May 312012
 

Every once in a while, I’ll get ahold of a Mike Daisey or a DoJ and have a tough time letting go. I think I’m almost done with Nathan Myhrvold, but I wanted to do one more post. I still feel a little poison that needs to be got out.

In the July 2011 editon of Wired UK, there was an article that profiled Intellectual Ventures and its brain trust. Like all writing about IV, it followed a familiar narrative structure:

1. Look at all these universally beneficial world issues IV is tackling! Malaria! Cancer! Frickin’ global warming!

2. Some people don’t like that they’re funding their “brainstorming” by “exploiting the patent system”.

3. Myhrvold says they’re on the side of the little guy and only providing a perfectly legal way for people to profit from their innovations. Namely them.

I’m going to take a few snippets of the piece to make my final point about Nathan Myhrvold and Intellectual Ventures.

Currently, Deane is busily testing a dozen ideas. “The challenge isn’t necessarily to find the golden nugget,” Deane explains. “The challenge is: don’t spend too much money on the ones that aren’t. You want to take the mentality of the venture capitalist: fail fast and fail cheap.”

Intellectual Ventures didn’t hold its first invention session until August 2003. By then it had gained several crucial insights about its business model. One was that most manufacturing companies have short-term goals because they need new product lines every couple of years; IV’s deep pockets leave it free, theoretically, from short-term pressures. Another advantage is that rivals in government and universities primarily fund research, so they experiment in pursuit of a single aim, rather than simply invent. A third is that brainstorming is not capital-intensive.

“Most companies have this model” — he assumes a mock-stern voice — “‘Failure is not an option.’ Well, not here! In this room where we invent, failure is always an option.”

“You have to be OK with it.” The average invention session produces ten to 20 patentable ideas. If the soul of IV resides in its philanthropic experiments, the patent system is its financial engine. The number of patents it files each year is now “in the high hundreds to low thousands”, says Eben Frankenberg, an executive vice president.

But Myhrvold sees nothing wrong in what Intellectual Ventures does. “The technology industry is primarily about making tools and toys for rich people,” he says, “whether they’re mobile phones or medical devices. But you also have two billion people on Earth that no one’s doing any of this stuff for and we have some very, very severe problems that conventional techniques have yet to solve and we feel we can help with.

Here’s the thing: Intellectual Ventures, cookbook aside, hasn’t released shit that would lend any credibility to their “changing the world” propaganda. What is does do extremely well is develop ideas to the point of patentability:

-brainstorming is not capital-intensive.
-IV’s deep pockets leave it free, theoretically, from short-term pressures.
-“You want to take the mentality of the venture capitalist: fail fast and fail cheap.”
-The average invention session produces ten to 20 patentable ideas.

But that’s where it ends, because anything more would lead to a rapidly diminishing return on their business model. Making things is hard, and it gets harder the closer you get to releasing that thing to the world. Sitting around and “brainstorming” ideas with a couple of other asshole brainiacs – while your patent sheister scribbles the meeting minutes – is doing precisely dick-point-oh for the world. Myhrvold’s disdain for the “VC mindset” of manufacturers who make “toys for rich people” is understandable because he’ll never ship. Why should he? It’s been almost 10 years since IV started amassing patents. Over 90% of them aren’t even theirs. Aside from the tens of thousands of weapons used to extort fees from other businesses using a deliberately convoluted network of shell corporations, what has IV given to the world? Just wait another 10 years. Take a long view. Keep looking to the horizon for that tsunami-busting Super Soaker while Myhrvold and Intellectual Ventures counts its money. They’ll continue to sit under their tens of thousands of bridges, putting up barriers between the real innovators – the people that fucking ship – and their bringing the products of their innovation into the real world.

I think I’m done now.

 Posted by at 9:28 pm
May 312012
 

Yesterday, I gave Intellectual Ventures’ founder Nathan Myhrvold a bit of a hard time, insinuating that all of his humanitarian double-talk was nothing but a cover for his well-oiled patent trolling machine. It seems I have judged him prematurely. After his feel-good session with Walt Mossberg at D10 yesterday, Myhrvold was caught backstage by All Things Digital’s Katie Boehret, where he talked about one of the innovations that has been brewing for years at IV – one that will finally be released to the world for the betterment of mankind.

Was it the laser-powered mosquito-zapper poised to eradicate malaria? Or the hurricane-busting Salter Sink, a wave-powered pump that diffuses the energy of hurricanes?

It was a cookbook. Myhrvold talked about his upcoming Modernist Cuisine.

Now before you get feisty, you have to understand what’s being released here: used properly (and with the payment of the appropriate royalties), a cookbook can feed billions. Hunger pandemic: SOLVED. He was even gracious enough to provide Boehret with an excerpt from his book:

Eggs Benedict à la Myhrvold (U.S. Patent # 8,188,299)

1. Borrow 3 eggs from neighbor across the street.
2. Wait for next door neighbor to cook breakfast.
3. Tell neighbor you hold the intellectual property for “eggs” and demand he pay a licensing fee for his omelette.
4. Use proceeds to have Le Bernardin cater your brunch.

