Judge Denise Cote last week signed a final order for injunctive relief in Apple’s e-book price-fixing case. How did the parties in the case ultimately fare, and what battles still loom? PW takes a look at the broad strokes of the price-fixing suit’s endgame.
In issuing her final injunction, Cote said she wanted to tread as lightly as possible on Apple’s business while seeking to foster some measure of competition in the e-book market. Any way you look at it, Apple dodged a bullet.
Cote’s final injunction spared Apple from what she deemed the two most contentious proposals from the Department of Justice. First, the injunction does not extend to Apple’s activities in its App Store, or intrude into other content markets, such as music or TV. And the final order employs only a dramatically scaled-back version of an external monitor. It also slashed a provision that, for two years, would have allowed e-book retailers to directly link to their own e-bookstores for in-app purchases without paying a commission to Apple.
Apple’s loss in its e-book price-fixing trial was, in a word, decisive. But just as Cote kept the scope of the trial narrowly limited to the alleged collusive behavior between Apple and the publishers, she kept the injunctive relief narrowly targeted as well. Apple still plans an appeal—but even if that appeal fails, the final injunction is one the company can live with.
Of course, with Apple’s appeal looming, it is also possible that the appeals court could stay the implementation of the final injunction, now set to take effect on or around October 5.
For the Publishers
For the five settling publishers, the final order represents a measure of closure, but also opens a new can of worms. That’s because the injunction requires Apple to retain unlimited power to discount e-books beyond the two years mandated in the publishers’ settlements. And, it staggers the order in which the five settling publishers will be allowed to negotiate new straight agency contracts with Apple, spacing them six months apart.
Hachette will be the first to be free to negotiate a straight agency deal with Apple, 24 months after the “effective date” of the final injunction. HarperCollins comes next, at 30 months; Simon & Schuster at 36 months; Penguin at 42 months; and Macmillan, the last to settle with the DOJ, at 48 months.
Extending Apple’s right to discount is how the court hopes to ignite competition in the e-book space. But, as with everything in this case, it really all comes down to one key player: Amazon.
That’s because, even though the court has ordered Apple to retain the right to discount e-books, it is unlikely that the company will actually use that power. Apple executives have said as much, repeatedly, and under oath. For Apple, each sale in the iBookstore must generate a single-digit net profit. As for other market actors, like Barnes & Noble, they are hardly eager to return to a permanent e-book price war.
Rather, the court is betting that vesting Apple with the right to discount for an extended period will reset the bar for the publishers’ next round of contract negotiations with Amazon—surely Amazon will negotiate for the same right to discount as Apple, won't they?
If the publishers are forced to individually negotiate new contracts without the benefit of the united front the Apple deals had provided, the court wants to see just how hard each publisher will fight to retain the pricing power it wrested from Amazon through its alleged scheme with Apple.
It will be interesting to see what happens. One one hand, the publishers will still approach their post-settlement contract talks with Amazon from a stronger position than they had before their Apple deals. After all, Amazon’s ability to retaliate against publishers has been diminished with Apple in the game. And, if nothing else, Apple’s trial gave the publishers a chance to further articulate and reinforce their common belief that Amazon’s market power must be blunted.
In PW’s initial reporting on the revised injunction, we wrote that Macmillan’s being placed last in the Apple negotiating line might have been a swipe at CEO John Sargent for his defiance. That was wrong. Macmillan has not been singled out—and, in fact, Hachette, being the first to renegotiate with Apple, might be in the toughest position of all.
When it comes time to strike their first-post-settlement deals with Amazon, will each publisher stick to the agency model they thought necessary, confident that other houses will do the same when their turns to renegotiate come? Do they risk Amazon retaliation if they do not offer them the same ability to discount as Apple? Or, perhaps more likely, will Amazon instead offer Hachette, or any publisher, such a sweet deal to dump or modify its agency resale terms that it cannot say no? If so, that would certainly complicate the first post-injunction negotiations with Apple, which had made a level pricing field a condition of opening the iBookstore.
Whatever the outcome, this aspect of the court’s order will certainly make the next round of Amazon negotiations worth watching.
E-book consumers got some good news last week, as the projected refunds from the publishers’ settlements will more than double. A new “plan of distribution” has been submitted to the court that will combine roughly $93 million from the Macmillan and Penguin settlements with the existing $69 million collected from the first three settlements. Consumers are now set to receive $3.06 per e-book for New York Times bestsellers purchased during the settlement period (up from an earlier estimated $1.32), and 73¢ per nonbestseller (up from 30¢). And those amounts could be adjusted further.
In addition, some key dates have been set. Consumers who want checks now have until October 21 to file. This includes consumers who did not opt for a check at the first deadline, last December. That means that consumers have another chance to receive actual cash. For those who do not request checks, refunds will be issued automatically to their e-book retailer accounts. No action is required.
In addition, the court has set a final approval hearing for December 6, 2013. Last year, Cote approved the first three settlements from the bench. If she does so again, there is a possibility that the refunds could start flowing smack in the middle of the holiday season—a $162 million stocking stuffer.
More money is likely to come once Apple resolves the state and consumer class actions against it. But don’t start counting your Apple windfall just yet. Apple and the states and the consumer class are on track for a May 2014 trial on damages, and Apple’s attorneys have indicated that they plan to play hardball. Apple will not only dispute collateral estoppel—that is, the degree to which Cote’s liability finding in the federal antitrust case translates into liability in the state and consumer cases—they will also fight class certification.
Still, there is an outside that Apple will settle—Cote ordered the parties to undertake settlement talks under the supervision of Judge Kimba Wood. But, failing that, Apple will go to trial again next year.