In fact, the government’s case is so compelling that the judge in the trial has already said she thinks it will prevail, despite Apple’s protests to the contrary. In pretrial comments, U.S. District Judge Denise Cote said she believes 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 will confirm that.”

Apple: Amazon made us do it

Not surprisingly, Apple has complained that this amounts to pre-judging the case, but it’s not hard to see how the judge arrived at that conclusion: Emails sent from Steve Jobs and other Apple executives to various publishers as they tried to strike a deal make it obvious that the computer company wanted to see a united front from the book industry before it agreed to any terms, and that it essentially pressured publishers to collude in order to achieve that.

In the run-up to the antitrust trial, Apple and the Big Five publishers who were named in the lawsuit tried to make their case in the court of public opinion, and their argument was that while their behavior may have looked an awful lot like collusion, they needed to do so in order to blunt the effect of Amazon’s virtual monopoly over e-books — which they suggested was a far worse danger than cutting a deal with Apple, the underdog in the market.

In an open letter about the case published a year ago, Macmillan CEO John Sargent denied that his company colluded with anyone when it decided to move to what is called the “agency model” of pricing (in which the publisher gets to set the price for e-books, rather than the retailer), and argued that doing this was necessary to blunt the force of Amazon’s hold on the market. At the end of the letter, he quoted Authors’ Guild president Scott Turow:

“The irony of this bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition. This would be tragic for all of us who value books and the culture they support.”

Were consumers harmed?

Very little of this is likely to be part of Apple’s legal arguments in the current trial, for the simple reason that it would never fly as an excuse for encouraging or facilitating collusion and price-fixing. If the major players in an industry get together and effectively agree on a strategy for keeping prices artificially high, it’s not enough to say “But your honor, we had to do this because our competitor is too large and it was the only way we could compete with them.”

As we’ve tried to point out in posts about the accusations against Google for its behavior, antitrust law in the U.S. isn’t designed to help prevent competitors from being squashed by a large player in an industry — even if that player has what amounts to a monopoly position. The key point is whether that particular company’s behavior alters or damages the marketplace in a way that harms consumers. And when it comes to that, the DoJ is on rock-solid ground.

As the Justice Department pointed out in its opening statement, the price of e-books climbed by as much as 50 percent in the weeks following Apple’s agreement with the Big Five publishers. Those two groups can — and have, on many occasions — make the argument that keeping prices higher than they would have been otherwise is in the long-term interests of the publishing industry (although that is also debatable), but that’s not what the DoJ or the court is interested in.

Apple took a risk, and it lost

Apple’s only argument is that while e-book prices rose and stayed high for some time as a result of its actions, they eventually came back down — but the judge is unlikely to find that persuasive either. In effect, Apple would be saying: “Yes, we colluded with publishers, but our attempt to keep prices artificially high eventually failed due to other market conditions we were powerless to affect.” That’s admitting guilt, but hoping to get a pass anyway.

So why is Apple bothering to fight this case, even though it knows that it will probably lose? Some of it could be sheer bloody-mindedness, but the company may also be worried about the potential implications of the ruling as it pertains to what are called “most-favored nation” agreements, which give partners the right of first refusal when it comes to pricing. As Zach Seward notes at Quartz, these agreements are everywhere in the entertainment business, and if they amount to collusion then Apple could find it harder to strike deals in other areas.

The bottom line is that Apple engaged in risky behavior with publishers because it felt it had to do so in order to break Amazon’s iron grip on e-books, and offering higher prices to publishers if they cut a deal with the company seemed like the best way to do that. Apple may even have been correct in that assessment — but collusion is still collusion. The only question now is how large the judgement against the company will be in terms of damages.

Post and thumbnail photos courtesy of Shutterstock / tlegend

As Reuters explained, the Justice Department has shown a new confidence in recent years in going after antitrust cases, following an embarrassing loss in 2004 when it failed to stop Oracle from acquiring PeopleSoft. In the case of the Apple ebook case, which involves allegations that Apple colluded with five big publishers to fix prices, the Justice Department has been playing an aggressive PR game — sending out documents and press releases to pump up its case.

Following this morning’s session, the government sent out slides intended to highlight the nature of the alleged conspiracy.

