United States of America v. Apple, Inc.

Filing 45

OPPOSITION TO MOTION to dismiss [34], on behalf of Appellant Bob Kohn, FILED. Service date 11/26/2012 by CM/ECF. [777714][45] [12-4017]

IN THE UNITED STATES COURT OF APPEALS COURT
FOR THE SECOND CIRCUIT
___________________________________
)
BOB KOHN
)
)
Appellant/Intervenor
)
)
v.
)
)
UNITED STATES OF AMERICA
)
)
Appellee/Plaintiff
)
)
v.
)
)
VERLAGSGRUPPE GEORG VON
)
HOLTZBRINK PUBLISHERS, LLC
)
d/b/a MACMILLAN,
)
THE PENGUIN GROUP,
)
A DIVISION OF PEARSON PLC, )
PENGUIN GROUP (USA), INC.
)
HACHETTE BOOK GROUP, INC.,
)
HARPERCOLLINS PUBLISHERS, L.L.C. )
and SIMON & SCHUSTER, INC.
)
)
Appellees/Defendants
)
)
APPLE, INC.,
)
Defendant
)
)

1

AFFIDAVIT OF
BOB KOHN
(CEO, ROYALTYSHARE)
IN SUPPORT OF KOHN’S
RESPONSE TO MOTION
TO DISMISS
No.12-1407

I, Bob Kohn, declare as follows:
1.

I am the Appellant herein. The facts stated in this affidavit are of my

own personal knowledge and, if called as a witness, I could and would competently
testify to the following.
2.

I am the Chairman & CEO of RoyaltyShare, Inc. (“RoyaltyShare”), a

venture capital-backed startup company which I co-founded in 2005. Between my
shareholdings in, and position as founder, Chairman & CEO, of the company,
RoyaltyShare is my most important personal financial asset. RoyaltyShare’s
success, and particularly the success of its largest customers, directly impacts me
personally and financially. My relationship to RoyaltyShare is set forth in the
record below in the comment letter I submitted to the Antitrust Division of the
Department of Justice (“Government”) on May 30, 2012 (ATC-0143), which the
Government filed with the District Court on July 23, 2012.
3.

RoyaltyShare provides technology solutions and enterprise services to

record companies and book publishers. Investors in RoyaltyShare include Trident
Capital, Inc. (Palo Alto, CA), Bertelsmann Digital Media Investments (New York,
NY), and Plumtree Partners (Dallas, TX).
4.

RoyaltyShare’s largest client is Sony Music Entertainment for whom

we provide royalty processing services, generating tens of thousands of royalty
statements to recording artists such as Adelle, Beyonce, Britney Spears, Bruce
2

Springsteen, Placido Domingo, Rod Stewart, Aerosmith, Barbara Streisand, Bob
Dylan, Miles Davis, Tony Bennett, and the Harry Fox Agency. This information
was publicly reported by Ed Christman, “RoyaltyShare Takes Over Sony Music’s
Royalty Processing,” Billboard Magazine (July 12, 2011). RoyaltyShare also
provides digital transaction management and/or royalty processing solutions and
services to over 100 independent record labels (including Welk Music Group,
Ministry of Sound, CBS Records, Nettwerk, etc.) and several major book
publishers.
5.

RoyaltyShare’s second largest client is Hachette Book Group, Inc.

(“Hachette”), one of the settling defendants in this case, a relationship which is
also referred to in the record below as part of my comment letter. RoyaltyShare
provides Hachette with a critical portion of its digital supply chain for e-books:
RoyaltyShare aggregates and ingests e-book revenue transactions from a variety of
E-Book Retailers with whom Hachette does business, including Amazon Kindle ebook store, Apple iBookstore, and Barnes & Noble Nook e-book store. We then
take these transactions and “clear” or validate them before putting them in a format
suitable for ingestion into Hachette’s downstream IT accounting systems. This is a
crucial part of Hachette’s e-book the supply chain which ensures that Hachette is
accurately reporting its e-book revenue and accurately paying royalties to its
authors derived from those revenues. This was publicly reported by Rachel Deahl,
3

“Hachette Signs With RoyaltyShare to Manage Backend Digital Sales,” Publishers
Weekly (May 19, 2010).
6.

