Apple vs. DOJ e-Book Case: Judge Cote's Guilty Verdict "Impossible"

On Friday, Judge Denise Cote reversed course and signed off on the Apple-DOJ plea bargain, thereby eliciting the single best explanation I've seen as to why the Appeals Court should overturn Cote's guilty verdict against Apple in the e-book anti-trust case.

"Antitrust experts in particular were outrage at the verdict as under that section of the law it should be impossible for a 'vertical' reseller (like Apple) to join a 'horizontal' conspiracy amongst publishers. Cote also ignored evidence that other booksellers had previously urged publishers to force Amazon to use the 'agency' model (where publishers set prices) before Apple even began planning its iBookstore business as Amazon's predatory pricing at the time was preventing competitors from joining the market."

Note the word "impossible." Analysts love words like "impossible" because they set up a binary choice that usually isn't hard to evaluate — something is either impossible or it's not. 

Never mind the verdict's other problems which I've listed off and linked to before — anti-trust experts are asserting that, as a matter of black-letter law, a vertical reseller like Apple can't be part of a horizontal conspiracy like the one DOJ says existed among the publishing houses...legally, it's "impossible." That's no mere technicality. If that's true, here's the binary choice:

1. DOJ prosecutors and Judge Cote were incompetent and didn't understand the relevant case law; or

2. They did know the law and ignored it for reasons I won't speculate on here.

Incompetence or bias. If the anti-trust experts are right, there are no other possible conclusions.

Amazon's Faulty Math on the Literary Market

Amazon posted a statement explaining its motives in trying to strong-arm Hachette (and, inevitably, other publishers if it succeeds) into slashing the wholesale prices of e-books. A few choice bits:

"If publishers lowered prices, they would sell more books, which would create more readers, which in turn would sell more books, it argues...The argument of profit-through-volume rings hollow coming from Amazon, however, with its price-to-earnings ratio of 500. The company has yet to be able to achieve any sort of meaningful profit despite growing to nearly $20 billion in quarterly sales across a huge range of products."

By it's own profit-through-volume logic, Amazon should be the richest company on the planet. Instead, Amazon has rarely ever posted a profit in its entire 20-year corporate history and just reported a $126 million loss for the last quarter alone.

"Amazon, by its own admission, was previously losing $3 to $5 per e-book when it sold e-books at the $9.99 price point before the Department of Justice stepped in to force publishers to adhere to a wholesale model. However, profits of the publishers did not go up significantly during the same period, suggesting that in fact publishers cannot sustain a $10 e-book price when it would only see $3.50 of each sale as Amazon proposes. In part, this is due to the fact that lower e-book pricing was previously demonstrated to have a deleterious effect on hardback and other printed book sales, as well as harming physical bookstores. These outlets continue to be the main profit centers for publishers, and the main way readers find and buy new books, despite the growth of e-books."

Yep. Steve Jobs called it four years ago.

"Coalition of Authors Blames 'Thuggish' Amazon for Hachette Dispute"

Yep. Take a look at some of the names on the list. Chances are pretty good that at least one of your favorite authors is on it.

Amazon's response is simultaneously insulting to authors and disingenuous towards readers.

In a harshly-worded statement, attempting to discredit Preston as a spokesperson for the movement, Amazon says that customers have "clearly expressed a preference for e-books priced less than $10. Even four years ago, when readers expressed such a preference, Mr. Preston responded by saying publicly, 'The sense of entitlement of the American consumer is absolutely astonishing.' It's pretty clear it's Mr. Preston who feels entitled. And what's 'astonishing' is that he thinks readers won't recognize an opportunist who seeks readers' support while actively working against their interests."

I suspect that if Amazon started selling first-run e-book novels from major publishers for $.99, consumers would express a preference for that price point, too. But the question isn't what price consumers prefer for e-books. The question is whether publishers can turn enough profit on $10 e-books to stay in business when e-book sales make up 50%+ of the market.

The answer so far seems to be "no."

Apple vs DOJ e-Book Case: The Plot Thickens...

Called it. Judge Cote wants the deescalation clause pulled from Apple's settlement agreement with the DOJ.

"U.S. District Judge Denise Cote in Manhattan said she found 'most troubling' a clause requiring Apple to pay only $70 million if an appeals court reversed her finding that the company is liable for antitrust violations and sent it back to her for further proceedings.

Speaking on a teleconference, Cote questioned if that would be fair and what might happen if the appeals court reversed her ruling on a minor issue."

A lawyer for the plaintiffs said he doesn't think that's likely and, given the problems inherent in retrying such a case, $70 million "would be a good outcome for consumers."

When a judge insists on a settlement amount from a defendant higher than the law requires and the plaintiff requests, it's probably a good sign that the judge dislikes the defendant.

Read the whole Rueters article here.

The Craft of Writing: The Little Notebook

High on my list of "indispensable writing tools," probably just below "my MacBook" and "Scrivener," sits "The Notebook."

