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June 21, 2013

Judge says “issues have shifted.” Does Apple stand a chance against the DOJ?

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Apple Senior VP Eddy Cue, who the DoJ accuses of masterminding a wide-ranging conspiracy to fix the prices of ebooks.

When the Department of Justice’s case against Apple began three weeks ago, things did not look good for the consumer electronics giant. Back in the heady, wild days of early June it was widely assumed that the DoJ would easily be able to prove that Apple engineered a widespread conspiracy involving five large publishers to raise the price of ebooks. (You can read more from our coverage of the trial, and the antitrust suit in general, here.)

Even the presiding judge, Denise Cote, hinted that they probably did not stand a chance, when she expressed her “tentative view” during a pretrial hearing that, “the government will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case, including the terms of the agreements, will confirm that.”

A lot can change in three weeks.

Thursday was the trial’s final day and, while the case will most likely not be decided for weeks, if not months, Apple’s chances of winning the antitrust suit are considerably rosier than they were three weeks ago. On Wednesday, the final day of testimony, Judge Cote seemed to suggest that her belief in the strength of the DoJ’s case had changed considerably over the past three weeks when she said, “I thought I had prepared so well. I learned a lot. But you have helped me understand so much more through the evidence presented.”

What changed her mind? Context.

For starters, Apple senior VP Eddy Cue, who the DoJ sought to paint as the conspiracy’s “ringmaster,” was cool, calm, and, perhaps most importantly, credible when he took the stand last week. Over the course of several hours, Cue patiently and painstakingly described why Apple made the decisions it made—from adopting the agency model to the most favored nation clause. In the process, he seems to have made a convincing case that Apple, to quote Fortune‘s Philip Elmer-Dewitt, “had good business reasons to structure its ebook deal the way it did, independent of whatever collusion the publishers might have engaged in.” When Cue finished his testimony, Elmer-Dewitt wrote, “it wasn’t clear whether the government had let its last best chance slip through its fingers or whether it never had a chance at all.”

On Wednesday, Apple called widely-respected economist Kevin Murphy to the stand as an expert witness. Murphy, who also assisted Microsoft when the DoJ brought an antitrust suit against it (remember that?), was brought in to deliver testimony about Amazon. Per Elmer-Dewitt’s report:

Amazon, as economist Kevin Murphy testified Wednesday, was the 800 pound gorilla in the courtroom. With an 80% to 90% share of the ebook market (and as one of th biggest retailers of physical books) Amazon wielded enormous power over the book industry. The court heard about the naked exercise of that power when the company punished an impertinent publisher [Macmillan] in January 2010 by removing the Amazon website’s “buy” button from all of the publisher’s books—digital and physical. Why the antitrust division chose to prosecute the publishers and not the ebook monopolist that was selling the products below remains a mystery.

In that context, Apple’s actions look very different. It may be, as the government alleged that the publishers conspired to form a horizontal agreement to fix the price of ebooks—a “per se” violation of the Sherman Act. Since the publishers settled without admitting guilt, we may never know. But there was no evidence presented in trial to prove that Apple knew what the publishers were talking about when they talked among themselves. As Professor Murphy testified, Apple’s actions throughout were exactly what economic theory would predict in the context, independent of any alleged conspiracy.

Apple continued to fight back on Thursday, when its lawyer, Orin Snyder, argued that a ruling against the company would create “a chilling and confounding effect not only on commerce [but on] content markets throughout this country.” (In his closing arguments, Snyder may also have thrown the other five publishers involved in the trial under the bus.) The DoJ, meanwhile, spent the last day of testimony arguing that Apple was significantly less innovative in the ebook market than it claimed to be.

 

Alex Shephard is the director of digital media for Melville House, and a former bookseller.

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