On or about April 1, 2010, Hachette changed its e-book distribution

model from retail to agency pricing. As a result, RoyaltyShare was required to
develop a new system to help Hachette validate e-book prices contained in the
sales reports from its e-retailers. This was publicly announced in “New
RoyaltyShare Service Helps Agency Model Publishers Validate eBook Sales
Pricing Compliance,” PRWeb (November 2, 2010).
7.

On July 25, 2012, Hachette and RoyaltyShare announced that a third

party validation audit of Hachette’s e-book revenue management process
confirmed that 100% of Hachette’s e-book sales were accurately processed and
reported. This was publicly announced by RoyaltyShare and Hachette and reported
in “Hachette Audit Confirms that RoyaltyShare Service Ensures 100% Accurate
Reporting of Digital Sales,” PublishersLunch.com (July 25, 2012), available at
https://twitter.com/PublishersLunch/status/228442613936713728.
8.

Since January, 2011, RoyaltyShare been aggregating and ingesting e-

book revenue transactions of three of the defendants in this action, Hachette,
Macmillan and Penguin, as well as from a number of other major and independent
book publishers, from a variety of e-retailers for the purpose of providing services
to the New York Times, Inc. Under RoyaltyShare’s service agreement with New
4

York Times, RoyaltyShare compiles e-book revenue data which the Times’s staff
uses to confirm the accuracy of other data they use to compile the New York Times
e-book “Bestseller Lists.” The New York Times best seller lists compete with other
best seller lists, including those offered by Amazon.com, Inc. RoyaltyShare’s
relationship with the Times was publicly announced by the New York Times (see,
NY

Times’s

press

release

at

http://phx.corporate-

ir.net/phoenix.zhtml?c=105317&p=irol-newsArticle&ID=1495160&highlight=
and reported by Julie Bosman, "Times Will Rank Ebook Bestsellers," New York
Times, November 10, 2010. Since that time, the website of the New York Times has
included the following statement, “RoyaltyShare, a firm that provides accounting
services to publishers, is assisting the Times in its corroboration of e-book sales.”
See,

“About

the

Best

Sellers”

at

http://www.nytimes.com/best-sellers-

books/overview.html.
9.

Recently, RoyaltyShare began providing supply chain services to

Macmillan, a defendant below, substantially similar to the services RoyaltyShare
has been providing to defendant Hachette. RoyaltyShare aggregates and ingests
Macmillan’s e-book revenue transactions from a variety of E-Book Retailers,
including Amazon, Apple, and Barnes & Noble, and we validate such transaction
data before putting it in a format suitable for ingestion into Macmillan’s
downstream systems.
5

10.

The services RoyaltyShare provides to two of the defendant

publishers in this case are called “supply chain” services. Since we receive e-book
transaction data directly from the E-book Retailers, we are directly integrated into
the e-book chain of transactions upon which these publishers rely to operate their
businesses. As part of this supply chain, RoyaltyShare manages the flow of e-book
transaction data from the e-retailer to the defendant publishers and other
publishers. RoyaltyShare’s role in the e-book supply chain is depicted in Diagram
1 below.

Diagram 1

6

11.

In September, 2012, shortly after the District Court entered the Final

Judgment, Hachette notified RoyaltyShare that, as a result of the Final Judgment, it
would require RoyaltyShare to modify and enhance its systems to specifically
enable Hachette to monitor compliance with the terms of the Final Judgment.
RoyaltyShare has already spent a significant number of hours of software
development resources, without additional compensation from Hachette, to
develop detailed technical specifications for these modifications.
12.

The nature of RoyaltyShare’s revenues is dependent upon the specific

kind of services we provide to the client. RoyaltyShare may provide full or partial
solutions to our clients, such as digital transaction management, e-book price
validation, and/or royalty processing services, either through the use of our
proprietary web-based software platforms designed for such purposes, or through
our service center staffed with royalty, metadata, audit response, and other
professionals who provide personal services.
13.

