E-Book Price Fixing Suit Against Apple Bookended by Supreme Court’s Refusal to Review 450 Million Dollar Judgment.

March 30, 2016

On Monday, March 7th, The Supreme Court denied a petition to review a decision by the Second Circuit Court of Appeals, which found Apple, Inc. guilty of price fixing.  In contesting a $450 million judgment, Apple argued that by entering into the E-Book market, the company had wrested monopoly control from online retail giant Amazon.  Apple contended that as a result, content output increased, and prices decreased.
According to a 2013 opinion written by Denise L Cote, a United States District Court Judge in Manhattan, Apple “[took] advantage of the Publisher Defendants’ fear of and frustration over Amazon’s pricing, as well as the tight window of opportunity created by the impending launch of the iPad . . . . [to garner] the signatures it needed to introduce the iBookstore” alongside the launch of the iPad.    The opinion also detailed how Eddy Cue, the company’s senior VP of internet software and services met with the “Big Six” publishing companies.

Cue told Apple that although current wholesale prices for e-books fell within the range of $13 to $15, the publishers would need to lower their wholesale prices for Apple, so that Apple could compete with Amazon, who priced their e-books at $9.99.

 
As documented in the 2013 opinion. Apple wanted publishers to agree to tiered price points ranging from $12.99 and $14.99.  Under this pricing strategy -called the agency model – publishers would set prices and Apple would receive a thirty percent commission for each sale.  This would allow publishers to raise the price of e-books from the $9.99 point established by Amazon.  Under the publishers agreement which Amazon, prices were set according to the wholesale model, whereby the publishers charged retailers close to half the cover price for a book, and the retailers set their own prices.
Founded in 1994, Amazon is famous for relentlessly plowing profits into expansion and operating on razor-thin profit margins.  This focus-on-the-long-term strategy has allowed the company to offer an ever more diverse range of products at extremely low prices, while driving competitors like Circuit City and Borders out of business.  Investors have rewarded the company accordingly; Amazon’s stock price doubled in 2015, and as of this writing, is valued at $580.02 per share. But, while this strategy is a boon for consumers, it can spell doom for both brick-and-mortar businesses and producers alike.
Apple which competes with Amazon in the tablet and content delivery markets (to name just a few) is also frequently lauded for its profitability.   The corporation is the most profitable corporation on the Fortune 500 index and, in 2014, broke single-quarter earnings by raking in $18 billion dollars in the third quarter.    The company is also praised for both its innovation, and for its ability to enter into adjacent markets (e.g. Apples’ acquisition of audio equipment manufacturer Beats).
But the company has had its share of product and branding failures.  To note just one example:  In 1989 Apple launched the Macintosh Portable, the hulking 16-pound ancestor of the modern Macbook. The unit cost approximately $12,500 in 2016 dollars.  But what made the Macintosh Portable supremely unattractive to consumers was the fact that due to a design flaw in the power supply, the units batteries could not be charged again if they had allowed to drain completely.
Apple has also faced accusations that its suppliers operate unethical factories.  In 2012, Foxconn Technology Co., one of Apples largest suppliers, was accused of coercing unpaid student labors into working 12 hour days. The company also received significant press attention after it installed netting around its onsite dormitories as a response to 18 suicide attempts by factory workers, 14 of which resulted in death.
But as several commentators have pointed out, Apple has learned from each of these failures.   While still costly, Apple laptops are now considered among the most reliable in the industry.   The company has made significant efforts to address its supply train troubles and, morality aside, does not appear to have faced significant financial repercussions for its activities.
This decision is a major victory for Amazon, whose complaints gave the Justice Department the impetus to file this action, and who will now be able to retain its dominance in the e-book market.  Whether Apple will demonstrate it’s trademark resilience by regrouping and reentering the e-book market remains to be seen.  In the meantime, class action members will begin receiving their share of the $450 million settlement (minus $50 million in attorneys fees).