Although I wasn’t able to capture any footage from Boehret’s chat, I did find a press photo of Myhrvold at a recent book signing:

 Posted by at 8:33 am
May 302012
 

Coming off the heels of Tim Cook’s proclamation that patent litigation is “a pain in the ass”, D10 hosted a person who, in the eyes of just about everyone, is the actual pain that Cook feels in his ass. Nathan Myhrvold, formerly Microsoft’s CTO, now runs an outfit called Intellectual Ventures. Their business model is simple: buy up as many patents as possible and use them to shake down companies for licensing fees. Contrary to the public’s opinion about what IV does, this is not racketeering. Just ask Myhrvold:

We like to say invention capital. Our goal is to invest in invention. We file patents ourselves on our own inventions or those that partner with us. We also have a business like private equity, where we take a controlling interest in existing patent portfolios — from universities, from all over the place.

Lifted directly from the D10 transcript

Except that the ratio of IV-generated patents to bought-out-and-weaponized patents is in the neighborhood of 30-1. But don’t let the obvious predatory nature of Myhrvold’s business be the only criterium upon which you judge. He’s also quite the humanitarian.  From the (highly recommended) NPR profile of Myhrvold and IV:

IV says it has invented a nuclear technology that’s safer and greener than existing technologies. A cooler that can keep vaccines cold for months without electricity. And the world’s most high-tech mosquito zapper.

So despite running a business that models itself after a Mafia protection scheme, beneath that slimy exterior beats a heart of pure gold.

But the lab is a tiny fraction of what IV does. The company has received about 1,000 patents on stuff it’s come up with at the lab; it’s purchased roughly 30,000 patents from other people. In fact, nothing that’s come out of this lab — not the mosquito zapper, not the nuclear technology — has made it into commercial use.

Oops. I’m sure the humanitarian efforts are totally not a smokescreen for a scummy business model and will yield a solution to global warming and malaria any day now.

Father Time did a pretty admirable job trying to rattle Myhrvold, but when you’ve been at this game as long as he has, you’ve got your “totally misunderstood” lines down pat. Mossberg laid down a line that sent his stock soaring in my eyes: “You just buy up patents and then you sue people, and I don’t understand how that helps innovation and creativity in the world.” Myhrvold quipped “Mostly, we license patents; we don’t mostly sue people.” So I assume the patents IV has acquired that it has yet to monetize are held for posterity. Mostly.

Engadget has some good coverage of the Mummer’s Farce here. I have to assume Myhrvold’s insistence on speaking publicly stems from an inherent masochism – or prolonged exposure to Ballmer – because I don’t think there’s an intelligent person on the planet who buys this guy’s schtick anymore.

 Posted by at 4:55 pm
May 302012
 

Like the rest of the technoverse, I followed the D10 kick-off with Tim Cook and took away my own impressions. I can’t claim any of them are novel, because my RSS feed from 10pm on was filled with tea-reading from the punditry, but I’m posting them on a “FWIW” basis:

  • 10 and 2 – you can’t get a real sense of Cook’s demeanor as he was getting grilled by Father Time and Kara Swisher from any Live Feed of the event, but if you take a look at the 17-minute synopsis clip posted on All Things Digital, you got to see the same Tim Cook that you saw at any of Apple’s recent media events: a picture of poise. Leg crossed, thoughtful and concise in his responses and dead-set on not revealing anything to the hosts, (despite being prodded constantly) he wasn’t the animated, anecdotal presence that Steve Jobs was, but that’s who he is (as Cook himself said). He laughed when Ping was mentioned, which I thought demonstrated a level of self-deprecation and the accessibility noted by many observers. I’d give him an 8 if this wasn’t his first major appearance that wasn’t Apple-programmed. For a newbie, I’d say he hit it out of the park.
  • Apple won’t be manufacturing iPads in the U.S. – Cook gave a very diplomatic answer to the question of if/when Apple would move its manufacturing stateside. I don’t know where Mossberg got his information that there was some kind of manufacturing resurgence in this country, but it’s not happening. Listen to the part where Cook describes not being able to fill the venue with this country’s tap-and-die specialists, let alone the entire cities teeming with this skill in China. By mentioning that parts of Apple’s production are happening here (chip and glass manufacturing), he offered the carrot that made his answer palatable.
  • The iTV did not become any more of a certainty – I’m fully aware that this conforms to my personal worldview that Apple shouldn’t make a television, but I didn’t get any sense that it was more likely having heard Cook’s/Apple’s answers regarding Apple and television. Cook even made a point of saying how much more popular the AppleTV was this year (2.7 million have sold this year alone vs. 3 million total last year). If anything, Cook highlighting the AppleTV’s success lowered the bass on the drumbeat of eventuality that’s being pounded out by the tech press over the iTV. I know: I’m biased.
  • Patents are a pain in the ass – In what I thought was one of Cook’s finer incendiaries, he called out companies that respond to Apple’s patent suits with standards-essential patents, making the point that Apple also owns several, but refuses to use them. It was a nice little jab at Google and Samsung, who are currently employing the practice, unfortunately with some success. He also didn’t concede settlement, stating that the company won’t tolerate being “the developer for the world.”
  • Facebook and Apple will become closer in the future – First: duh. Second, keeping in mind the laugher Cook had when Ping was mentioned, I don’t think Apple will try to enter “the social” in any meaningful way on its own again. The no-brainer partnerships with the Facebooks and Twitters are where Apple will focus, which is exactly how it should be.
  • Fasten your seat belts –  Cook was visibly most effusive when he was talking about what Apple had in the pipeline, so expect Cook’s first full year as Apple’s CEO to be a barnburner. WWDC should give us a taste. I can hardly wait.
 Posted by at 3:23 pm
May 302012
 

I’m guessing we all saw it, given that we’re all tuned in to most things Apple. I won’t link to it, because Gizmodo is the tech site equivalent of a Love Canal sturgeon. It’s penned by Douchebag’s Row Member Jesus Diaz, as if you needed any other reason not to seek it out.