With respect to some clients who use our software platforms,

RoyaltyShare’s revenues are based on a percentage of digital music or e-book
revenue received or the number of sound recordings or e-books published by our
clients, or both. In some cases, rather than a percentage of revenues, we receive a
specific number of cents per e-book transaction. For example, for every dollar that
settling defendant Hachette loses in e-book revenue as a result of an alleged anti7

competitive provision in the Final Judgment, RoyaltyShare loses an easily
quantifiable amount of money.
14.

As a result of its integration within its clients’ e-book supply chain,

RoyaltyShare’s business is directly impacted by events which affect our clients,
including pro-competitive and anti-competitive actions that have an impact upon
their businesses. Thus, the Final Judgment, and the anticompetitive effects which it
is alleged to have, directly and financially impacts RoyaltyShare and me
personally.
15.

The District Court, in its order entering the Final Judgment, found as

“undisputed” that Amazon had achieved a “90 percent monopoly” of the U.S. trade
e-book market. Thus, Amazon represented 90% of U.S. e-book revenues of the
defendant publishers, giving it undisputed 90% monopsony power over the
publishers from whom it sources e-books. (It was also reported that Amazon
represented about 25% of the defendant publishers’ printed book revenues).
16.

The extent to an E-book Retailer such as Amazon can wield its

monopsony power to the economic disadvantage of one of RoyaltyShare’s
customers, big or small, is a direct function of the competitiveness of the trade ebook market and the relative market power of the E-book Retailers through whom
our publisher clients sell e-books.

8

17.

Should, for example, Amazon wield its monopsony power to stop

selling the e-books of one or more of RoyaltyShare’s publisher clients by removing
their “buy” buttons from the Amazon website not only would our customer lose
revenue, but RoyaltyShare would lose revenue, and perhaps a significant customer.
The alleged anti-competitive effects of the Final Judgment which make this threat
more likely is not conjectural or hypothetical. The Government’s own Complaint
alleges (at paragraph 80) that when, in January, 2010, Macmillan, a defendant
publisher in the action below, presented Amazon with a proposal for an e-book
distribution contract to replace its existing one, Amazon reacted by promptly
deleting the “buy” buttons in the Amazon online store for all of Macmillan’s books
(e-books, as well as printed books). At that time Amazon removed the buy buttons
from Macmillan’s books, Amazon had 90% percent share of the U.S. trade e-books
market and 25% of the printed book market. This gave them the palpable
monopsony power that allowed them to retaliate against Macmillan, the sixth
largest publisher in the United States, simply because Macmillan made a business
proposal that Amazon didn’t like. As a result, 90% of Macmillan’s e-book
revenues and 25% of its printed book revenues vanished in an instant.
18.

This was not the first time Amazon wielded its monopsony power in

this specific way. As the Author’s Guild alleged in its comment letter to the
Government dated June 25, 2012 (ATC-0214), in January, 2008, Amazon removed
9

the buy buttons from more than 1,000 self-published printed books and threatened
that these books would be permanently removed from the Amazon website unless
the books were published via Amazon’s own BookSurge print-on-demand service.
Later that year, as the Author’s Guild also alleges in its comment letter, that
Amazon exercised what the New York Times called its “nuclear option” of
removing the buy buttons of book publishers. This was reported by Doreen
Caravajal, “Small Publishers Feel Power of Amazon’s Buy Button,” New York
Times (June 16, 2008). Earlier this year, when Amazon refused to renew its
agreement to publish e-books of publishers distributed by IPG, which serves as a
distributor for hundreds of independent book publishers, Amazon refused to renew
its agreement with IPG unless they and the publishers they represent agreed to
terms more favorable to Amazon. While they were negotiating, Amazon again
exercised its nuclear option, pulling the buy buttons from its Kindle store for over
5,000 e-books published by those independent book publishers. The titles remained
banned from Amazon until the dispute was settled three months later. This was
reported by Michael Cader, “Amazon Removes Kindle Version of IPG Books
After Distributor Declines to Change Selling Terms,” PublishersLunch.com
(February 22, 2012) and “Standoff Ends: IPG and Amazon Agree to Terms on
eBooks and Titles Restored,” PublishersLunch.com (May 25, 2012). Each of these

10

incidents is also alleged in my memorandum supporting my motion for leave to
participate as amicus curiae, which is on the record below at ECF No. 97 at 18-20.
19.