Anyone serious about writing should have a small notebook that goes with them everywhere. I've heard many graphic designers, artists, architects, and other creative types from many different fields say the same thing and for a similar reason -- you never know when a good idea will cross your path or enter your head, and you don't want to risk losing it. For writers, it's ideas about characters, plot, dialogue, interesting facts, places, etc etc etc.

It's a practice that many great thinkers throughout history have followed. (Don't let the article title or the linked website fool you...this is great advice for anyone, regardless of gender).

"The list is hardly comprehensive; the practice was so widespread among eminent men that it would likely be easier to compile a list of famous men who did not use them, than did."

No endorsement intended, but mine is an old FranklinCovey binder that I keep filled with lined pages and which I've carried around for a decade now; some people use iPads and iPhones and an app like Vesper or Write for the same purpose , but a cheap $2 notebook can work just as well (so would an iPad or iPhone). No one who says they're serious about writing gets to plead poverty on this one. Find something that works for you and start carrying it everywhere. You'll find pretty quickly that you feel naked without it.

45 Years Since Apollo 11

Neil Armstrong and Buzz Aldrin walked on the moon forty-five years ago, just a little over eight years after President Kennedy called for the US "to go to the moon in this decade."

"We choose to go to the moon. We choose to go to the moon... (interrupted by applause) we choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too."

Eight years. The US did it in eight years with computers orders of magnitude more primitive than we have in the iPhones we carry around in our pockets. Would somebody please explain to me why we haven't put an astronaut on Mars yet?

Apple vs DOJ e-Book Case: Settlement Agreement a Poison Pill?

Yes, I'm still harping on the Apple e-book anti-trust saga. Every writer and book lover ought to be paying attention to it. The outcome will decide the future of book publishing in the US. And, as an analyst, I find it fun mental exercise to parse through possible outcomes of stuff like this. If any readers are lawyers, feel free to correct my misunderstandings about the legalities over on my Facebook page.

The latest bit of news is that Apple agreed to pay $450 million to settle the inevitable class-action lawsuit that resulted Judge Denise Cote verdict that Apple colluded in price-fixing with publishers.

"The settlement was first announced last month, but the terms of the deal were not announced at that time. With the news of a $450 million agreement, Apple would save nearly $400 million from the $840 million the lawsuit originally sought, if it were to have gone to trial.

While Apple has agreed to the terms, they must still be ratified by U.S. District Judge Denise Cote. If the court's ruling that Apple violated antitrust laws is affirmed, consumers will receive $400 million from Apple."

This wasn't unexpected. Large corporations typically negotiate settlement agreements in class-action lawsuits rather than risk having to write a check for the maximum possible penalty. It's a simple cost-benefit calculation and guilt or innocence isn't part of the equation. Where the maximum penalty is $850 million, $450 million, a bit more than 50%, is a perfectly reasonable settlement. Apple is meeting DOJ halfway. That's righteous...assuming the judge doesn't hate you.

See, here's the interesting bit -- Judge Denise Cote has shown unremitting hostility towards Apple since before the anti-trust trial began and that accusation is a big part of the basis for the appeal of her guilty verdict. Which is why I find it notable that there's a clause that kicks in if the Appeals Court overturns her verdict and orders a t:

"...if the ruling is not affirmed and liability must be retried, the settlement provides a smaller recovery of $50 million."

Now, I'm not a lawyer (IANAL) so I don't know how common such provisions are in settlement agreements; but to my untrained eye, that bit of legal language looks like it's designed to twist Judge Cote's arm "Take the deal and we'll agree to $450 million. Reject the deal and it drops to $50 million." Why do I think that?

If Judge Cote is unfairly biased against Apple, that clause presents her with a choice she must find abhorrent:

1. Accept the settlement and Apple pays half the maximum penalty she probably wants to inflict if the Appeals Court sustains her verdict; or

2. Reject the perfectly rational settlement offer, thereby giving Apple more evidence of personal bias and strengthening their appeal while also positioning Apple to settle the whole morass for $50 million if the appeal succeeds. Apple has something north of $150 billion cash on its balance sheet at last report, so $50 million is .0003% of Apple's checking account. It's a rounding error (though $450 million is only a slightly larger rounding error and the full $850 million penalty Judge Cote would probably like impose would only be ~0.6% of Apple's cash on hand).

If #2 happens and the Appeals Court overturns her original verdict, the only way to slap Apple with any non-chump-change penalty would be for DOJ retry the case -- not a pleasant prospect. It would take years, Apple would come armed with an Appeals Court ruling that neutralizes at least some of their previous arguments, and Judge Cote can't force them to do it. So she either accepts the smaller settlement or Apple pays virtually no penalty at all no matter what happens unless the DOJ wants to start the whole mess all over again.

DOJ must be confident that Apple's appeal will fail; otherwise I can't imagine how/why DOJ's lawyers agreed to that clause. I don't know what Judge Cote thinks Apple's chances are on appeal, but if she's at all worried it will succeed, I can't imagine she's very happy with the DOJ right now.