July 11, 2013
Reading Judge Cote’s decision
by Alex Shephard
We read all 160 pages of Judge Cote’s decision yesterday. You can read our reactions below.
Update #1 11:49 AM: Reading through the decision, I keep coming back to this immortal scene from Casablanca:
Update #2 12:10 PM: Over at The Atlantic Wire, Alexander Abed-Santos writes:
The irony of this debate over e-book prices is that e-book price points have steadily been trending downward. “Since late October, as many of those publishers sign new agreements with book retailers, the average price of a best-selling e-book has dropped from an average of $11.79 to $6.95,” CNBC reported. And with e-books selling for deep discounts and some e-books going for free, you have to wonder how much lower can prices dip—or if that dip, at this point, is significant enough to make a significant difference for consumers.
Of course, averaging ebook prices, if it includes the ocean of barely-a-book things priced at 99 cents or lower, is a statistical sleight of hand. It’s also worth noting that publishers aren’t lying about how much it takes to produce books: the expectation that a new book in digital format is somehow worth a quarter of the physical book is dangerous and unsustainable.
Update #3, 12:28 PM: According to Cote, Apple pushed the MFN clause, which “not only protected Apple by guaranteeing it could match the lowest retail price listed on any competitor’s e-bookstore, but also imposed a severe financial penalty upon the Publisher Defendants if they did not force Amazon and other retailers similarly to change their business models and cede control over e-book pricing to the Publishers.” The point, as the National Journal‘s Brian Fung reports, “was not only to raise e-book prices overall; it was to break Amazon’s stranglehold over e-book pricing without getting its own hands dirty.” Apple was adamant that it was the publishing industry’s last, best hope to take on Amazon’s predatory pricing practices, telling them, “There is no one outside of us that can do this for you. If we miss this opportunity, it will likely never comes again.” To quote John Lennon, “The dream is over.”
Update #4, 12:45 PM: From Cote’s ruling: “E-books are books that are sold to consumers in electronic form, and that can and must be read on a dedicated electronic device such as the iPad, the Barnes & Noble Nook, or Amazon’s Kindle.” lol
Update #5, 1:00 PM: Some excerpts from Cote’s ruling: “Through 2009, Amazon dominated the e-book retail market, selling nearly 90% of all e-books.”
“With a digital book discount, Amazon’s $9.99 price point roughly matched the wholesale price of many of its e-books.” i.e. Amazon was selling ebooks either for no profit or at a loss.
“In the short-term, the Publishers believed the low price point was eating into sales of their more profitable hardcover books, which were often priced at thirty dollars or more, and threatening the viability of the brick-and-mortar stores in which hardcover books were displayed and sold. Over the long-term, they feared that consumers would grow accustomed to e-books priced at $9.99 and that the $9.99 price point would erode prices for all books, thereby threatening the business model for the publishing industry. They believed that this low price failed to reflect the true value of many books and also failed to distinguish among books in terms of the effort entailed to create and produce them and in terms of their quality, however one might measure quality.” Yup.
“The Publishers also feared Amazon’s growing power in the book distribution business. They were concerned that, should Amazon continue to dominate the sale of e-books to consumers, it would start to demand even lower wholesale prices for e-books and might begin to compete directly with publishers by negotiating directly with authors and literary agents for rights—a process referred to as disintermediation.” (Cote adds a footnote to this point that Amazon did exactly that with its Kindle Digital Platform.)
Update #6, 1:15 PM: “On a fairly regular basis, roughly once a quarter, the CEOs of the Publishers held dinners in the private dining rooms of New York restaurants, without counsel or assistants present, in order to discuss the common challenges they faced, including, most prominently Amazon’s pricing policies.” I heard that the publishers always ate here.
Before one dinner Hachette’s David Young said, “I hate [Amazon’s] bullying behavior and will be happy to support a strategy that restricts their plans for world domination,” which is pretty great.
