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Justice Department lays out a killer case against Apple for price-fixing e-books

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U.S. DISTRICT COURT, Manhattan — In the case of Apple allegedly coordinating a massive price-fixing operation in the e-book market, a huge question remains: How will Apple combat the mountain of evidence the U.S. Department of Justice has against it?

In opening statements for the United States v. Apple Inc. et al trial, held today in a Manhattan federal court, Justice Department lawyers laid out a fairly clear-cut case to U.S. District, Southern District of New York, Judge Denise Cote that Apple helped to organize an effort among top publishers to raise e-book prices. The Justice Department has collected dozens of e-mail, phone calls, and key witnesses that seem to seal the deal for Apple.

“This is a straightforward case about price-fixing,” one DOJ lawyer said. He noted that the government isn’t trying to attack Apple over its size or success (which some have argued is the case with Apple’s overseas tax inquiries) — it’s just trying to prove that Apple was the key instigator for helping five publishers to fundamentally change their pricing model all at once.

Initially, e-books were sold through a wholesale pricing model, which allowed for the low $9.99 price popularized by Amazon. But with the launch of the iPad, the publishers collectively adopted an agency pricing model, which let them set their own pricing and ultimately led to more expensive $12.99 and $14.99 e-books.

Even though Amazon tried to stick with its lower prices initially, it was practically forced to adopt the agency model after the iPad’s launch. That was no coincidence, the DOJ argued.

Just looking at the Justice Department’s opening slide deck [below] paints a pretty damning case against Apple. In particular, Eddy Cue, Apple’s head of Internet Software and Services, looked to be the key ringleader in orchestrating the price change. Prior to the launch of the iPad in January 2010, Cue was in constant communication with executives from Hachette, Simon & Schuster, Penguin Group, Macmillan, and HarperCollins about getting them aboard the iBooks store.

“After talking to all the other publishers and seeing the overall book environment, here is what I think is the best approach for ebooks,” Cue wrote in an e-mail to Penguin CEO David Shanks.

Although Cue was initially resistant to the idea of agency pricing after it was first brought up by a publishing executive, a conversation with Steve Jobs convinced him that it was the right path. Eventually, Cue proposed that the publishers adopt the agency pricing model for e-books, allowing them to price titles as they like while Apple gets its usual 30 percent cut (just like with songs, TV shows, and apps in App Store). That was a fundamental shift from the wholesale pricing Amazon was using previously. Just like physical book stores, Amazon purchased titles at a discounted rate and was able to price them as it saw fit.

The DOJ pointed out that publishers tried for years to move the e-book market away from Amazon’s $9.99 price — but they needed a strong company like Apple to serve as the ammunition for getting the deed done.

Some of the evidence implies that Apple knew exactly what it was doing. During Jobs’ blowout presentation for the first iPad, he bought a copy of the Edward Kennedy autobiography on stage for $14.99. That same title was available on Amazon for $9.99.

When the Wall Street Journal‘s Walt Mossberg questioned Jobs on why people would pay more for an e-book from Apple, Jobs not so wisely replied, “That won’t be the case. … The prices won’t remain the same.”

Elisa Rivlin, the general counsel of Simon & Schuster, ended up calling that remark “incredibly stupid” in an e-mail to CEO Carolyn Reidy  [slide 76 below].

So far, Apple’s lawyers seem more concerned about having a fair trial rather than combating the DOJ’s arguments directly. One Apple lawyer brought up Cote’s pretrial comments, in which she practically had the case already judged: “I believe 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,” she told Reuters a few weeks ago.

But Cote was quick to point out that Apple still had a fair shot. “This isn’t a vote about whether I like Apple,” she said.

Apple has denied any wrongdoing ever since the case was filed last year, but it’ll be interesting to see just how well it can prove that in court. Stay tuned as we report on further developments from this trial over the next three weeks.

Update: We originally attributed a quote to Simon & Schuster CEO Reidy, when it was actually made by its general counsel. We regret the error.


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