As I also mention in such memorandum, nine of the largest

independent book publishers in the United States submitted a comment letter to the
Government (ATC-0727) explaining in their view why the proposed settlement
would adversely impact competition in the market for trade e-books. In that letter,
they also allege that none of them have ever “been successful in establishing
agency pricing relationships with Amazon.” This, in my view, is a clear indication
of the inferior bargaining leverage these publishers have with Amazon.
20.

In November, 2007, Amazon launched its Kindle text reader device

and web-based platform to support the sale and delivery of e-books. At that time,
book publishers sold e-books to Amazon and other e-book retailers under the
“retail” pricing model. Under the “retail” model, which is also described in the
Government’s Competitive Impact statement, publishers sold copies of each title to
retailers for a discount (usually 50%) off the price printed on the physical edition
of the book (i.e., the “list price”). Retailers, as owners of the books, were then free
to determine the prices at which the books would be sold to consumers.
21.

As the Government also recognized, Amazon lowered the price of

newly released and bestselling e-books to “$9.99-or-less,” quoting from paragraph
30 of Government’s Complaint in this case. Thus, for example, an e-book with a
11

list price of $26.00 would be sold by the publisher to Amazon for $13.00, and
Amazon would re-sell that copy to a consumer for $9.99 or less. Amazon’s
marginal cost for each e-book it sold was at least equal to the price it paid to the
publisher. There is no difficulty measuring Amazon’s incremental cost for each
additional e-book: Amazon must pay a wholesale price to the publisher—in this
example, $13.00—for each additional e-book it buys, whether it buys one e-book
or a million e-books. By selling these e-books for “$9.99-or-less,” Amazon thus
sold each e-book significantly below its marginal cost. In doing so, Amazon was
absorbing a marginal loss of about 23%, or over $3.00 per unit, in this example.
Amazon’s conduct was not in the nature of promotion or a loss leader. Amazon
was doing this consistently for every new trade e-book released by the defendant
publishers and other publishers, from the time it launched the Kindle.
22.

As a direct result of its below marginal cost pricing, Amazon achieved

a 90 percent share of the trade e-book market. (The District Court, in its order
entering the Final Judgment, found as “undisputed” that Amazon had achieved a
“90 percent monopoly” of the trade e-book market). It was my belief that not only
did Amazon’s 90 percent share put it in a position to raise its prices high enough to
recoup its losses after driving out its competitors, but that Amazon was
intentionally engaging in below marginal cost pricing for the very purpose of
driving competitors out of the e-book market and keeping new entrants away from
12

the market. A new entrant in this market could not effectively compete in a market
in which it would be forced to have a negative gross margin on every single e-book
it sold.
23.

On January 27, 2010, Apple announced the iPad. Shortly thereafter, I

learned that Apple and several of the major book publishers each entered
agreements with Apple under which the publishers would make their e-books
available for distribution to consumers under what is known as, the “agency
model.” The agency model was patterned after the structure employed by Apple in
re-selling copyrighted software applications (“Apps”) made available through the
iPhone App Store. Instead of purchasing e-books at a wholesale price, Apple and
other e-book retailers would sell e-books at prices set by the publishers and pay the
publishers of 70% of the revenues.
24.

Under the agency model, the e-retailers became agents of the book

publishers, selling e-books at prices set by the book publishers. Thus, under the
agency model, e-book price competition occurs between the book publishers
instead of between e-retailers. E-retailers would start competing on the quality and
price of their services provided to consumers while book publishers would
compete upon the quality and price of their e-books.
25.

I believe that, by allowing e-retailers to compete based upon the

quality of its product and services, consumers will be better off. Meanwhile,
13

consumers still benefit from price competition, because publishers are completely
left free to compete on the price of its e-books. Indeed, the District Court later
found, as the Government recognized, that the agency model is not “intrinsically
unlawful.” In fact, in my view, it was better than just legal: it was a boon to
competition.
26.

The Final Judgment has had an adverse anti-competitive impact upon

the trade e-book market business, the business of RoyaltyShare’s largest
customers, and RoyaltyShare’s business, which impact will continue as long as the
Final Judgment in its current form remains in effect.
27.

