Apple's appeal over e-books price-fixing case rejected by US Supreme Court, but its vision for the industry prevails

An Apple logo hangs above the entrance to the Apple store on 5th Avenue in New York City, on July 21, 2015.
An Apple logo hangs above the entrance to the Apple store on 5th Avenue in New York City, on July 21, 2015. PHOTO: REUTERS

NEW YORK (BLOOMBERG/REUTERS) - Apple suffered a final defeat in its legal fight with the Justice Department over e-books on Monday (March 7), when the Supreme Court refused to hear the company's appeal.

Apple Inc had challenged an appellate court decision that it conspired with five publishers to increase e-book prices, meaning it will have to pay US$450 million (S$621 million) as part of a settlement.

The court's decision not to hear the case leaves in place a June 2015 ruling by the New York-based 2nd United States Circuit Court of Appeals that found Apple liable for engaging in a conspiracy that violated federal antitrust laws.

Apple, in asking the high court to hear the case, said the June appeals court decision that the company had conspired with the publishers contradicted Supreme Court precedent and would "chill innovation and risk-taking".

The 2nd Circuit's ruling followed a 2013 decision by US District Judge Denise Cote that Apple played a "central role" in a conspiracy with publishers to raise e-book prices.

The Justice Department said the scheme caused some e-book prices to rise to US$12.99 or US$14.99 from the US$9.99 price previously charged by market leader Amazon.com Inc.

"Apple's liability for knowingly conspiring with book publishers to raise the prices of e-books is settled once and for all," said Mr Bill Baer, head of the US Justice Department's antitrust division.

Publishers that the Justice Department said conspired with Apple include Lagardere SCA's Hachette Book Group Inc, News Corp's HarperCollins Publishers LLC, Penguin Group Inc, CBS Corp's Simon & Schuster Inc and Verlagsgruppe Georg von Holtzbrinck GmbH's Macmillan.

On Feb 17, the appeals court in New York upheld the proposed settlement, which had been challenged by an e-books purchaser.

The publishers were concerned about the price of e-books being pushed down by Amazon while Apple was looking for a way to make its new iPad product a hit and was seeking to break up Amazon's low-cost dominance in the digital book market.

Apple and the publishers agreed on an arrangement in which Apple would get a 30 per cent commission and publishers were allowed to set the prices for their books, a tactic known as"agency pricing" that prevents discounting.

The publishers also agreed they would charge all outlets the same amount, meaning Amazon was forced to raise its prices. E-books that had cost US$9.99 suddenly cost US$12.99 or US$14.99.

Amazon said in a statement it was "ready to distribute the court-mandated settlement funds to Kindle customers as soon as we're instructed to move forward".

Apple did not respond to requests for comment.

When the case was filed in April 2012 it was seen as a fight over the future of the digital book industry, with Apple Inc. and the five biggest publishers aligned against Amazon.com Inc.

While Apple and its allies lost in court, their vision for the industry won out. It has not been good for e-books. 

If Apple hoped to gain an advantage over a rival, it failed. Amazon controls about three-quarters of the US e-book market, according to Good e-Reader, a website that follows the industry.

In 2010 it made up 54 per cent of the market. 

Once Amazon gave up on its goal of setting a US$10 standard price for e-books, the prices began to rise.

Today, three of the top five best-selling books on the New York Times list for fiction cost at least US$12. It's not unusual to be able to buy a paperback book for less than the cost of the digital version. 

There's a widespread assumption that digital media always wins out over physical media.

But even the Internet isn't immune to the basic laws of economics. E-book sales declined 12.3 per cent over the first 10 months of 2015, compared with the previous year, according to the American Association of Publishers, which compiles data from 1,200 companies.

The major publishers have been reporting slipping revenue from e-book sales, even as physical book sales rise.

There are various reasons for this shift, from the popularity of adult coloring books, which don't work so well on Kindles, to the lack of blockbuster young adult novels this year.

But also, charging more for something reduces its appeal in the market. 

Harper Collins said in February that digital book sales dropped to 16 per cent of its consumer book sales in its most recent quarter, from 19 per cent the year before. 

"It's a fascinating question and clearly what it shows is that purchasers make a decision based on price," said Mr Robert Thomson, chief executive officer of News Corp., which owns Harper Collins, in a recent call with investors. "They are valuing a print book versus an e-book." 

Mr Thomson said he still expects e-books to grow as a percentage of the company's overall book business, but acknowledged that people have lots of choices on their devices, and won't necessarily choose books over other forms of entertainment. 

None of the statistics highlighting the recent decline in e-books include independent and self-published e-books.

These are generally much less expensive than what's coming out of the major publishing houses, and people within the self-publishing world insist that it continues to thrive.

Author Earnings, an advocacy group for writers, says that nearly 60 per cent of Kindle books come from outside the traditional publishing process.  These books account for about 40 per cent of total consumer spending. The group describes gains among independent authors as driving the declines among major publishers. 

For now, it seems the major publishers have undermined the digital book market, spurred at first by Apple's offer to help increase prices.

But there's one way that this case could spark a bit of an e-book stimulus, says Mr Michael Kozlowski, editor- in-chief of Good e-Reader.

Now that its legal options are exhausted, Apple will have to pay out US$400 million in refunds to e-book customers, which they can only use to buy new e-books.

The total revenue to publishers for trade e-books in the United States for the first 10 months of 2015 was just a bit more than US$1.1 billion, so Apple's settlement could be a significant shot in the arm for the languishing industry. 

"My guess is that e-books will not fall as dramatically as they did last year, primarily because of those credits," said Mr Kozlowski.