2 Economists Better Than 1 Is Apple IPod Trial Strategy

By Robert Burnson

Photographer: David Paul Morris/Bloomberg

The Apple Inc. iPod Nano is displayed for a photograph during an event in San... Read More

Apple Inc. (AAPL) tried a two-economists-are-smarter-than-one strategy to convince a jury in a $1 billion antitrust trial that it wasn’t trying to cheat consumers with its early iPod upgrades.
Two University of Chicago professors summoned by Apple testified Dec. 10 and Thursday that a Stanford University economist called earlier as a witness by consumer attorneys got it wrong when he calculated that “locking” iPod users to iTunes raised prices starting in 2006 and resulted in damages to consumers and retailers totaling $351 million.
Robert Topel, one of the Chicago academics, testified Thursday that Stanford economist Roger Noll failed to take product improvement into consideration when doing his analysis.
Topel’s colleague, Kevin Murphy, told the jury Dec. 10 that Apple’s “integrated” system for digital music, made up of a music player, a media player and a
music store, was “pro=competitive” and benefited consumers because it was seamless, reliable and easy to use.
Because Apple controlled every piece of the system, “it had the flexibility to innovate,” Murphy said. “There was no anticompetitive impact.”

8 Million Consumers

Attorneys representing as many as 8 million consumers and 500 retailers and resellers who bought iPods from 2006 to 2009 claim Cupertino, California-based Apple modified iTunes software so music downloaded with a program made by competitor RealNetworks Inc. (RNWK) couldn’t be played. This was how Apple tried to maintain a monopoly on digital music, they allege.
Noll testified that because the iTunes 7.0 upgrade discouraged customers from switching to rival players, consumers were less “price sensitive” to iPods, and Apple could charge more for the devices as a result.
Murphy and Topel said Noll’s conclusion that Apple overcharged consumers for iPods was based solely on security measures built into iTunes 7.0 while failing to take into account improvements in the software, including the ability to play movies, download games and sync music on iPods with other computers.
“There is no way to tell what the independent effect of the features are,” Topel said, “because they all happen at the same time.”
Under cross-examination, Murphy said Apple had paid him about $250,000 in the last four years to serve as an expert witness in several cases. His rate, he said, was $1,250 an hour.
The case, filed in 2005, took nine years to get to trial. Jurors may get the case as early as Dec. 15. Any damages awarded by the jury may be tripled under federal antitrust law.
The case is the Apple iPod iTunes Antitrust Litigation, 05-00037, U.S. District Court, Northern District of California (Oakland).