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.

Photo: Getty
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How a small tax rise exposed the SNP's anti-austerity talk for just that

The SNP refuse to use their extra powers to lessen austerity, says Kezia Dugdale.

"We will demand an alternative to slash and burn austerity."

With those few words, Nicola Sturgeon sought to reassure the people of England, Wales and Northern Ireland last year that the SNP were a party opposed to public spending cuts. We all remember the general election TV debates, where the First Minister built her celebrity as the leader of the anti-austerity cause.

Last week, though, she was found out. When faced with the choice between using the powers of the Scottish Parliament to invest in the future or imposing cuts to our schools, Nicola Sturgeon chose cuts. Incredible as it sounds the SNP stood shoulder to shoulder with the Tories to vote for hundreds of millions of pounds worth of cuts to schools and other vital public services, rather than asking people to pay a little bit more to invest. That's not the choice of an anti-austerity pin-up. It's a sell-out.

People living outside of Scotland may not be fully aware of the significant shift that has taken place in politics north of the border in the last week. The days of grievance and blaming someone else for decisions made in Scotland appear to be coming to an end.

The SNP's budget is currently making its way through the Scottish Parliament. It will impose hundreds of millions of pounds of cuts to local public services - including our schools. We don't know what cuts the SNP are planning for future years because they are only presenting a one year budget to get them through the election, but we know from the experts that the biggest cuts are likely to come in 2017/18 and 2018/19. For unprotected budgets like education that could mean cuts of 16 per cent.

It doesn't have to be this way, though. The Scottish Parliament has the power to stop these cuts, if only we have the political will to act. Last week I did just that.

I set out a plan, using the new powers we have today, to set a Scottish rate of income tax 1p higher than that set by George Osborne. This would raise an extra half a billion pounds, giving us the chance to stop the cuts to education and other services. Labour would protect education funding in real terms over the next five years in Scotland. Faced with the choice of asking people to pay a little bit more to invest or carrying on with the SNP's cuts, the choice was pretty simple for me - I won't support cuts to our nation’s future prosperity.

Being told by commentators across the political spectrum that my plan is bold should normally set alarm bells ringing. Bold is usually code for saying something unpopular. In reality, it's pretty simple - how can I say I am against cuts but refuse to use the powers we have to stop them?

Experts - including Professors David Bell and David Eiser of the University of Stirling; the Resolution Foundation; and IPPR Scotland - have said our plan is fair because the wealthiest few would pay the most. Trade unions have backed our proposal, because they recognise the damage hundreds of millions of pounds of cuts will do to our schools and the jobs it will cost.

Council leaders have said our plan to pay £100 cashback to low income taxpayers - including pensioners - to ensure they benefit from this plan is workable.

The silliest of all the SNP's objections is that they won't back our plan because the poorest shouldn't have to pay the price of Tory austerity. The idea that imposing hundreds of millions of pounds of spending cuts on our schools and public services won't make the poorest pay is risible. It's not just the poorest who will lose out from cuts to education. Every single family and business in Scotland would benefit from having a world class education system that gives our young the skills they need to make their way in the world.

The next time we hear Nicola Sturgeon talk up her anti-austerity credentials, people should remember how she did nothing when she had the chance to end austerity. Until now it may have been acceptable to say you are opposed to spending cuts but doing nothing to stop them. Those days are rapidly coming to a close. It makes for the most important, and most interesting, election we’ve had in Scotland.

Kezia Dugdale is leader of Scottish Labour.