Apple 2.0

Covering the business that Steve Jobs built

Apple to DOJ: Bite me

May 26, 2012: 7:57 AM ET

The Justice Department may regret trying to make its e-book antitrust suit stick to Apple

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FORTUNE -- I haven't had so much fun reading legal documents since the Watergate trials.

I loved U.S. v. Apple et al. for the juicy details: the 56 phone calls, the clandestine meetings in swank Manhattan eateries, the secret e-mails "double erased" to ensure they couldn't be traced.

But what makes Apple's (AAPL) response, filed Tuesday, such a great read is the clarity and precision with which it cuts the government's case to shreds.

At least as it applies to Apple.

In the space of six paragraphs the document characterizes the Justice Department's assertions as "absurd" and "fundamentally flawed," accuses the government of "ignoring inconvenient facts" and of siding with monopoly rather than competition.

The key paragraph:

The Government starts from the false premise that an eBooks "market" was characterized by "robust price competition" prior to Apple's entry. This ignores a simple and incontrovertible fact: before 2010, there was no real competition, there was only Amazon. At the time Apple entered the market, Amazon sold nearly nine out of every ten eBooks, and its power over price and product selection was nearly absolute. Apple's entry spurred tremendous growth in eBook titles, range and variety of offerings, sales, and improved quality of the eBook reading experience. This is evidence of a dynamic, competitive market. These inconvenient facts are ignored in the Complaint. Instead, the Government focuses on increased prices for a handful of titles. The Complaint does not allege that all eBook prices, or even most eBook prices, increased after Apple entered the market.

Apple's filing doesn't try to defend the five publishers the DOJ has accused of colluding to fix prices. In fact, it basically throws them under the bus, pointing out that if there was a price-fixing conspiracy among its co-defendants -- as alleged -- they kept it secret from Apple.

Meanwhile, the government's lawyers are going to have a hard time proving that Apple violated antitrust laws because the company's market share in the e-book business before the launch of the iPad was essentially zero.

They can't make a case against Apple for collusion because whatever the publishers may have said to one another, there's no evidence that Apple conspired with its competitors.

They can't even use as evidence the blunt quotes taken from the Steve Jobs biography because they are hearsay.

The one element of the government's case that seemed to give Apple's lawyers a hard time was the charge that the most-favored-nation provision Steve Jobs added at the last minute was "designed to protect Apple from having to compete on price at all, while still maintaining Apple's 30% margin."

In its response, Apple's legal team can't even bring itself to name the provision, referring to it repeatedly as MFN. But they manage to shoot some holes in the government's argument, pointing out, among other things, that the 30% cut Apple takes is hardly pure profit margin. It costs money to run the iBookstore, and while Apple doesn't claim to lose money on e-book sales, that's not where it gets the big bucks.

You can get the gist of Apple's filing in those first six introductory paragraphs. The rest is an item-by-item refutation of the government's case and a summary of Apple defenses, should it come to that.

The full document is available as a pdf here.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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