The piece in question lists 10 things that would have irked Steve Jobs if he was alive today. I’m not saying you shouldn’t write about Apple’s challenges, but there’s a way of doing it that doesn’t make you look like a piece of shit – which Diaz is, without question. I won’t go into the list, which, true to the form of the author’s body of work, is filled with poorly-written half-truths. What I will do is show you the header graphic.

Stay classy, Gizmodo

I’d recommend that Jesus Diaz lose his job, but that recommendation could apply to any one of at least a dozen pieces he’s written. It also assumes that the scumbag Gawker network produces anything that isn’t a stone’s throw away from this afterbirth. In my fantasy life, I dream of the day that Gizmodo gets tired of having to ban a third of the commenters following anything Diaz writes and he’ll be be kicked to the curb. Maybe then Gizmodo will assume some level of decency in its reporting of tech news. But we all know that pieces like this fit exactly into the niche Gizmodo has built for itself. It’s too bad there’s such a large market for them.

 Posted by at 11:10 am  Tagged with:
May 292012
 

I’ve spent a bit of time with Windows 8 and there’s definitely things to like about it. I delivered my initial verdict just about a year ago: it’s got some nice eye candy, but the Metro + Windows 7 sandwich is disorienting. I’m focused on the ways Windows 8 is different than its predecessors, so I’m not the audience that’s going to be using it.

There’s been a steady stream of Windows pundits weighing in on Windows 8 “layering issue”, but in terms of overall impressions, Michael Mace has a long, but thoughtful piece over on his Mobile Opportunity blog that paints a pretty meh picture for Microsoft’s  prospects. In what may be the most succinct boil-down in TMA history, this is what I believe will be the biggest problem for Microsoft – in Mace’s words:

An existing Windows user can’t just sit down with Windows 8 and start using it.

When Apple affected its transition to OS X, a lot of things about the desktop experience changed, but the central metaphor remained intact. With Windows 8, the metaphor is intact, but it lies buried beneath a layer of Metro gloss that will certainly be disorienting to existing Windows users. And let’s be clear here: Microsoft isn’t winning hearts and minds with new interfaces – “winning” for Microsoft is making things the “same enough” for people locked into their ways of doing things not to mutiny and move to a competing OS. By doing things like removing the Start menu and relegating the traditional Windows desktop to an underpinning, Microsoft is introducing a tectonic shift in the way things get done on a PC. This isn’t going to bode well for adoption.

Apple has always been a company where the designers told the engineers what to do and that expectation has – within the last 5 years – served the company very well. Microsoft has always been a company that iterated its offerings by doing things just different enough not to break legacy users’ experience. I understand the need for Microsoft to be competitive in the tablet space, but letting the designers of that aesthetic run amok and pave over the Windows Desktop is not the way to go about it. It may look nice, but people who appreciate that are already using Macs.

 Posted by at 1:12 pm
May 292012
 

Dell is getting smashed in the mouth lately. The one-time PC leviathan whose CEO once claimed Apple should “shut it down and give the money back to the shareholders” has been eating those words for approximately infinity quarters. As the company is continuing its transition to the enterprise (read: focusing on doing business with people who aren’t consumers), their financial statements are dominated by Shift+9 and Shift + 0. That isn’t to say that Dell is getting out of consumer PCs altogether. Behold Dell’s latest take on the “all-in-one” PC, the 27″ XPS:

Where have I seen this before?

If the iconic design looks familiar, you have a pulse.

Oh.

27″ form factor, brushed metal hinged base, right side-loading media slot, wireless keyboard and mouse, top bezel-centered camera …but it runs Windows, so you can tell them apart when they’re turned on. Knocking off Apple has paid off well for Samsung, and I don’t suppose Dell has much to lose at this point.

 Posted by at 11:16 am  Tagged with:
May 292012
 

One of the lynchpins of the Department of Justice’s assertion that Apple was responsible for colluding with publishers to drive up the price of ebooks is that there was a competitive market prior to Apple’s entry defined by Amazon’s $9.99 price point for new releases and bestsellers. From paragraph 92 of the DoJ complaint:

Prior to the Defendants’ conspiracy, consumers benefited from price competition that led to $9.99 prices for newly released and bestselling e-books.

Apple pretty capably demolishes this myth in their response:

Apple denies that the $9.99 price level referenced in paragraph 92 was the result of “price competition.” Rather it reflected a strategic pricing decision made by Amazon, with a 90% share of eBook sales, made almost exclusively to consumers who had purchased Amazon’s Kindle eReader.

There’s been a lot written about Amazon’s business model recently. Most of it focuses on how little money they make and how a company with a P/E of 174 could be valued so high. The prescient former Apple CEO Jean-Louis Gassée has a theory that he lays out in his Monday Note:

After having cleared the field, Amazon will take advantage of what is delicately called “pricing power”. As the Last Man Standing, they will raise prices at will and regain profitability. This isn’t Amazon’s only game. The breadth of their offering, their superior customer service and awesome logistics, make life difficult for poorly managed competitors such as Best Buy, or the undead Circuit City, to name but a few companies whose weaknesses where exposed by Amazon’s superbly efficient machine.