My colleague, Laura Owen, will have full details of this morning’s proceedings shortly. In the meantime, here’s some screenshots from the slides that the government is using to argue for Apple’s guilt. The government’s strategy appears intended to suggest that where there’s smoke, there’s fire — and that Apple must be at the end of the alleged conspiracy. Keep in mind this is just one side of the story, but here are slides showing communication between Apple SVP of Internet Services Eddy Cue and top publishing execs:

You can see the whole set of Justice Department’s “bad Apple” slides here:

U.S. v. Apple Et Al Opening Slides 6-3-2013

The purpose of the hearing was to set schedules, review witness lists and go over last-minute evidence objections ahead of the trial. Cote proposed that each side should be given 22 hours over a four day period plus a final day for closing arguments; the federal government said it would need at least 30 hours to make its case, and Apple requested the same, meaning the total trial would last 12 days. Cote said she will decide in the near future.

The parties also reviewed the witness list, which includes prominent publishing CEOs like Macmillan’s John Sargent as well as Apple executive Eddy Cue. Today’s hearing also raised the possibility that News Corp executive James Murdoch, who exchanged a series of emails with Apple’s Steve Jobs, could take the stand for cross-examination; the federal government will decide in coming days, on the basis of an evidence issue, whether this will be necessary.

Much of the trial, however, is unlikely to feature dramatic CEO testimony. Instead, the core of the trial is likely to slog through recondite economic arguments and civil evidence issues; part of today’s hearing focused on expert witness opinion about the competitive effects of agency pricing and whether it coincided with Apple’s economic self-interest.

Today’s hearing also focused on an ongoing dispute in which Apple is attempting to force its competitors, especially Amazon, to unseal evidence they have submitted as part of the proceedings.

At the outset of the hearing, in a courtroom that rises 15 stories above lower Manhattan with a view of the Brooklyn Bridge, Cote stressed that the case represented an enormous amount or work, and told the parties to call her “day or night” if they decided to settle.

Update: Reuters reports that Cote indicated that she was “leaning towards” the Justice Department’s view of the case, and cited the following comment by the judge:

“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”

According to a court filing released on Tuesday, CEOs of the same publishing houses that once rejected the price-fixing theory will now offer evidence to suggest they colluded with Apple in order to increase ebook prices. The case involves allegations that Apple and its late CEO Steve Jobs organized a conspiracy with the Big Six publishers to introduce a commission-style pricing system in order to wrest pricing power from Amazon.

The new filing, posted below, says that the CEOs of Macmillan, Hachette, Harper Collins, Simon & Schuster and Random House will testify about various aspects of Apple’s role in the alleged conspiracy. All of these companies with the exception of Random House were also named in the antitrust lawsuit brought by the Department of Justice and agreed to settle the case last year.

The government’s new filing says Macmillan CEO John Sargent is expected to testify that:

“[T]he deal that 5 of us did with Apple meant someone was gonna have to do it. Just luck of the draw that it was me. . . . The optics make it look like I stood alone, but in the end I had no doubt that the others would eventually follow.”

Such evidence could prove damaging to Apple, which is also expected to confront testimony from Amazon executives. Apple will also be forced explain a growing list of possibly incriminating comments and emails. One of these, cited by the government to show Apple played an active role in the price changes, describes SVP of internet software and services Eddy Cue telling Jobs:

“In the end, they want us and see the opportunity we give them but they’re scared to commit! It [has] less to do with the terms and more about the dramatic business change for them. . . . They just have to get some balls.”

The new filing also includes the views of other prominent executives, including News Corp’s Rupert Murdoch. According to Harper Collins CEO Brian Murray, Murdoch was “pissed at Amazon” and wanted to “screw Amazon.”

In its own filings, Apple maintains its long-held position that it is not a “ringmaster” of a conspiracy, as the government alleges, but that it simply offered the same pricing system, which is based on a 30 percent commission, that it offers to any company that sells through its iTunes store. Apple also maintains that it helped to create competition at a time when Amazon dominated the ebook market.

The next important step of the proceedings will take place on May 23, when the parties meet before U.S. District Judge Denise Cote for a pre-trial conference.