RoyaltyShare has been directly and adversely affected by what the

settling defendants have been required to do in compliance with the terms of the
Final Judgment. Under Section IV of the Final Judgment, these publishers must
“take each step required under the agreement to cause the agreement to be
terminated and not renewed or extended.” Thus, agency agreements that had been
in place between Hachette, HarperCollins, and Simon & Schuster, respectively,
with e-retailers such as Amazon, Apple, Barnes & Noble and others, were
terminated and replaced. As a direct result of the Final Judgment, these agency
agreements, which contained provisions that made the trade e-book market more
competitive, were replaced with agreements that made such market less
competitive.
14

28.

When the settling publishers signed new agreements with the e-

retailers, those agreements were subject to restrictions contained in Section V of
the Final Judgment. Under Section V, the settling publishers are prohibited from
exercising two of the most essential pro-competitive features of the agency model:
the prohibition for a period of two years against the publisher’s ability to restrict eretailers from selling e-books at below marginal cost and the prohibition for a
period of five years against the publisher’s ability to enforce a “Price MFN,” a
term defined in the Final Judgment. These prohibitions affect the publishers’
respective agreements with every E-book Retailer, including Amazon. Each of
them is anti-competitive and each injures the business of RoyaltyShare.
29.

The prohibition against the publisher’s ability to restrict Amazon and

other E-book Retailers from selling below marginal cost reverses the procompetitive impact of the agency model. Competitors in the e-book market who
compete by providing better services to consumers could not effectively compete
in a market in which it would be forced to suffer a negative gross margin on each
of the e-books it sells.
30.

The conduct permitted in Section VI of the Final Judgment, limiting

Amazon’s below cost pricing to an aggregate amount of total commissions paid to
publishers, does nothing to protect competitors from Amazon’s selling below
marginal cost. Because the total dollar amount of Amazon’s 30% commission over
15

the course of a year is so much higher than that of its smaller rivals, it could use
below marginal cost pricing across such a wide swath of e-books and for such an
extended period of time, to put rivals out of business well before it had to raise
prices to recoup its losses or comply with its agreements with the publishers.
Moreover, once Amazon starts to recoup its losses by setting monopoly prices, the
provision would not protect surviving rivals from Amazon’s short term use of
below marginal cost pricing to discipline them for undercutting the monopoly
price. In such a case, Amazon could recoup its losses once the disciplinary period
is over or the competitor is out of business. With its “90 percent monopoly” of the
trade e-book market, Amazon has enough market power to set higher than
competitive prices, and then sustain those prices long enough to earn in excess
profits what they earlier gave up in below-cost prices. Finally, there are real
practical difficulties with this provision. For example, the Final Judgment does not
provide for a means to review and enforce the annual aggregate dollar value of the
permitted discounts. If the publishers are the only means of enforcing the
provision, and if publishers are not accurate in their monitoring the totals of
Amazon’s below marginal cost pricing against Amazon’s total annual
commissions, or if a publisher or its accounting methods somehow “restricts,
limits, or impedes” Amazon’s discounting, then any misstep by a publisher against
Amazon could be construed as “retaliation” against Amazon in violation of Section
16

V.D. of the Final Judgment. For all practical purposes, the Final Judgment, by
permitting Amazon to resume below marginal cost pricing of e-books, guts the
agency model of its essential pro-competitive purpose.
31.

After Amazon’s adoption of the agency model, which eliminated

Amazon’s ability to sell e-books below its marginal costs, Amazon’s market share
in trade e-books dropped to 60%. I believe that such drop was a direct result of
Amazon’s adoption of the agency model. Such drop reduced Amazon’s monopoly
and monopsony power by one-third and made the trade e-book market more
competitive. This pro-competitive impact made it less likely for Amazon to
exercise its power to eliminate the revenues of one of our customers and in turn
injure RoyaltyShare’s business.
32.

