Apple 2.0

Covering the business that Steve Jobs built

With the end in sight, the winds have shifted in the Apple e-book trial

June 20, 2013: 7:02 AM ET

Closing arguments are set for Thursday, and things are looking up for Apple.

Steve Jobs demos iBooks. Photo: SlashGear

Steve Jobs demos iBooks. Photo: SlashGear

FORTUNE -- It may be telling that before the case went to trial the Department of Justice thought it would need 30 hours to prove that Apple (AAPL) had conspired with five book publishers to raise the price of e-books, while Apple's lawyers only wanted 27 hours to defend their client. The two sides settled on 29 hours apiece.

But after three weeks of testimony -- and with summations scheduled for Thursday -- Apple said it needed two and half hours to make its closing arguments while the DOJ thought 90 minutes would suffice. It was as if Apple wanted to luxuriate in a well-constructed defense, and the government couldn't wait to walk away from a case that hadn't gone its way.

It's not as if the facts laid out in U.S.A. v. Apple et al. -- the complaint the DOJ's antitrust division filed 14 months ago -- weren't demonstrably correct.

The five publisher defendants did believe in 2009 that Amazon's (AMZN) "wretched $9.99 price point" for e-books was lowering the perceived value of their product. They did know that acting alone none of them could compel Amazon to raise its prices. Apple's entry into the e-book market did provide a perfect opportunity for the publishers to level the playing field. Apple did indeed see a way to turn the "agency scheme" (as the DOJ called it) into a profitable business model for itself.

What the government failed to see -- and what seemed plain to most outside observers -- was the context.

393417069972Amazon, as economist Kevin Murphy testified Wednesday, was the 800 pound gorilla in the courtroom. With an 80% to 90% share of the e-book market (and as one of the biggest retailers of physical books) Amazon wielded enormous power over the book industry. The court heard about the naked exercise of that power when the company punished an impertinent publisher in January 2010 by removing the Amazon website's "buy" button from all of the publisher's books -- digital and physical. Why the antitrust division chose to prosecute the publishers and not the e-book monopolist that was selling their products below cost remains a mystery.

In that context, Apple's actions look very different. It may be, as the government alleged, that the publishers conspired to form a horizontal agreement to fix the price of e-books -- a "per se" violation of the Sherman Act. Since the publishers settled without admitting guilt, we may never know. But there was no evidence presented in trial to prove that Apple knew what the publishers were talking about when they talked among themselves. As Professor Murphy testified, Apple's actions throughout were exactly what economic theory would predict in the context, independent of any alleged conspiracy. And when Eddy Cue -- Steve Jobs' point man in the negotiations -- told the story from beginning to end of how he cut the deals that created the iBookstore, it all made perfect sense.

The best indicator of the distance this case has traveled since it opened on June 3 may be the words of the judge who will decide it.

Judge Cote.

Judge Cote.

In a pre-trial hearing, U.S. District Judge Denise Cote said she believed, having read many of the documents, 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."

On Wednesday, after she closed the case, the judge sounded a lot less sure of herself:

"I thought I had prepared so well," she said. "I learned a lot. But you have helped me understand so much more through the evidence presented."

"I look forward to your summations," she concluded. "It seems to me the issues have somewhat shifted during the course of the trial. Things change. People have to stay nimble. I'm looking forward to understanding where we are now."

Court drawings: Illustrations by Elizabeth Williams

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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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