Update #7, 1:20 PM: Young again, this time on the necessity of “windowing,” (“the delayed release or ‘withholding’ of the e-book versions of New Releases): “windowing… was the only way we could deal with Amazon selling off the family jewels.” It’s unclear if Young is referring to actual jewels or, well, nevermind. MacMillan’s John Sargent on windowing: “Windowing is entirely stupid [and] actually makes no damn sense at all really.”
Update #8, 1:30 PM: “Cue’s team had assembled data that showed that the book market in North America was larger than the music market… Apple’s McDonald predicted that the e-book market could reach nearly $1 billion in 2010.”
Update #9, 1:35 PM: “Apple expected that its entry into the market with an iBookstore on [the iPad] would help make books “cool” for the iTunes generation.” I don’t know what I find grosser about this, the implication that books aren’t cool or being referred to as the “iTunes generation.”
Update #10, 1:40 PM: I have to say, the first quarter of this ruling makes a pretty compelling case that Amazon is a monopolistic and predatory company that does everything in its power to suppress competition. (Apple is, of course, similarly abhorrent in many ways and seems to have violated antitrust laws. But, reading through this ruling, it’s pretty astounding that Amazon got a pass.)
Update #11, 1:45 PM: Easily the worst thing about this ruling so far is that Cote refers to “e-retailers” as “e-tailers,” which is fucking stupid.
Update #12, 1:50 PM: Reading this is a bit like watching a bad horror movie. It’s astounding how brazen the publishers were—conducting meetings with competitors without attorneys present, openly talking about the need to collude. I keep wanting to scream WHY ARE YOU BEING SO STUPID?????? at them. I’m not a fancy big city lawyer, but even I know that they were basically begging to get sued.
Update #13, 1:55 PM: “[Cue] had pegged Penguin’s CEO as a “follower,” and chose to hold off on contacting him.” #burn
Not Carolyn Reidy, though. “[Cue] considered Reidy a real “leader” among her fellow CEOs. He was not wrong.” The DOJ had tried to paint Reidy as a major instigator of the price-fixing scandal. Looks like it worked.
Update #14, 2:00 PM: Cote does not like Cue, and generally presents him as a master manipulator throughout (his skills as a negotiator are brought up frequently). On Cue, in a footnote: “[In] several… aspects of Cue’s testimony, regrettably, he was not credible…. As a savvy negotiator he knew how to place himself in the Publishers’ shoes, understand their interests, and appeal to their concerns, as he eventually admitted toward the end of his testimony.”
Update #15, 2:25 PM: According to Cote, the MFN (Most Favored Nation) clause was a brilliant and dastardly play:
“By combining the MFN with the pricing tiers, the pricing discretion Apple gave to the Publishers with one hand, it took away with the other… It eliminated any risk that Apple would ever have to compete on price when selling e-books, while as a practical matter forcing the Publishers to adopt the agency model across the board. As Cue admitted to colleagues in Britain in the Spring, “any decent MFN forces the model.”
Update #16, 2:30 PM: Cote on the controversial Steve Jobs email drafts:
“A great deal of time was spent at trial trying to understand a series of five emails drafted by Jobs on January 14. Cue wanted Jobs’s approval for higher price caps, and Jobs’s emails show that he was quite concerned about the profitability of the iBookstore. Jobs’s final email in the chain indicates that the Publishers need to “move to the agent model too for new release for the first year. If they don’t I’m not sure we can be competitive.” The emails were addressed to Cue, and he denies ever receiving any of them, including the last in the series.”
So, Cote doesn’t seemed to believe that the emails were drafts, after all. How one earth there is so much confusion as to whether an email is a draft or not, I will never understand. It seems like it should be obvious, but apparently not. But maybe Cote just isn’t part of the “iTunes generation.”