But traders recognize the wink and the nod behind today’s numbers, they are willing to pay a high price for a share of Amazon’s future dominant position.

The point about Amazon’s “future dominance” is underscored by their profitability, which is illustrated in the Monday Note piece by a chart taken from Seeking Alpha:

Amazon's margins - prior to the other shoe dropping

So you have a market juggernaut artificially keeping prices down while reaping an unsustainable margin, ostensibly to drive out competition before using this leverage to raise prices in the future. Part of this strategy was selling select e-books at a loss for $9.99 until Apple entered the market. If you look at the grain of one particular tree’s bark, like the DoJ does, this is “bad” for the consumer. If you pull your camera back a couple of feet, you can see what Amazon is doing – and what the DoJ should be addressing. Even for the government, this degree of myopia would be funny if it wasn’t so damaging. But by all means, waste taxpayers’ money going after the wrong party.

 Posted by at 10:46 am
May 252012
 

Yesterday, I posted the full back-and-forth between the Department of Justice and Apple regarding the DoJ’s allegations of Apple conspiring to fix prices on e-books with publishers, which I’d encourage everyone to read. All of Apple’s responses to the allegations involving them are uniformly denied, but some of them stand out in terms of punch. Here are a few of my favorites (Apple’s response in italics):

5. To accomplish the goal of raising e-book prices and otherwise limiting retail competition for e-books, Apple and the Publisher Defendants jointly agreed to alter the business model governing the relationship between publishers and retailers. Prior to the conspiracy, both print books and e-books were sold under the longstanding “wholesale model.” Under this model, publishers sold books to retailers, and retailers, as the owners of the books, had the freedom to establish retail prices. Defendants were determined to end the robust retail price competition in e-books that prevailed, to the benefit of consumers, under the wholesale model. They therefore agreed jointly to replace the wholesale model for selling e-books with an “agency model.” Under the agency model, publishers would take control of retail pricing by appointing retailers as “agents”who would have no power to alter the retail prices set by the publishers. As a result, the publishers could end price competition among retailers and raise the prices consumers payfor ebooks through the adoption of identical pricing tiers. This change in business model would not have occurred without the conspiracy among the Defendants.

Apple admits that it entered into individual bilateral contracts with book publishers to offer eBooks through its iBookstore using an agency model. Those contracts are the best evidence of their contents. Apple has always sold eBooks under the agency model. That practice predated the iBookstore. Apple’s App Store, which has distributed more than 25 billion applications (“apps”), has always been based on an agency model. A number of individual eBook titles were sold through the App Store prior to the opening of the iBookstore – each and every sale under an agency agreement with the author or publisher. Apple denies that its agency agreements represented a change in Apple’s business model but admits that absent the agency agreements (not some purported “conspiracy”) it would not have entered eBook distribution, given the circumstances of the business as it existed prior to Apple’s entry. Except as specifically admitted, Apple denies the allegations of paragraph 5. 

6. Apple facilitated the Publisher Defendants’ collective effort to end retail price competition by coordinating their transition to an agency model across all retailers. Apple clearly understood that its participation in this scheme would result in higher prices to consumers. As Apple CEOSteveJobs described his company’s strategy for negotiating with the Publisher Defendants, “We’ll goto [an] agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” Apple was perfectly willing to help the Publisher Defendants obtain their objective of higher prices for consumers by ending Amazon’s “$9.99” price program as long as Apple was guaranteed its 30 percent margin and could avoid retail price competition from Amazon.

Apple denies the allegations of paragraph 6. Apple did not agree to, nor did it “facilitate,” the transition of other retailers to an agency model. The Government’s selective citation to hearsay from a small portion of Apple’s former CEO’s biography is irrelevant and has no place in this litigation. In an agency model, the “principal,” in this case the publisher, decides the price of its product in the retail marketplace. If that principal believes a particular product is worth more or less than others are charging, it is free under our economic and legal system to offer that higher or lower price. And it is perfectly legal for a principal and agent to discuss the pricing decisions of the principal. There is no allegation that Apple ever had any communications or agreements, directly or indirectly, with its competitor, Amazon, on any of the issues raised in the complaint. 

7. The plan – what Apple proudly described as an “aikido move” – worked. Over three days in January 2010, each Publisher Defendant entered into a functionally identical agency contract with Apple that would gointo effect simultaneously in April 2010 and “chang[e] the industry permanently.” These “Apple AgencyAgreements” conferred on the Publisher Defendants the power to setApple’s retail prices for e-books, while granting Apple the assurance that the Publisher Defendants would raise retail e-book prices at all other e-book outlets, too. Instead of $9.99, electronic versions of bestsellers and newly released titles would be priced according to a set of price tiers contained in each of the Apple Agency Agreements that determined de facto retail e- book prices as a function of the title’s hardcover list price. All bestselling and newly released titles bearing a hardcover list price between $25.01 and $35.00, for example, would be priced at $12.99, $14.99, or $16.99, with the retail e-book price increasing in relation to the hardcover list price.

Apple denies the allegations of paragraph 7. The Government’s reference to an “akido move” – another selective citation to the biography of Apple’s former CEO – is flatly inconsistent with the concept of an agreement. “Akido” is not a team sport like football with a quarterback directing the plays; it is a defensive martial art practiced one-on- one by individuals, requiring use of little strength or power, based on redirecting an attacker’s own force. The small excerpted portion at most describes the impact of the additional competition introduced by the launch of the iBookstore and the iPad. This lawsuit wrongly seeks to condemn Apple based on the Government’s apparent dissatisfaction with the impact of competitive entry, demand stimulation and innovation (ignoring significant indicia of consumer and market benefit), not based on any anticompetitive conduct by Apple. This is contrary to law and sound economic policy.

