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Apple DOJ e-Book Clash Continues

Zacks Equity Research

The ongoing e-book price-fixing case between Apple Inc (AAPL) and the U.S Department of Justice took an interesting turn, after the former’s senior VP for Internet Services and Software Eddy Cue appeared as a central witness.

In his testimonial to the Manhattan federal court, Eddy Cue denied involvement in any price fixing with the five publishers namely, HarperCollins Publishers Inc, Simon & Schuster Inc, Hachette Book Group, Macmillan and Penguin Group. Currently, Apple is the only defendant in the case with the others having settled with the government.

In Apr, 2012, the Department of Justice (:DOJ) filed a civil antitrust lawsuit against Apple and these five publishers for conspiring and manipulating e-book prices. The DOJ alleged that the conspiracy resulted in inflating e-book prices by an average $2.0 to $3.0 in a three-day period in early 2010, which resulted in consumers paying millions of dollars more for e-books.

In May this year, the DOJ filed an e-mail as evidence, from Apple’s late CEO Steve Jobs to James Murdoch of News Corp. (NWS), the parent company of HarperCollins, which invited News Corp to join the e-book market along with Apple to sell e-books at $12.99 and $14.99.

The DOJ alleged that Apple feared Amazon’s (AMZN) dominant position in the market and believed that it would be difficult to compete against its low priced business model. This bought the two parties (Apple and the publishers) together to fight a single common enemy: Amazon.

As per the DOJ’s investigation, the next phase comprised a number of secret meetings (also e-mail & phone conversations) between the two parties in Manhattan and certain parts of Europe.

As per the DOJ, Eddy Cue was the main negotiator between these five publishers and Apple, who hatched a conspiracy to shift the e-book industry from the wholesale model practiced by Amazon to an agency based model, which helped publishers to inflate e-book prices.

He testified that the negotiations were hurriedly done in order to showcase the iBookstore at the time of the launch of Apple’s inaugural iPad in Jan 2010. However, he denied Apple’s involvement in forcing the agency model on any other publishers/retailers, including Amazon.

In regard to the higher e-book prices after Apple opened iBookstore, he argued that the publishers were not happy with the Amazon’s low $9.99 pricing policy, and they demanded higher prices from Apple at the time of negotiations.

Although this may not have been in the best interest of the general public, Apple’s entrance into the e-book market improved it greatly, as consumers got a lot of book choices at reasonable prices. Eddy Cue said that the deals enabled Apple to sell e-books within the same price range as that of the cheapest retailer.

We believe that Eddy Cue’s testimonial has been looked upon favorably by investors. Apple’s stock price gained 1% ($3.77) to close at $435.96 at the close of Jun 13, 2013, after a steady decline over the last three days.

We believe that Apple will vehemently fight off the anti-trust allegations to not only protect its reputation but also its late founder’s legacy. On the other hand, since the e-book segment does not form a major part of Apple’s business, we believe that the lawsuit will not be a major overhang on the stock.

However, Apple is expected to continue to face a number of other headwinds that include the lack of new innovative products and increasing competition from Samsung and Google (GOOG), which will keep the stock range bound in the near term.

Currently, Apple has a Zacks Rank #4 (Sell).

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