Update #17, 2:40 PM: To Cote, all conversation about the Apple deal making publishers more “competitive” or “leveling the playing field” with regards to Amazon, is fundamentally Orwellian: “The word ‘competitive’ in this and many other contexts at the trial,” she writes in a footnote, “means the opposite of competition. It means the eradication of retail price competition.”
Update #18, 3:00 PM: This often reads like an oral history.
Update #19, 3:05 PM: Cote periodically paints publishers’ attempts to raise the price of ebooks as a means to ensuring that hardcover prices remain high. That’s probably part of it, but it’s also worth noting that, as we have argued many times before, the biggest issue was ensuring that ebooks were not permanently priced at unsustainable levels. While people (Cote included) often focus on the fact that ebooks cost less than hardcovers (because there’s no physical element), printing costs aren’t the only costs.
Update #20, 3:10 PM: “On the night of January 18, Amazon received confirmation from a former colleague who was now working at Random House that most of the Publishers were likely to enter agency agreements with Apple.”
Update #21, 3:15 PM: After finding out about the publishers’ negotiations with Apple, Amazon unveiled a “Fuck you publishers, we’re cutting you out of the equation” plan, a “70% royalty option for e-books with a list price between $2.99 and $9.99.” Cote: “With an author receiving $6.25 of $8.99, and Amazon keeping the rest, this amounted to a naked play to eliminate the Publishers as a middle-man between authors and Amazon.”
The best part of all this?
“News Corp’s Rupert Murdoch called HarperCollins to complain and in no uncertain terms expressed a desire to take revenge on Amazon.” Dude is a Shakespearian villain.
Update #22, 3:20: In her prose, and with her characterizations of key figures (Cue, especially) and events (the secret back room dinners), I am beginning to think that Judge Cote is a fan of legal thrillers. Example:
“By the end of the that week, four of the five Publisher Defendants had put Amazon on notice that they were joining forces with Apple and would be altering their relationship with Amazon in order to take control of the retail price of e-books. It was clear to Amazon that it was facing a united front.” (End of section.) (italics mine)
Update #23, 3:25: James Murdoch, of all people, is remarkably sharp and cogent re: ebook pricing. He also makes a strong case for the agency model, despite its flaws: “So, yes, getting around $9 per new release is less than the $12.50 or so that Amazon is currently paying. But the current situation is not sustainable and not a strong foundation upon which to build an ebook business.”
Update #24, 3:30: Periodically, the publishers come off like tragic heroes: “Each of the Publisher Defendants realized that its negotiations with Amazon would be difficult, but in their view they had embarked upon a mission that was neccesary to protect the publishing business. They took comofrt in their knowledge that the five of them stood together, and in Apple’s presence in the market.”
Update #25 3:35: Jobs, at iPad unveiling: “The price will be the same. Publishers are actually withholding their books from Amazon because they are not happy.”
General Counsel of S&S to Reidy: “[I] cannot believe that Jobs made that statement… [it was] incredibly stupid.” I think I have Stockholm Syndrome because I am starting to love these people.
Update #26 3:40: Cote paints Macmillan’s first post-agency meeting with Amazon as a kind of break-up: “Macmillan, the smallest of the five publishers, did the honorable thing and delivered its message in person.”
Update #27 3:45: “Macmillan had anticipated that Amazon might retaliate against it by removing the “buy buttons” on the Amazon site that allow customers to purchase books from Amazon’s online store or from the Kindle, or by eliminating Macmillan’s products from its sites altogether. That night, Macmillan learned which option Amazon had chosen. Amazon removed the buy buttons for both print and Kindle versions of Macmillan titles. Customers could view the Macmillan books on the Amazon website but could not purchase them.” That is cold.
Update #28 3:50: Literally every footnote about Eddy Cue in this ruling is about how he’s not credible. Also, all of the conversations between the publishers make them sound like gossipy teens. It’s actually astounding how much contact there was between the heads of corporations who are ostensibly in competition with one another.
