Thatcher became opposition leader in 1975, she named Howe as her shadow chancellor.

He retained this brief when the party returned to government in 1979. In the controversial budget of 1981, he outlined a radical monetarist programme, abandoning then-mainstream economic thinking by attempting to rapidly tackle the deficit at a time of recession and unemployment. Following the 1983 election, he was appointed as foreign secretary, in which post he negotiated the return of Hong Kong to China.

In 1989, Thatcher demoted Howe to the position of leader of the house and deputy prime minister. And on 1 November 1990, following disagreements over Britain's relationship with Europe, he resigned from the Cabinet altogether. 

Twelve days later, in a powerful speech explaining his resignation, he attacked the prime minister's attitude to Brussels, and called on his former colleagues to "consider their own response to the tragic conflict of loyalties with which I have myself wrestled for perhaps too long".

Labour Chancellor Denis Healey once described an attack from Howe as "like being savaged by a dead sheep" - but his resignation speech is widely credited for triggering the process that led to Thatcher's downfall. Nine days later, her premiership was over.

Howe retired from the Commons in 1992, and was made a life peer as Baron Howe of Aberavon. He later said that his resignation speech "was not intended as a challenge, it was intended as a way of summarising the importance of Europe". 

Nonetheless, he added: "I am sure that, without [Thatcher's] resignation, we would not have won the 1992 election... If there had been a Labour government from 1992 onwards, New Labour would never have been born."

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.