37. Beginning no later than September 2008, the Publisher Defendants’ senior executives engaged in a series of meetings, telephone conversations and other communications in which they jointly acknowledged to each other the threat posed by Amazon’s pricing strategy and the need to work collectively to end that strategy. By the end ofthe summer of2009, the Publisher Defendants had agreed to act collectively to force up Amazon’s retail prices and thereafter considered and implemented various means to accomplish that goal, including moving under the guise of a joint venture. Ultimately, in late 2009, Apple and the Publisher Defendants settled on the strategy that worked—replacing the wholesale model with an agency model that gave the Publisher Defendants the power to raise retail e-book prices themselves.

Apple lacks sufficient information and belief as to the allegations regarding the Publisher Defendants to respond to those allegations in paragraph 37. Apple denies the remaining allegations that “Apple and the Publisher Defendants” in “late 2009” (or any time) settled on “the strategy” to “give the Publisher Defendants the power to raise retail eBook prices themselves.” It was perfectly lawful for Apple to offer an opportunity for individual publishers to sell eBooks directly to consumers with Apple as an agent on commission. The Complaint acknowledges that Apple did not participate in the formation of a purported publisher conspiracy (see, e.g., paragraph 53). Indeed, the Complaint alleges that Apple did not hold “exploratory conversations” with the publishers until December 2009 (paragraph 53). Although it alleges in conclusory terms that Apple and the Publishers apparently immediately agreed on a conspiratorial “strategy” in December 2009, there are no allegations that Apple was made aware of the purported underlying conspiracy between the publishers. Proposing an agency model was in Apple’s unilateral and independent business interests, and Apple’s separate negotiations with each of the publishers over a period of weeks is directly inconsistent with the allegations in paragraph 37. 

38. The evidence showing conspiracy is substantial and includes: • Practices facilitating a horizontal conspiracy. The Publisher Defendants regularly communicated with each other in private conversations, both in person and on the telephone, and in e-mails to each other to exchange sensitive information and assurances of solidarity to advance the ends of the conspiracy. • Direct evidence ofa conspiracy. The Publisher Defendants directly discussed, agreed to, and encouraged each other to collective action to force Amazon to raise its retail e-book prices. • Recognition of illicit nature of communications. Publisher Defendants took steps to conceal their communications with one another, including instructions to “double delete” e-mail and taking other measures to avoid leaving a paper trail. • Acts contrary to economic interests. It would have been contrary to the economic interests of any Publisher Defendant acting alone to attempt to impose agency on all of its retailers and then raise its retail e-book prices. For example, Penguin Group CEO John Makinson reported to his parent company board of directors that “the industry needs to develop a common strategy” to address the threat “from digital companies whose objective may be to disintermediate traditional publishers altogether” because it “will not be possible for any individual publisher to mount an effective response,” and Penguin later admitted that it would have been economically disadvantaged if it “was the only publisher dealing with Apple under the new business model.” • Motive to enter the conspiracy, including knowledge or assurances that competitors also will enter. The Publisher Defendants were motivated by a desire to maintain both the perceived value of their books and their own position in the industry. They received assurances from both each other and Apple that they all would move together to raise retail e-book prices. Apple was motivated to ensure that it would not face competition from Amazon’s low-price retail strategy. • Abrupt, contemporaneous shift from past behavior. Prior to January 23, 2010, all Publisher Defendants sold their e-books under the traditional wholesale model; by January 25, 2010, all Publisher Defendants had irrevocably committed to transition all of their retailers to the agency model (and Apple had committed to sell e- books on a model inconsistent with the way it sells the vast bulk of the digital media it offers in its iTunes store). On April 3, 2010, as soon as the Apple Agency Agreements simultaneously became effective, all Publisher Defendants immediately used their new retail pricing authority to raise the retail prices of their newly released and bestselling e-books to the common ostensible maximum prices contained in their Apple Agency Agreements.

Apple lacks sufficient information and belief as to the allegations regarding the Publisher Defendants to respond to those allegations and on that basis denies those allegations in paragraph 38. Apple denies the remaining allegations, including the allegation that it provided “assurances” they “all would move together to raise retail eBook prices.” This allegation makes no sense. Apple had no power in its agreements to set prices, except to require a publisher to match lower prices offered elsewhere for a very small number of individual titles. The DOJ’s Competitive Impact Statement filed with this Court highlights the lack of logic in this allegation. It states, in pertinent part at page 6, that “[a]fter each round of negotiations with Apple over the terms of their agency agreements, Publisher Defendants’ CEOs immediately contacted each other to discuss strategy and verify where each stood with Apple.” Such alleged communications among the publishers underscores the fact that Apple was negotiating independently with each publisher and not providing the purported assurances alleged. The suggestion that Apple’s decision to pursue an agency model supports a showing of conspiracy because it is inconsistent with “the vast bulk of the digital media it offers in its iTunes store” ignores (among other things) that Apple’s “App Store” operates on an agency model. Prior to the iBookstore, Apple sold a number of individual eBook titles on the App Store, all under the agency model. Moreover, the use of the phrase “ostensible maximum prices” is conclusory rhetoric contrary to the facts – raising a price no higher than an “ostensible maximum” shows that it was in fact an actual maximum. Finally, Apple admits that any “illicit” communications among the Publishers, to the extent they existed, were concealed from Apple. 