By prohibiting the settling publishers from exercising the most

essential pro-competitive feature of the agency model, the Final Judgment makes
the trade e-book market less competitive. Specifically, Section V of the Final
Judgment by its terms enables Amazon to resume selling e-books at below their
marginal cost. Competitors of Amazon and new entrants to the market will be less
able to compete on the level and quality of services to consumers, because they
will be forced to suffer a negative gross margin on each e-book it sells. The Final
Judgment thereby reverses the pro-competitive benefit of the agency model,
making it more likely that Amazon will increase its market share. With its market
17

share headed back into the direction of 90%, Amazon will be more able to directly
threaten RoyaltyShare’s business by taking action that is injurious to the e-book
revenue flow of RoyaltyShare’s largest customers. Accordingly, the Final
Judgment’s restriction on the settling defendants’ use of agency pricing is anticompetitive and directly injures in RoyaltyShare and Kohn’s interest in the
company. Reversal of the District Court’s order entering the Final Judgment, or the
removal of its anti-competitive restrictions on the settling defendants’ agency
agreements, would directly redress this injury.
33.

In addition, the 5-year prohibition in Section V of the Final Judgment

against the publisher’s ability to “enter into any agreement with an E-book Retailer
relating to the Sales of E-books that contains a ‘Price MFN’” independently guts
the agency model of its essential pro-competitive purpose.
34.

In my comment letter to the Justice Department dated May 30, 2012, I

articulated the essential purpose of the most favored nation provision contained in
the publishers’ agency agreements with E-book Retailers. As stated in paragraph
65 the Complaint in this action, the MFN required each publisher to guarantee that
it would lower the retail price of each e-book in the e-retailer’s store “to match the
lowest price offered by any other retailer, even if the Publisher did not control the
other retailer’s ultimate consumer price.” This pro-competitive provision protected
each E-book Retailer, including Amazon, from potentially anti-competitive
18

practices by the publishers. For example, without the Price MFN provision, a
publisher, on its own or in conspiracy with an E-book Retailer, could lower the
price of some or all e-books offered through a particular E-book Retailer to the
competitive disadvantage of all other E-book Retailers. Or, the publisher could
offer to sell its e-books to one of the E-book Retailers under the retail model,
effectively allowing such retailer to sell at below marginal cost, giving it an unfair
advantage over their competitors. Without the Price MFN, the publishers would
thus have the power to determine which E-book Retailer would succeed and which
would fail.
35.

Without the Price MFN provision, the publishers’ could also

circumvent their agreements with the e-retailers by establishing their own E-book
Retailer, selling their e-books directly to consumers, separately or together. By
charging consumers, through that vehicle, lower prices than its charges consumers
through other E-book Retailers, the publishers could give themselves a competitive
advantage over all other E-book Retailers. Under this scenario, a large portion of
the aggregate agency commission generated through its own e-retailer vehicle
could be used to support below market prices, allowing the publishers to quickly
drive rival E-book Retailer out of business. The Complaint alleged facts to the
effect that three of the publisher defendants already established a joint venture,
which could be used for such a purpose. By allowing publishers to drive rival E19

book Retailers out of business, the Final Judgment’s prohibition on Price MFNs
will have an anti-competitive impact upon the market for trade e-books for a period
of five years. The injury to RoyaltyShare is clear and immanent. With fewer Ebook Retailers, the need for digital transaction services is reduced. Accordingly,
the Final Judgment’s prohibition against the Price MFN provision is anticompetitive and directly injures in RoyaltyShare and Kohn’s interest in the
company. Reversal of the District Court’s order entering the Final Judgment, or the
removal of its anti-competitive provisions, would directly redress this injury by
eliminating the prohibition on Price MFNs.
36.

Shortly after this action was filed in April, 2012, I began participating

in the process established by the Tunney Act that invites public participation in the
District Court’s public interest determination, including submitting a comment
letter objecting to the settlement, filing amicus briefs, and filing a motion to
intervene in this case for the purpose of appealing the Final Judgment. These
actions were taken with the knowledge and approval of RoyaltyShare’s senior
managers, including its Chief Operating Officer and President of Technology
Solutions. RoyaltyShare’s management came to the conclusion that the substantive
provisions of the proposed Final Judgment would have anticompetitive and other
negative impacts upon a relevant market that directly impacts RoyaltyShare’s
business and the businesses of our largest customers. RoyaltyShare’s management
20