Here’s the filing (all 156 pages of it!) with some of the key points underlined:

DOJ Motion of Facts and Law

The case followed complaints by Microsoft and others over Google’s treatment of rivals’ web services in its search results. These companies argue that Google favors its own services, which are not clearly marked as such, and also that it unfairly locks advertisers onto its platform and scrapes content from third-party search and comparison sites without consent.

A recent leak outlined the terms of the proposed settlement deal, but here’s the official version:

To address these concerns, Google offers for a period of 5 years to:

(i) – label promoted links to its own specialised search services so that users can distinguish them from natural web search results,
- clearly separate these promoted links from other web search results by clear graphical features (such as a frame), and
- display links to three rival specialised search services close to its own services, in a place that is clearly visible to users,

(ii) – offer all websites the option to opt-out from the use of all their content in Google’s specialised search services, while ensuring that any opt-out does not unduly affect the ranking of those web sites in Google’s general web search results,
- offer all specialised search web sites that focus on product search or local search the option to mark certain categories of information in such a way that such information is not indexed or used by Google,
- provide newspaper publishers with a mechanism allowing them to control on a web page per web page basis the display of their content in Google News,

(iii) no longer include in its agreements with publishers any written or unwritten obligations that would require them to source online search advertisements exclusively from Google, and

(iv) no longer impose obligations that would prevent advertisers from managing search advertising campaigns across competing advertising platforms.

Authorities in the U.S. more-or-less cleared Google over similar complaints, but it’s important to note that Google’s share of the search market there is around 67 percent, whereas in the E.U, it’s around 90 percent. This gives it stronger market power in Europe, and forces the regulators’ hand somewhat (as do local laws).

A Q&A document, which outlines the Commission’s concerns in detail, points out that “it does not seem likely that another web search service will replace [Google] as European users’ web search service of choice.”

“In this context, it is important for the Commission to intervene in order to ensure that Google’s prominent market position in web search does not affect the possibility for other competitors to innovate in neighbouring markets, including in the long-term,” the document states.

The long-awaited deal is significant because it concludes a multi-year investigation by EU competition authorities, and because it is the first time that Google has bent to government demands over how it presents its search results. The details of the five-year deal, which has yet to be formally announced, were reported on Saturday by the Financial Times.

The terms of the deal

According to the FT, Google’s obligations vary depending on the nature of the search results. The most onerous conditions relate to listings like travel or restaurants where Google has a clear financial interest. In these cases, the company must identify any search listings that are Google-owned, and also provide at least three links to competing search engines. For other Google-related listings that do not produce direct revenue — weather or news, for instance — the company must provide a label.

The labeling will involve markers like boxes, separate page placement and “hover links.” A third party will monitor for compliance with these and other parts of the agreement.

The deal also requires Google to honor requests from news agencies and other sites not to “scrape” their content for use in its search listings, and to provide assurances that it won’t punish these sites by deleting them from the search listings altogether.

The agreement also addresses Google’s advertising practices by preventing it from imposing exclusive ad deals on its partners, and by making it easier for those partners to switch their ad campaigns to rivals like Microsoft and Yahoo.

The FT has a detailed account of the obligations here.

A victory for the EU, the public or Google?

When the deal is formally announced by EU regulators, we can expect to see considerable spin from Google and its competitors about what it really means.

At this stage, it’s clear that the deal represents the largest regulatory imposition to date over Google’s search business, which is still the core of the company and its prime money maker. This amounts to a victory for the EU and its high-profile competition commissioner, Joaquín Almunia.

While Google will hardly be celebrating the regulations, the company could have fared far worse. The five-year deal, which is legally binding, means Google avoids the sort of heavy fines and bitter regulatory battles that ensnared arch-rival Microsoft for well over a decade.

Europeans consumers, meanwhile, are likely to continue using Google as they have done so far. Despite repeated accusation by groups and companies tied to Microsoft that Google manipulates its search results, there is little actual evidence that the company blatantly puts its thumb on the scale.

The agreement may, however, serve to give Google critics some peace of mind by providing legal assurances that their worst fears won’t come true. And, as the deal is not finalized, critics and others will have time to comment on its provisions.

A different outcome from America

One of the most noticeable features of the deal is how much it differs from the outcome of a similar investigation carried out by America’s Federal Trade Commission.

