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.

Getty
Show Hide image

How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

0800 7318496