51. Apple’s entry into the e-book business provided a perfect opportunity for collective action to implement the agency model and use it to raise retail e-book prices. Apple was in the process of developing a strategy to sell e-books on its new iPad device. Apple initially contemplated selling e-books through the existing wholesale model, which was similar to the manner in which Apple sold the vast majority of the digital media it offered in its iTunes store. On February 19, 2009, Apple Vice President of Internet Services Eddy Cue explained to Apple CEO Steve Jobs in an e-mail, “[a]t this point, it would be very easy for us to compete and I think trounce Amazon by opening up our own ebook store.” In addition to considering competitive entry at that time, though, Apple also contemplated illegally dividing the digital content world with Amazon, allowing each to “own the category” of its choice—audio/video to Apple and e-books to Amazon.

Apple admits that in late 2009 it considered whether it would create an iBookstore to offer eBooks to read on its new and yet-to-be announced iPad. Apple considered whether it would utilize a wholesale model. Apple admits that Mr. Cue wrote an email to Mr. Jobs on February 19, 2009, almost a year before the iPad launch, before Apple began its evaluation of the eBook business, and ten months before Apple had its individual exploratory conversations with each publisher. That email is the best evidence of its contents. Apple denies that it contemplated “dividing the digital content world with Amazon,” and notes that there are no allegations in the Complaint of any communications between Apple and Amazon on any topic, much less a fictional market division that is not the subject of this, or any proceeding, because nothing of the sort was contemplated, much less acted upon. 

60. As perhaps the only company that could facilitate their goal of raising retail ebook prices across the industry, Apple knew that it had significant leverage in negotiations with Publisher Defendants. Apple exercised this leverage to demand a thirty percent commission—a margin significantly above the prevailing competitive margins for e- book retailers. The Publisher Defendants worried that the combination of paying Apple a higher commission than they would have liked and pricing their e-books lower than they wanted might be too much to bear in exchange for Apple’s facilitation of their agreement to raise retail e-book prices. Ultimately, though, they convinced Apple to allow them to raise prices high enough to make the deal palatable to them.

Apple denies the allegations of paragraph 60, except that Apple admits that any positive margin on sales by definition would be significantly above the negative prevailing margin incurred by Amazon across at least some of its eBook sales. Apple specifically denies that the requested 30% agency commission represented a profit margin – instead it was a fee for a combination of services having a considerable cost to Apple – or that it was a function of any leverage or market power. Instead, Apple’s negotiating position was based entirely on its consistent business model, and the attraction of its innovative new iPad and the iBookstore as a distribution platform for book publishers who wanted to expand the market for eBooks. This was competition on the merits, with Apple providing a superior reading platform on a beautiful 10 inch iPad screen, with color, multi-media, and fixed display, and access to millions of future iPad purchasers. This is classic procompetitive behavior that should be celebrated, not condemned through litigation. The Government’s allegations highlight a fundamental problem with its theory as to Apple. Without Apple’s entry, eBook distribution would essentially be ceded to a single distributor (Amazon), who would then possess virtually unlimited power in the eBook business. Apple provided all publishers, large or small, similar opportunities to utilize Apple as an agent to sell eBooks directly to consumers through the iBookstore on non-discriminatory terms. 

61. As it negotiated with the Publisher Defendants in December 2009 and January 2010, Apple kept each PublisherDefendant informed of the status of its negotiations with the other Publisher Defendants. Apple also assured the Publisher Defendants that its proposals were the same to each and that no deal Apple agreed to with one publisher would be materially different from any deal it agreed to with another publisher. Apple thus knowingly served as a critical conspiracy participant by allowing the Publisher Defendants to signal to one another both (a) which agency terms would comprise an acceptable means of achieving their ultimate goal of raising and stabilizing retail e-book prices,and (b) that they could lock themselves into this particular means of collectively achieving that goal by all signing their Apple Agency Agreement.

Apple denies that it “kept each Publisher Defendant informed of the status of its negotiations with the other Publisher Defendants.” Apple admits that on occasion in the weeks prior to the announcement of the iPad it provided individual publishers a general sense of progress toward the conclusion of negotiations with a sufficient number of publishers in total to warrant Apple’s entry, but Apple denies that it provided any one publisher with individual or specific information about any other publisher. Apple had no interest in negotiating arbitrary variations in agreements for the performance of an essentially identical agency role for similarly situated publishers and had concrete efficiency-based justifications for seeking terms that were not materially inconsistent across principals; accordingly, Apple admits and alleges that any assurances it made to individual publishers were consistent with these interests and justifications and wholly lawful. Apple engaged in individual negotiations with each publisher, and reacted on an independent basis to the separate input of each publisher. Apple had no intent to and did not facilitate a conspiracy among the publishers; it simply used commonsense and time-honored negotiating tactics to achieve its independent business interests as ultimately reflected in separate bilateral contracts between Apple and each Publisher Defendant, each of which is the best evidence of its contents. Apple wanted pricing to be competitive, and its bilateral negotiations were intended to achieve that goal. Apple denies that it knowingly allowed the publishers to signal to each other about agency terms at all, much less as part of an alleged “ultimate goal of raising or stabilizing retail eBook prices,” or that it knowingly allowed them to signal “they could lock themselves into” a “particular means of collectively achieving that goal” by entering into an agency agreement with Apple to offer eBooks directly to consumers. 

