Since it was filed in April, the Department of Justice's price-fixing lawsuit against Apple (AAPL) and five major publishing companies, and the proposed settlement the Department entered with three of those publishers, has certainly seen no shortage of opinions.
A Tunney Act public comment period on the settlement resulted in 868 public comments, 90 percent of which opposed the settlement. In addition to this outpouring, we have seen additional filings protesting the settlement from Apple and the non-settling publishers, amicus filings protesting the settlement from Barnes and Noble, the American Booksellers Association, and the Author's Guild, who have stated they believe the settlement will be an undue burden on their industry, and an amicus filing from attorney Bob Kohn, who opposes the settlement on principal. Even Senator Chuck Schumer has weighed in opposing the settlement.
But conspicuous by their absence from this gabfest is one key player: Amazon (AMZN).
The Department of Justice's central allegation against Apple and the publishers revolves around Amazon. They claim the defendants conspired to force Amazon to adopt the "agency model" for ebook pricing, under which the publisher sets the ultimate price paid by the consumer instead of the retailer. This constitutes price fixing as Amazon had set the maximum price for ebooks at $9.99 before the agency model, but the publishers selected higher price points such as $12.99 and $14.99.
And many of the comment opposing the settlement revolved around Amazon as well. Commenters claimed that the agency pricing was necessary as Amazon had actually been selling ebooks below cost- a practice which could make Amazon themselves guilty of antitrust violations.
Amazon has cultivated a public belief that they are in favor of the settlement. At the time the settlement was announced, Amazon gave a statement to the press saying the case was a "big win for Kindle owners" and claiming they were looking forward to lowering prices as soon as they could. But this statement was not an official court filing - it was not even an official press release.
Since Amazon is such a central figure in the case, and since they claim to have an interest in seeing the settlement approved, it would seem reasonable to expect that they would file official documents into the case. These filings could bear witness to the Department of Justice's allegations against Apple and the publishers, deny any allegations against Amazon, express support for the terms of the settlement, and declare Amazon's intention and ability to resume selling ebooks at lower prices if the settlement is approved.
Yet Amazon has held their tongue. They did not file a public comment during the Tunney Act process and they have not filed an amicus brief. While this does not automatically ruin the Department of Justice's case, it certainly can't be helping.
I can only think of two possible explanations for this:
1. They believe the DoJ case is a lost cause and the settlement will be thrown out
I'm not an attorney or an antitrust expert, so I'm not fully qualified to comment on the soundness of the case or the likelihood of the settlement recieving court approval.
But given the number of issues raised by the various opposition filings, it certainly seems plausible that the settlement will be rejected for some reason.
2. Amazon's statement is a bluff to sell Kindles in the short term; they have no intention of lowering prices even if the agency model is banned.
This I can explain. When Amazon first began selling ebooks in 2007, there were no apps or PC programs available to read them. You had to buy a $399 Kindle to read them, and Amazon was probably making a pretty penny at that price. It made sense to take a bit of a hit on the books to encourage hardware sales.
In the two years since the Agency model has been adopted, however, the hardware margins have taken a nosedive and it is now believed the Kindle's themselves are sold at a loss. Furthermore, Amazon has debuted multiple apps and a cloud reader designed to bypass the need for the hardware in the first place. Since the business model that produced it is history, it is unlikely that Amazon could easily return to the $9.99 price point.
Filing a court document stating otherwise could be perjury, so they stuck to making an inadmissible verbal statement.
It is also possible that both of these things are true. Amazon doesn't want to lower prices, and they are banking on the settlement being overturned so they don't have to.
Either way, I believe this may be a bit of good news for non-defendant Barnes and Noble (BKS). Collateral damage from this lawsuit is already priced into BKS stock, which dropped 8% on April 11th the date the settlement was announced.
Apple is not a good play in this case because ebooks are not a large portion of their business. Amazon's stock may suffer if they are forced to take back their promise of lower Kindle pricing, but I don't see a strong Amazon short thesis here as a court rejection of the settlement would probably be seen as a neutral for them (I happen to be shorting Amazon for other reasons).
But for Barnes and Noble, either a court rejection of the settlement OR a revelation of higher than expected Kindle pricing after approval of the settlement could be an upward catalyst. With a price-to-sales ratio of 0.09 and 34% of shares short, it wouldn't take much to make the BKS stock price pop back to the $18-$20 range recently attained following the Microsoft announcement.
This position isn't for the timid; an announcement that the court is approving the settlement could give BKS a haircut. It's hard to estimate the downside, but it is likely lower than the corresponding upside as the settlement is already largely priced in.
Note that as there is no specific timeframe for a ruling on this settlement. If no decision has been reached on the settlement by September 6, it may be prudent to exit this position for a day, as Amazon is expected to unveil the new Kindle Fire.
Disclosure: I am long BKS.
Additional disclosure: I am short AMZN