Update #29 4:40: “The increases at Amazon within roughly two weeks of moving to agency amounted to an average per unit e-book retail price increase of 14.2% for their New Releases, 42.7% for their NYT Bestsellers, and 18.6% across all of the Publishers Defendants’ e-books… The prices of some of their New Release hardcover books were also raised in order to move the e-book version into a correspondingly higher price tier.”
Update #30 4:45: What were the effects of this price increase? Fewer sales. And, according to Cote, customers suffered: “Some consumers had to pay more for e-books; others bought a cheaper e-book rather than one they preferred to purchase; and it can be assumed that still others deferred a purchase altogether rather than pay the higher price.”
Update #31 4:55: Jobs called raising e-book prices an “aikido move” to his biographer Walter Isaacson. I’m just going to let that sit in for a second.
Update #32 5:00 Jobs to Isaacson:
“Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that—they thought it would trash their ability to sell hardcover books for $27. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, “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.” But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you our books.”
Update #32 5:05: Monsanto just joined Rupert Murdoch as a “not entirely unexpected cameo by evil person/entity.”
Update #33 5:10: “Because unlawful conspiracies tend to form in secret, however, proof of a conspiracy will rarely consist of explicit agreements.” Someone should have told Apple/the publishers about this whole “secret” thing, as it seems like none of them could shut up about it.
Update #34 5:10: Cote: “Inspired by the impending Launch of the revolutionary iPad, scheduled for January 27, Apple seized the moment.” Carpe diem, motherfuckers. (Also, I do not understand the rules governing capitalization in this brief at all.)
Update #35 5:15: I’ve already written about this a bit, but the MFN clause is crucial in Cote’s decision: “Apple included the MFN, or price parity provision, in its Agreements both to protect itself against any retail price competition and to ensure that it had no retail price competition.”
Update #36 5:20: Cote is very fond of using one of the publisher’s description of the economics of the Apple deal as being “terrible” and tends to lean on that much harder than arguments for the long-term economic utility of the deal. Here’s Cote:
“The economics of the Agreement were, simply put, “terrible” for the Publishers. The Publisher Defendants already expected to lose revenue from their substitution of an agency model for the wholesale model of e-book distribution. Unless a Publisher Defendant followed through and transformed its relationships with Amazon and other resellers into an agency relationship, it would be in significantly worse terms financially as a result of its agency contract with Apple. As significantly, unless the Publisher Defendants joined forces and together forced Amazon onto the agency model, their expected loss of revenue would not be offset by the achievement of their ultimate goal: the protection of book value.”
Update #37 5:25: Cote: “And when it appeared a Publisher Defendant might be too scared to commit to this drastic business change, Cue reminded that Publisher Defendant that Apple’s entry into the market represented a once-in-a-lifetime opportunity to eliminate Amazon’s control over pricing.” Gonna let that last part hang in the air for a minute.
Update #38 5:40 Cote:
“The evidence of this conspiracy can be found in Jobs’s admissions to a reporter, to James Murdoch, and to his biographer; in contemporaneous e-mails pulled from the files of Apple, the Publishers, Amazon, and others; in the web of telephone calls among Publisher Defendants’ CEOs surrounding each turning point in the presentation and execution of the Agreements; and as compellingly, in the circumstantial evidence. The circumstantial evidence includes the following: each of the Publisher Defendants shared the identical goal to raise the $9.99 price point to protect its physical book business; the agency Agreements represented an “abrupt shift” from the past model for the distribution of e-books; the Publisher Defendants each demanded that Amazon adopt this new model within days of each other; the agency model protected Apple from price competition; the rise in trade e-book prices to or close to the price caps established in the Agreements was large and essentially simultaneous; in adopting a model that deprived each of them of a stream of expected revenue from the sale of e-books on the wholesale model, the Publisher Defendants all acted against their near-term financial interests; and each of the Publisher Defendants acted in identical ways even though each was also afraid of retaliation by Amazon…In any events the Plaintiffs have shown that the Agreements did not promote competition, but destroyed it.” “
Update #39 5:45: Addressing Apple’s defense, Cote argues that Apple “abandoned each of [the] arguments… that Apple identified in its opening statement.” Also: “Apple misreads Monsanto and its progeny. It also perceives ambiguity where none exists.”