believed that an intervention should be sought to redress its injuries and concluded
that I would be the person best-situated to bring to the attention of the Justice
Department and the District Court the anticompetitive impact of the Final
Judgment. If the Final Judgment was to be challenged on appeal, the basis for such
challenge must not be that its entry was against RoyaltyShare’s interest, which it
certainly was, but that the Final Judgment was not in the public interest. It was to
address the public interest that my comments, amicus brief, and intervention for
this appeal have been directed. In fact, the Government in its response public
comments (ECF No. 81 at 18) repeatedly dismissed the arguments of objectors
who had a financial stake in the impact of the Final Judgment precisely because
“the third parties that the Court is directed to consider under the Tunney Act are
the consumers of e-books.” Had the Government or District Court raised the issue
of my standing, I would have submitted an affidavit alleging the additional facts I
herein allege to particularize and support the elements of my standing to appeal the
Final Judgment.
37.

I have served as an advisor and/or investor in several high tech

companies over the last 20 years. Most recently, I have become an advisor to and
shareholder in Zola Books, Inc. Zola Books is an e-retailer of e-books and is a
direct competitor to the Amazon Kindle, Barnes & Noble and Apple iBookstore.

21

38.

On September 4, 2012, I filed an amicus curiae brief after having

received leave of the District Court to do so. The next day, I met with Joseph
Regal, the CEO of Zola Books, Inc., a new venture which had been preparing to
launch an e-retail business to compete with Amazon, Apple and Barnes & Noble in
the sale of e-books to consumers. Mr. Regal had submitted a comment letter to the
Government (ATV-0679) which explained how the agency model removed what
had been a significant obstacle to his entering the e-book market. No longer forced
to lose money on every single e-book sold, a new entrant like Zola Books could get
a foothold in the market based on the quality of its product and services. He also
explained how the Final Judgment would make it more difficult for him to compete
in the e-book market. We discussed the government’s lawsuit against the
publishers and Apple and the impact the proposed Final Judgment would have on
his business. I told Mr. Regal that if the District Court enters the Final Judgment, I
was thinking about filing a motion to intervene for the purposes of appeal. Mr.
Regal encouraged me to do so and that Zola Books would fully support such an
action. Mr. Regal then expressed his interest in engaging me to provide Zola Books
with advice on business strategy and financing. I expressed my interest in helping
Zola Books in any way I could. Soon thereafter we memorialized a consulting
agreement and I made a personal investment in Zola Books.

22

39.

The day after our meeting, September 6, 2012, the District Court

announced its decision to enter the Final Judgment and entered the judgment later
that day. On September 7, 2012, I filed a motion to intervene for the sole purpose
of seeking appellate review of the Final Judgment.
40.

The outcome of this appeal is also of direct concern to me as an author

of, and owner of copyrights in, two books, one of which is published in e-book
form by a wholly-owned subsidiary of one of the settling defendants,
HarperCollins. The e-book is available for sale in the Amazon Kindle e-book store
and other e-retailers. Under my agreement with HarperCollins, I receive a royalty
of 20% of revenues that HarperCollins receives from E-book Retailers like
Amazon on sales of the e-book edition. Thus, the pricing terms on which such ebook is sold by the publisher will directly impact the royalties I earn. If the Final
Judgment has the anti-competitive impact that I have alleged it has, it will increase
Amazon’s monopsony power in the trade e-book market. With such monopsony
power, Amazon will be more likely able to lower the price it pays to HarperCollins
for the e-books it re-sells, including mine. This will directly lower the royalties I
will earn on the e-book which HarperCollins has the exclusive right to resell and I
would therefore suffer an injury in fact directly traceable to the Final Judgment.
This injury would be fully redressed by the elimination of the anti-competitive
provisions of the Final Judgment that I have alleged.
23

41.

In my view, the Final Judgment is having an undue or unlawful anti-

competitive impact upon the market for trade e-books and a harmful impact upon
e-book consumers and the public generally.
42.