In a January report, the FTC concluded a two-year antitrust inquiry by announcing that Google had done nothing wrong in the field of search. While the FTC did extract a pledge the company related to patent abuse, this was more a face-saving measure for the FTC than a burden on Google. (Here’s a plain English summary of the US investigation).

Different laws in the US and EU explain the divergent outcomes. American antitrust laws, for instance, focus on harm to consumers not competitors — a different line of inquiry to what happens in Europe. America also has more robust speech laws. Google argued strenuously that its search results are protected by the First Amendment; the FTC likely folded its cards rather than risk losing a court case over the question.

Google also controls a higher share of the search market in Europe than it does in the U.S. — more than 90 percent, compared with around 67 percent.

According to a source familiar with the investigations, Google was also more willing to settle in Europe because a legally binding EU commitment  does not expose the company to civil lawsuits.

“Amazon’s acquisition of Goodreads is a textbook example of how modern Internet monopolies can be built,” said Guild president Scott Turow in a statement issued on Friday. Turow claims that Amazon sought to eliminate Goodreads as a future competitor and that it has “squelched” an important source of independent discussion and reviews.

It’s unlikely anything so dramatic will occur in the short term. As executives from Goodreads and Amazon told my colleague Laura Owen, the book network will remain for now a standalone site and the first goal of the merger is to “do no harm.”

The data and marketing insight Amazon receives from Goodreads is likely to strengthen the retailer’s already powerful position in book selling. The question of whether this will lead to an Amazon “monopoly” is another matter altogether. Under American rules on vertical integration, a company breaks antitrust laws only it obtains a dominant positions and abuses that position to harm consumers.

Turow and the Authors Guild have already been vociferous critics of Amazon. Last year, Turow accused the company of using discounting to “destroy bookselling.” More recently, the Guild joined with the Association of American Publishers to demand that Amazon be denied control over new internet suffixes “.book” and “.author.”

Class action lawyers had earlier demanded that Isaacson provide evidence, based on his interviews with Steve Jobs, about why Jobs asked publishers to sell books on Apple’s iPad device. Isaacson refused to hand over his notes and invoked a New York law that allows journalists to shield their sources in many situations.

The lawyers, who want Apple to pay for allegedly fixing book prices, had subpoenaed Isaacson and said the reporters’ shield did not apply. Last week, however, court documents show the parties agreed to drop Isaacson from the case.

The Isaacson dispute comes at a time when Apple’s antitrust showdown with the Department of Justice and class action lawyers is coming to a head. While the five publishers who were also named as defendants decided to settle, Apple is rejecting the accusations that it acted as the hub for an illegal conspiracy to raise book prices and thwart Amazon. Meanwhile, Amazon executives are poised to testify against Apple.

Even though the Isaacson biography is no longer part of the case, a court transcript shows Steve Jobs will remain a central figure. In response to a question about who decided to sign contracts with book publishers, Apple executive Keith Moerer said, “Ultimately, I would say it was — Steve. But working closely with — with Eddy, Mr. Cue.”

Meanwhile, other recently filed court documents identify one recipient of a highly publicized Jobs email about Amazon and pricing — the recipient was James Murdoch, a senior executive at News Corp, parent company of HarperCollins. The other recipient(s) are still redacted. You can see the email below:

Steve Jobs Emails by

How this settlement is different

According to documents filed with the court Friday (PDF, and see links below), Macmillan agreed to many of the same settlement terms that HarperCollins, Simon & Schuster, Hachette and Penguin already agreed to — but there are also significant differences. Retailers will immediately be allowed to discount Macmillan’s ebooks, in order to “provide for more prompt relief to consumers.” In the cases of the three original settling publishers (HarperCollins, Simon & Schuster and Hachette) and Penguin (which settled in December), “several months passed before consumers saw the benefits of the settlements through lower retail prices on many of the settling publishers’ ebooks.” In Macmillan’s case, however, according to the competitive impact statement:

That “two-year cooling-off period” means that, for two years, settling publishers can’t restrict retailers like Amazon from setting, changing, or lowering ebook prices. The settlement means Macmillan gets a back-dated head start on this period, so it will again be able to restrict discounting in December 2014. Most-favored nations clauses are prohibited for five years, but Macmillan had already removed those from its contracts.