65. The proposed e-book distribution agreement mainly incorporated the principles Apple set out in its e-mail messages ofJanuary 4 through January 6, with two notable changes. First, Apple demanded that the Publisher Defendants provide Apple their complete e-book catalogs and that they not delay the electronic release of any title behind its print release. Second, and more important, Apple replaced the express requirement that each publisher adopt the agency model with each of its retailers with an unusual most favored nation (“MFN”) pricing provision. That provision was not structured like a standard MFN in favor of a retailer, ensuring Apple that it would receive the best available wholesale price. Nor did the MFN ensure Apple that the Publisher Defendants would not set a higher retail price on the iBookstore than they set on other websites where they controlled retail prices. Instead, the MFN here required each publisher to guarantee that it would lower the retail price of each e-book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the Publisher Defendant did not control that other retailer’s ultimate consumer price. That is, instead of an MFN designed to protect Apple’s ability to compete, this MFN was designed to protect Apple from having to compete on price at all, while still maintaining Apple’s 30 percent margin.

Apple admits that the proposed agency agreements incorporated principles previously conveyed by Apple to individual publishers. The proposals and related documents referenced in this paragraph are the best evidence of their contents. Apple denies that it negotiated any restrictions on how a publisher dealt with another distributor. Apple denies the characterization of the MFN provisions in the respective proposals. In particular, the Government states that the MFN did not “ensure Apple that the Publisher Defendants would not set a higher retail price on the iBookstore than they set on other websites where they controlled retail prices.” The paragraph does not allege what “other websites” are being referred to. It is not surprising that the Government does not actually allege the language of the MFN, the best evidence of its terms, which applies on its face to any other eBook distributor. The MFN says nothing about excluding eBook distributors acting as publisher agents. If the MFN was not “standard,” this was because de novo entry into an alleged market controlled by a single dominant distributor is not a standard event. If the MFN was “unusual” this is only because it was sought by a party with no market power, it applied to a minimal share of sales (starting from zero), and it served a procompetitive purpose: to allow Apple to enter eBook distribution assured that its iBookstore would be price competitive on new releases. Apple denies that its commission was “a margin” – it was a negotiated fee for service as an agent that had associated costs. 

66. The purpose of these provisions was to work in concert to enforce the Defendants’ agreement to raise and stabilize retail e-book prices. Apple and the Publisher Defendants recognized that coupling Apple’s right to all of their e-books with its right to demand that those e-books not be priced higher on the iBookstore than on any other website effectively required that each Publisher Defendant take away retail pricing control from all other e-book retailers, including stripping them ofany ability to discount or otherwise price promote e-books out of the retailer’s own margins. Otherwise, the retail price MFN would cause Apple’s iBookstore prices to drop to match the best available retail price of each e-book, and the Publisher Defendants would receive only 70 percent of those reduced retail prices. Price competition by other retailers, if allowed to continue, thus likely would reduce e-book revenues to levels the Publisher Defendants could not control or predict.

Apple denies the allegations of paragraph 66. The DOJ’s theory is that if Amazon remained on the wholesale model and continued to price at $9.99, the MFN would allow Apple to insist on a price match yielding the Publisher Defendants “only 70 percent of [$9.99]” on Apple sales, which supposedly would compel a publisher to compel Amazon (a monopolist) to flee the wholesale model. Not so. The courts and the DOJ itself have consistently recognized that for an MFN to exert inescapable compulsion of this sort (and, even then, only on non-dominant firms), the MFN must apply to a significant share of the market, as would typically be the case when imposed by a dominant firm holding market power due to its large market share. As the senior DOJ official who signed the Complaint initiating this case recently said: “It’s not that all MFNs lead to competitive harm. But we take a close look at them when employed by firms with significant market power.” Interview with Sharis A. Pozen, The Antitrust Source at 7 (April 2012), available at http://www.americanbar.org/publications/the_antitrust_source.html. But here, Apple was a new entrant with zero share and no market power. Apple was bringing a new group of potential consumers to the eBooks market, who unlike a Kindle owner, could buy eBooks from any seller. If Amazon had chosen to retain the wholesale model and continued to price selected books at $9.99, to the extent Apple sales yielded the publishers less money (70% of $9.99), this lower return would have been incurred on a very small base (starting from zero); at the same time, the publishers would have made more money from their growing Amazon sales, which constituted the bulk of the business. And if the argument is that Amazon would insist upon better terms because of those negotiated by Apple on an agency basis, then logic refutes this speculation, since Apple’s entry into the market can hardly be found to have increased Amazon’s monopsony power. Thus, there is no factual basis for an argument that the MFN exerted irresistible force on the publishers, much less any reason to disregard the MFN’s lawful procompetitive purpose. 

74. On January 24,2010, Hachette signed an e-book distribution agreement with Apple. Over the next two days, Simon& Schuster, Macmillan, Penguin, and HarperCollins all followed suit and signed e-book distribution agreements with Apple. Within these three days, the Publisher Defendants agreed with Apple to abandon the longstanding wholesale model for selling e-books. The Apple Agency Agreements took effect simultaneously on April 3, 2010 with the release of Apple’s new iPad.