For the reasons explained above, the competitiveness of the trade e-

book market is also of direct financial concern to me. My interest in the subject of
this litigation encompasses, among other things, my direct ownership interests in
RoyaltyShare, Zola Books, and the copyright in the e-book published by one of the
settling defendants. Two of RoyaltyShare’s largest customers are defendants in this
action and the Final Judgment has already had a direct impact upon RoyaltyShare’s
business. All of Zola Books’ e-book suppliers or licensors, including all five
publisher defendants are directly affected by the Final Judgment and the contracts
that Zola Books was negotiating with and entered into with the settling defendants
were all directly impacted by the Final Judgment, because the terms of those
contracts are governed by the terms of the Final Judgment.
43.

I am the co-author of Kohn On Music Licensing (Wolters Kluwer, 4th

Ed. 2010), an 1,800 word treatise on the business and legal aspects of the music
business, which follows earlier editions published in 1992, 1996, and 2002. The
book has been cited by the U.S. Supreme Court in Eldred v. Ashcroft, 57 U.S. 186
at n21 (2003); the Second Circuit Court of Appeals in Woods v. Bourne, 60 F.3d
978 (2d Cir. 1995) and Boosey & Hawkes v. Buena Vista Home Video, 145 F.3d
24

481 (2d Cir. 1988); the Sixth Circuit in Bridgeport Music v. Dimension Films, 410
F.3d 792 at f18 (6th Cir. 2005); and the Southern District of New York in Fred
Ahlert Music Corp. v. Warner/Chappell Music, 958 F.Supp. 170 (S.D.N.Y. 1997).
44.

I have testified as an expert before the District Court in In Re

Application of AOL, RealNetworks and Yahoo! (related to United States v.
ASCAP), 559 F.Supp.2d 332 (S.D.N.Y. 2008) (a rate hearing in which I provided
testimony to the late District Judge William C. Conner on how music is transmitted
and marketed on the Internet).
45.

During the course of my 30-year career–working for entertainment,

computer software, and internet companies–I have had responsibility and oversight
for several high profile antitrust matters. These matters directly concerned the
intersections between copyright and antitrust law as they relate to the public
interest in promoting innovation and competition. Each case, like the one before
this Court, involved the adoption by consumers of technology products and
copyrighted works, which operated in conjunction with each other, in a market
prone to attempted monopolization by dominant systems providers.
46.

I have testified before both the Department of Justice and the Federal

Trade Commission on these matters. Transcripts of such testimony are available at
Robert H. Kohn, Hearings of the Federal Trade Commission on the Changing
Nature of Competition (panel on "Networks, Standards, Foreclosure, Strategic
25

Conduct") http://www.ftc.gov/opp/global/bobkohn.shtm (Washington,
D.C., November 29, 1995) (cited in, Antitrust for High Tech Companies (Prepared
Remarks of Susan DeSanti, Director of Policy Planning, Federal Trade
Commission)

http://www.ftc.gov/speeches/other/desanti1.shtm (San

Francisco,

February 2, 1996); and Robert H. Kohn, DOJ/FTC Joint Hearings on "Competition
and

Intellectual

Property

Law

and

Policy

in

the

Knowledge-Based

Economy" http://www.ftc.gov/opa/2002/02/ipsecond.shtm (Berkeley, California,
February 27, 2002).
47.

I am licensed to practice law in California and am a member in good

standing of the State Bar of California. For three years during the 1990’s, I taught
Corporate Law at Monterey College of Law, Monterey, California.
48.

The Final Judgment not only directly injures my personal financial

interests, but others who are directly part of the e-book supply chain, such as
booksellers, e-retailers, independent book publishers, literary agents, published and
unpublished authors, and ultimately consumers and the public generally, whose
interest the Tunney Act was intended to protect.
49.

I believe that my direct financial interest in the outcome of this appeal

is sufficient to support my standing to appeal the Final Judgment in this case and
that I am well-situated to demonstrate that entry of the Final Judgment was
contrary to the dictates of the Tunney Act in that it was not in the public interest.
26

This affidavit was signed on the date below in the city of New York, New
York. I declare the foregoing under the penalty of perjury pursuant to 28 U.S.C. S
1746.
Dated: November 26, 2012

__________________________
Bob Kohn
Chairman & CEO, RoyaltyShare, Inc.

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