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Gadgetmaker faced up to $840M USD in damage claims after being found guilty of ebook price fixing

With a trial set for July over accusations that Apple, Inc. (AAPL) and its late CEO -- Steven P. Jobs -- brokered illegal collusive agreements with publishers to fix eBook (electronic book) prices at lower levels, Apple has backed off at the last minute, agreeing to a settlement with a coalition of state attorney generals and consumers.
 
I. New Settlement -- Contents Unknown
 
The most crucial detail -- what is in this settlement -- is missing, as Apple successfully negotiated a court order to seal the settlement.  Given that Apple faced up to $840M USD in potential damages claims (by prosecutors' estimations), the settlement is probably less than $100M USD.
 
Apple has a month to submit a filing asking for approval of its settlement offer.  That filing may provide some insight into exactly what it's willing to pay back to consumers in damages.

The popular gadget maker's legal woes stem from the 2010 release of the iPad.  To drive the device's sales Apple made a major foray into the eBook market, brokering key contracts with publishers.
 
The case was somewhat unusual because Apple at the time did not have a dominant position in the eBooks market.  However, a lengthy federal probe by the U.S. Department of Justice revealed a long paper trail of corporate communications, including emails from Steve Jobs and his executives.  These emails painted what seemed to be a clear picture that Apple colluded with the publishers to fix prices to try to break the power of Amazon.com, Inc. (AMZN).  Price fixing is illegal even for minority players in a given market, according to U.S. antitrust laws.
 
At the time, Amazon's prices for eBooks were around $9.99 USD -- a price that was often below cost.  After Apple's tactics, prices jumped to as high as $15 USD.
 
II. A Brief Recap and the Remaining Unknowns
 
The federal probe's implication that Apple and the publishers price-fixed was met with a federal lawsuit in April 2012.  The publishers who signed questionable contracts with Apple quickly settled, leaving Apple alone to fight the accusations.  The case went to trial and Apple struggled to defend itself during the June 2013 trial.  The trial was held in Manhattan, New York at the U.S. District Court for the Southern District of New York.
 
In July 2013, after reviewing both sides’ arguments and evidence, Judge Denise Cote ruled in the non-jury trial that Apple was guilty.  She proposed a set of solutions to correct the situation in Aug. 2013.
 
Apple quickly rejected that settlement offer, taking particular issue with the idea of an external monitor to watch its behavior for signs of wrongdoing.  It argued a monitor would be a competitive threat and it should be allowed to self-report on its progress in avoiding anticompetitive/collusive behavior.  Apple was granted a hearing before the 2nd U.S. Circuit Court of Appeals in New York to plead its case, but the Circuit Appeals court was unconvinced and order that the lower court's ruling stand.
 
The finding of guilt allowed state attorney generals and consumers to band together under a second suit in the class action lawsuit against Apple seeking monetary damages.  Judge Cote was scheduled to hear both sides and issue a ruling on whether Apple owed the states and consumers damages.
Apple e-book
The ebook ruling has helped to reinforce Amazon's dominant position in the market.

Apple was last heard vowing to file a formal appeal Judge Cote's original finding of guilt (a more aggressive move than its previous tactic of calling for a hearing to try to dismiss the external monitor).  It is probable that Apple may have agreed to forgo its appeal as part of the settlement.  It is unknown how the current settlement impacts Apple's ongoing legal complaints about the external monitor.
 
Ultimately the case appears to result in cheaper rates for consumers, but the dark side is that it has served to reinforce Amazon's dominant position in the market.  Amazon has recently begun to show signs of abusive behavior, delaying shipments of paper books and the release of highly anticipated new titles (both in digital and non-digital form), in an effort to squeeze a bigger cut of digital + non-digital book revenue from publishers.
 
Barnes & Noble, Inc. (BKS) one of Amazon's major rivals was unhappy that DOJ prosecutors had no issue with the market's most dominant player sell eBooks below cost.  It has argued that such a tactic should be illegal.

Source: Bloomberg



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RE: Typical American Govt "Justice"
By amanojaku on 6/17/2014 5:19:03 PM , Rating: 2
Fines aren't just to deter future illegal behavior. They're also meant to take away the advantages gained from past illegal behavior.

Apple caused eBook prices to go up 50%, then took 30% of the total. Where Amazon would have gotten $3 per sale on a $10 book, Apple got $4.50 per sale on a $15 book. Apple sold more than 100M iBooks by 2011; the iBookstore opened in 2010. I don't have sales figures for 2011, but assuming growth in sales of 30%YoY then 2011 sales had to be at least 130M iBooks. That means a total of around 250M iBooks sold by the time the lawsuit hit.

At 250M books sold, Apple's costs model would have generated $1.125B in fees and Amazon's would have generated $750M, for a difference of $375M. The fine appears to be WAY out of line at nearly three times the estimated profit!

The thing is, we don't know what other factors were involved in determining the fine. Since the publishers were required to raise prices with other vendors, that means ALL eBook consumers were affected. The fine could cover other eBook sales, since Amazon would have continued at $10 if it could. And if memory serves, Amazon and Apple each own about 45% of the eBook sales. That means another $375M was taken from consumers due to the price fixing. Now the fine is $750M ($375M from Apple sales, $375M from Amazon sales).

If Apple and Amazon accounted for 90% of eBook sales, then 28M eBooks were sold by everyone else. The Apple cost model profit nets another $42M. The fine is now just under $800M. Then, there's the potential loss of book sales. Some publishers reported a reduction of sales after the price bump; one publisher said 5%. That's a reduction of 14.6M eBook sales. Since the publishers were involved in this their loss is their fault and not counted. The retailers (Amazon, B&N, etc...) lost out on $22M in licensing fees from lost sales.

I'm not willing to account for the remaining $200M in fines, but there's my analysis.


RE: Typical American Govt "Justice"
By amanojaku on 6/17/2014 5:22:29 PM , Rating: 3
Eh! It was a DT poster who stated $1B in fines. The media quoted a potential of $840M. So my $800M analysis might be more accurate than I thought...


RE: Typical American Govt "Justice"
By Reclaimer77 on 6/17/2014 6:16:52 PM , Rating: 1
I said ABOUT a billion. To me ~$800 million is about a billion. Wtf?


RE: Typical American Govt "Justice"
By amanojaku on 6/17/2014 6:27:39 PM , Rating: 2
God dammit, Reclaimer. Not everything is an attack against you. I was clarifying the details of my post, since someone would accurately point out that $800M is pretty far away from $1B, unless you happen to have a few billion to spare. If you're paying a fine, $200M is a lot.


By Reclaimer77 on 6/18/2014 9:40:04 AM , Rating: 1
My bad I misinterpreted. Relax :)


"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad














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