Update #40 5:55: Cote on why Apple’s claim that it “is particularly unfair to find that it engaged in illegal conduct since Amazon and Google, among others, used similar negotiating tactics and included nearly identical terms, including MFNs, when they subsequently executed their own agency agreements with Publishers” failed:
First, it is no defense to participation in an illegal price fixing conspiracy to suggest that others did it too… Apple has pointed to no evidence that either Amazon or Google desired either to eliminate retail price competition or raise retail prices. Quite the contrary. Amazon was adamant in its support of retail price competition and lower prices. It did not relinquish its control over retail pricing easily.”
According to Penguin’s David Shanks, Amazon “yelled and screamed and threatened” when approached about switching to the agency model.
Update #41 6:00: More snark from Cote re: use of the word “competition”: “Apple uses the term ‘competitive’ to convey that it wanted its prices to be the lowest in the marketplace, not to convey that it wanted prices arrived at through the process of competition.”
Also related: “Apple preferred to compete with Amazon on the strength of its device rather than through price wars.” The footnotes in this ruling are way more fun than the main text. Apple’s refusal to engage in a price war with Amazon comes up throughout the opinion—Cote writes “Apple demanded, as a precondition of its entry into the market, that it would not have to compete with Amazon on price,” at the tail end of her argument. She’s right, but of course, it also had very good reason not to try to engage in a price war with Amazon, as that would require loss leader pricing.
Update #42 6:10: More footnote fun. Here Cote explains why witnesses were unreliable:
“This Opinion has already described several instances in which testimony given by Cue and Sargent was unreliable. Other witnesses who were noteworthy for their lack of credibility included Moerer, Saul, and Reidy. Their demeanor changed drastically depending on whether Apple or the Plaintiffs were questioning them; they were adamant in details until confronted with documents or their prior deposition testimony; instead of answering questions in a straightforward manner, they would pick apart the question and answer it narrowly or avoid answering it altogether. Thus, the findings in this Opinion are informed by the documentary record, the circumstantial evidence, including an understanding of the competitive landscape in which these events were unfolding, and that portion of each witness’ testimony that appeared reliable and credible.”
Despite Cote’s claim that “issues have shifted” at the end of the trial, it seems like nothing really shifted at all. The decision reflects that—it rarely delves into witness testimony.
Update #43 6:15 Cote: “Apple is confronted with the fact that the conspiracy succeeded. It not only succeeded, it did so in record-setting time and at the precise moment that Apple entered the e-book market… while this conspiracy was complex to execute its terms were relatively simple and required no extended discussion. The issue was whether Apple and the Publishers would join together to eliminate Amazon’s power to set retail prices and tehn to raise prices to the point that Apple would permit.”
Update #44 6:30 Two pages from the end of her decision, Cote takes on the Amazon argument:
“If Apple is suggesting that Amazon was engaging in illegal, monopolistic practices, and that Apple’s combination with the Publisher Defendants to deprive a monopolist of some of its market power is pro-competitive and healthy for our economy, it is wrong. This trial has not been the occasion to decide whether Amazon’s choice to sell NYT Bestsellers or other New Releases as loss leaders was an unfair trade practice or in any other way a violation of law. If it was, however, the remedy for illegal conduct is a complaint lodged with the proper law enforcement offices or a civil suit or both. Another company’s alleged violation of antitrust laws is not an excuse for engaging in your own violations of law. Nor is suspicion that that may be occurring a defense to the claims litigated at this trial.
Alex Shephard is the director of digital media for Melville House, and a former bookseller.