Unlike the other big-six publishers, Macmillan also publishes digital textbooks. Those are exempt from the settlement because the DOJ antitrust case focused only on trade books.

Finally, there are provisions to make it clear that Macmillan’s parent company, Holtzbrinck, would be in trouble if it “worked in concert with Macmillan to evade Macmillan’s obligations under the settlement.”

“Our company is not large enough to risk a worst case judgment”

In his letter, Sargent describes massive legal bills that Macmillan — the smallest of the big-six publishers, and the only one that is entirely privately owned — would have had to pay in “a worst case judgment”:

As each publisher settled, the remaining defendants became responsible not only for their own treble damages, but also possibly for the treble damages of the settling publishers (minus what they settled for).  A few weeks ago I got an estimate of the maximum possible damage figure. I cannot share the breathtaking amount with you, but it was much more than the entire equity of our company.

Court docs

Macmillan’s proposed final judgment (PDF)

Competitive impact statement (PDF)

So why were the feds investigating Google in the first place?

A group of Google competitors, many of them tied to Microsoft, claimed the company was breaking antitrust laws by kicking competitors down its search rankings. Sites like Yelp and Kayak complained that Google favored its own search and travel businesses ahead of theirs in the search listings.

The Federal Trade Commission responded by “exhaustively” investigating a wide range of Google’s business practices, including its ad business and use of patents.

So what did the FTC find?

Today, the FTC concluded that Google didn’t break any laws in the way it displayed its search results. The agency said that Google did change the way its search algorithm sorted results but that those changes were “plausibly connected” to efforts to improve its user experience — not simply to crush competitors.

The FTC did say that Google misbehaved by using standards-essential patents (ones it is supposed to share at reasonable royalty rates) as a weapon. Google responded by saying it won’t do that anymore.

So why is this a big win for Google?

It’s a win for Google because the government won’t get all up in its search results. Microsoft and others had hoped the government would impose some sort of “search neutrality” requirement on Google but that won’t happen now. The end of the investigation also means that Google won’t have to reveal any of the “secret sauce” that it uses to order the search results.

The company also avoided a so-called “consent decree” about its search practices; these decrees set out what the agency thinks a company has done wrong and how it must behave in the future. Consent decrees also act as a magnet for private lawsuits.

As for the patent issue, it was just a sideshow that has little effect on Google’s core business or strategy.

So Google can do what it likes with its search results?

Pretty much. In the past, the company claimed its results were strictly objective but more recently it has argued that search listings are simply a matter of opinion protected by the First Amendment.

The company did, however, make a voluntary pledge today to remove snippets from Yelp reviews and other such sites if the company in question asks them to; Google also said it won’t punish those who opt out.

Is this bad news for consumers?

Not necessarily. So far, Google has stayed more or less true to its stated mission of helping people find any type of information (search “Google sucks” for instance). It’s only in so-called “search verticals” like shopping that Google, like rival Bing, has really been putting its thumb on the scale and favoring certain partners. But in the future who knows what Google will do.

So who loses?

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated. Sites like Yelp, Kayak and Expedia also lose in the sense that Google can now push them down its search listing with impunity (though there is no sign for now that Google is actually doing this).

The FTC is also a loser because it ran a high profile two-year investigation but came up dry. In this context, the patent ruling is just a minor victory that lets the agency save face.

Did the FTC simply cave in to Google?

Not really. The FTC was in an awkward spot because it didn’t have a slam-dunk case. The agency would have had to prove the existence of a Google monopoly and that Google abused that monopoly; it would also have to clear the First Amendment issue. Rather than risk the embarrassment of losing a lawsuit, the FTC decided to fold its cards instead.

But aren’t European regulators going to force Google to bend on search rules?

The European Commission suggested in December it will come down harder on Google. According to a source familiar with the matter, the outcome is likely to be a “commitment decision” in which Google promises to behave a certain way or else be fined. The source added, however that the rules of a European “commitment” do not expose companies to private lawsuits so, unlike in the U.S., Google will be willing to enter a binding agreement.

It’s too soon to know what that outcome will be but we’re likely to find out in the next month.

(Image by Kzenon via Shutterstock)