Apple admits that it signed agency contracts with Hachette, Simon & Schuster, Macmillan, Penguin and HarperCollins within a few days before the public announcement of the launch of the iPad. Those agency contracts are the best evidence of their contents. The timing was driven by the desire to announce the launch of the iBookstore at the time of the launch of the iPad. Apple further admits that the agreements became effective on the date of the launch of the iBookstore. While paragraph 74 alleges that there was a “longstanding wholesale model for eBooks,” this allegation ignores that eBooks had been available only for a few years, and were available primarily to Kindle owners on the platform of a single dominant player, Amazon, and therefore Apple denies that allegation. It also ignores that Apple had previously sold eBooks on the App Store – under the agency model. The Government’s allegations fail to address why the agency model, long recognized as perfectly lawful, and in this instance consistent with Apple’s legitimate business interests and prior business experience, should not have been utilized. This would have meant Apple would not enter the market, and would have allowed Amazon to cement a long-term dominance in the sale of eBooks. 

78. Apple understood that the retail price MFN was the key commitment mechanism to keep the Publisher Defendants advancing their conspiracy in lockstep. Regarding the effect of the MFN, Apple executive Pete Alcorn remarked in the context of the European roll-out of the agency model in the spring of 2010:

I told [Apple executive Keith Moerer] that I think he and Eddy [Cue] made it at least halfway to changing the industry permanently, and we should keep the pads on and keep fighting for it. I might regret that later, but right now I feel like it’s a giant win to keep pushing the MFN and forcing people off the [A]mazon model and onto ours. If anything, the place to give is the pricing – long run, the mfh is more important. The interesting insight in the meeting was Eddy’s explanation that it doesn’t have to be that broad —any decent MFN forces the model.

Apple denies the allegation that it “understood that the retail price MFN was the key commitment mechanism to keep the Publisher Defendants advancing their conspiracy in lockstep,” or that the quoted excerpt from an Apple executive, not responsible for negotiating the agency agreements at issue, constitutes an admission. Apple’s MFN was very narrow – it generally simply allowed Apple to require a publisher to offer a competitive price on a new release in the iBookstore. The MFN excluded special promotions, for example, and was not self-executing. It was not a breach of the MFN for a lower competitive price on an individual title to exist elsewhere; it simply gave Apple the right to require the publisher meet the price on certain new releases. If as the Government alleges, pricing in the eBooks market was “competitive” prior to Apple’s entry, then having Apple, an agent without pricing discretion, with limited rights to require publishers to meet those prices in the marketplace cannot be viewed as anticompetitive. The eBooks price levels prior to Apple’s entry were not “competitive,” but simply reflected strategic decisions made by a 90% player to promote its long-term interests in preserving market dominance, and it would not be unexpected that significant entry and demand stimulation would change the pricing dynamics in the alleged market. 

85. When a company takes a pro-competitive action by introducing a new product, lowering its prices, or even adopting a new business model that helps it sell more product at better prices, it typically does not want its competitors to copy its action, but prefers to maintain a first-mover or competitive advantage. In contrast, when companies jointly take collusive action, such as instituting a coordinated price increase, they typically want the rest of their competitors to join them in that action. Because collusive actions are not pro-competitive or consumer friendly, any competitor that does not go along with the conspirators can take more consumer friendly actions and see its market share rise at the expense of the conspirators. Here, the Defendants acted consistently with a collusive arrangement, and inconsistently with a procompetitive arrangement, as they sought to pressure another publisher (whose market share was growing at the Publisher Defendants’ expense after the Apple Agency Contracts became effective) to join them.

Insofar as paragraph 85 contains legal argument, no response is required. Apple lacks sufficient information or belief as to the factual allegations in paragraph 85 to respond, and on that basis denies the allegations. Apple denies that it sought to pressure a “hold out” publisher to move to the agency model. Apple provided all publishers, large or small, similar opportunities to utilize Apple as an agent to sell eBooks directly to consumers through the iBookstore on non-discriminatory terms. Apple did not “cajole” any publisher (a benign term meaning to persuade with flattery), but rather sought to explain the benefits of working with Apple. 

92. Defendants’ conspiracy and agreement to raise and stabilize retail e-book prices by collectively adopting the agency model and Apple price tiers led to an increase in the retail prices of newly released and bestselling e-books. Prior to the Defendants’ conspiracy, consumers benefited from price competition that led to $9.99 prices for newly released and bestselling e-books. Almost immediately after Apple launched its iBookstore in April 2010 and the Publisher Defendants imposed agency model pricing on all retailers, the Publisher Defendants’ e-book prices for most newly released and bestselling e-books rose to either $12.99 or $14.99.

Apple denies that the $9.99 price level referenced in paragraph 92 was the result of “price competition.” Rather it reflected a strategic pricing decision made by Amazon, with a 90% share of eBook sales, made almost exclusively to consumers who had purchased Amazon’s Kindle eReader. Consumers who did not want to buy a Kindle because they did not find it an attractive device or an attractive value proposition did not benefit from a $9.99 price, or any price, no matter how ostensibly low. 

 Posted by at 12:03 pm
May 242012
 

I found Apple’s reply to the DoJ allegations to be a great read – some of the language Apple uses in taking apart the government’s case is absolutely withering. But the format used for the majority of the document (Apple responding to paragraph numbers in the DoJ document) makes it a little tough to get the context of Apple’s responses. For the benefit of my vast readership, I’ve taken the liberty of consolidating the documents. The numbered DoJ allegations are followed by Apple’s response in italics. Download the .pdf here.

 Posted by at 6:05 pm
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