Reality Bites: DOJ takes down Apple, publishers ebook defenses

Since the Department of Justice stood up for fans of digital books a few months ago and sued the major publishers and Apple over their 2010 conspiracy to raise prices, the amount of whining, spin and flat out lies emanating from some of the publishers and Apple has been both impressive and depressing. That so many journalists and bloggers who should know better repeated much of this truthy crap storm is even more depressing.

So it was like a breath of fresh air yesterday when the Department of Justice released, along with some 868 comments it received, a powerful and straightforward brief refuting much of the garbage that lately passed for analysis and history of the ebook market. The whole 66-page brief (PDF) is worth reading — actually should be required reading for reporters and bloggers covering the issue — so I’ll limit myself to highlighting just a few key points. To start, the brief offers a simple, concise explanation of what went wrong:

When Apple launched its iBookstore in April of 2010, virtually overnight the retail prices of many bestselling and newly released e-books published in this country jumped 30 to 50 percent—affecting millions of consumers. The United States conducted a lengthy investigation into this steep price increase and uncovered significant evidence that the seismic shift in e-book prices was not the result of market forces, but rather came about through the collusive efforts of Apple and five of the six largest publishers in the country. That conduct, which is detailed in the United States’ Complaint against those entities, is per se illegal under the federal antitrust laws.

It’s really as simple as that.

Among the many detailed refutations and take-downs in the brief, the main one I want to focus on is about the role of Amazon. Recall that for more than a decade, the ebook market was nearly moribund. It wasn’t until November, 2007, when Amazon introduced its Kindle ereader and related ecosystem that the market exploded. A critical component, of course, was the deep discounts Amazon offered on some Kindle books, although that was far from the only innovative and important feature that helped the platform succeed where so many others had failed.

Publishers and their allies have centered their defense on outlandish claims that Amazon was simultaneously discounting them to death (even though they still had full control over how much Amazon paid them) and creating a monopoly to rip off consumers (even though Amazon’s entire business was predicated on low prices).

The Justice Department’s brief offers at least three powerful rejoinders:
-Amazon wasn’t do anything wrong
-The ebook market was vibrant and competitive
-”He hit me first” isn’t actually a viable legal defense

First, the Justice Department noted that it investigated allegations against Amazon and found no evidence of predatory pricing or other illegal conduct. Amazon’s ebook effort was consistently profitable, as only some ebooks, such as best sellers, were sold at $9.99, the money-losing price point so hated by publishers.

“Loss leaders,” two-for-one specials, deep discounting, and other aggressive price strategies are common in many industries, including among booksellers. This is to be celebrated, not outlawed. Unlawful “predatory pricing,” therefore, is something more than prices that are “too low.” Antitrust law prohibits low prices only if the price is “below an appropriate measure of . . . cost,” and there exists “a dangerous probability” that the discounter will be able to drive out competition, raise prices, and thereby “recoup[] its investment in below-cost pricing.” Brooke Group v. Brown and Williamson Tobacco Corp., 509 U.S. 209, 222-24 (1993). No objector to the proposed Final Judgment has supplied evidence that, in the dynamic and evolving e-book industry, Amazon threatens to drive out competition and obtain the monopoly pricing power which is the ultimate concern of predatory pricing law. The presence and continued investment by technology giants, multinational book publishers, and national retailers in e-books businesses renders such a prospect highly speculative. Of course, should Amazon or any other firm commit future antitrust violations, the United States (as well as private parties) will remain free to challenge that conduct.

Second, the agency reviewed some of the history of the ebook market after the Kindle arrived and before the illegal price-fixing conspiracy, which has been the subject of some of the most ridiculous propaganda from Apple and the publishers. And what was the condition of that market? Highly competitive and filled with innovation. Barnes & Noble, for example, not only had already introduced its popular Nook reader and garnered over half of ereader sales, but Google and Apple were far along in planning to launch their own offerings as well. Color ebooks, to pick one particularly silly example offered by Apple, were coming soon whether or not publishers colluded to raise prices.

The idea that somehow Amazon could now gain a monopoly is even sillier. The company has only a fraction of the profits and cash flows of its competitors, Apple, Google, Microsoft and Sony. Barnes & Noble was in a bit of financial turmoil earlier this year but got a $300 million injection from Microsoft as part of a wide-ranging alliance and remains a highly competitive number 2 in the market.

Third and finally, even if Amazon was in the midst of some heinous scheme to monopolize the ebook market, U.S. law still does not permit a bunch of companies to get together and agree to raise prices.

When Congress enacted the Sherman Act, it did “not permit[] the age-old cry of ruinous competition and competitive evils to be a defense to price fixing,” no matter if such practices were “genuine or fancied competitive abuses” of the antitrust laws. See United States v. SoconyVacuum Oil, 310 U.S. 150, 221-22 (1940); see also, e.g., FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411, 421-22 (1990) (“[I]t is not our task to pass upon the social utility or political wisdom of price-fixing agreements.”). Competitors may not “take the law into their own hands” to collectively punish an economic actor whose conduct displeases them, even if they believe that conduct to be illegal. See FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 465 (1986) (“That a particular practice may be unlawful is not, in itself, a sufficient justification for collusion among competitors to prevent it.”); Fashion Originators’ Guild of Am. v. FTC, 312 U.S. 457, 467-68 (1941) (rejecting defendants’ argument that their conduct “is not within the ban of the policies of the Sherman and Clayton Acts because the practices . . . were reasonable and necessary to protect the manufacturer, laborer, retailer and consumer against” practices they believed violated the law (internal quote omitted)); Am. Med. Ass’n v. United States, 130 F.2d 233, 249 (D.C. Cir. 1942), aff’d 317 U.S. 519 (1943) (“Neither the fact that the conspiracy may be intended to promote the public welfare, or that of the industry nor the fact that it is designed to eliminate unfair, fraudulent and unlawful practices, is sufficient to avoid the penalties of the Sherman Act.”). Thus, whatever defendants’ and commenters’ perceived grievances against Amazon or any other firm are, they are no excuse for the conduct remedied by the proposed Final Judgment.

No excuse, indeed…

(please note: Comments are moderated. Please keep it clean and relevant)

  • shockme

    You also aren’t allowed to engaging in dumping to wipe out your competition. This is just Amazon doing a Harvard drive-by.

  • RedMercury

    Well done, shockme. Don’t even bother reading the articles, just keep spewing the same rhetoric over and over again.

    You can discount your offerings for below cost as long as you’re not losing money as a whole. The idea behind “dumping” is you accept losses in order to drive your competition out of the market. But the reality is that Amazon made money by selling e-books, even when they offered discounts for certain books that ended up being sold below cost. If you’re making money selling a product, how can you be “dumping?”

    The argument was that, “Gosh, Amazon might have become a monopoly–they were well on their way–and we had to do something because if they became a monopoly they might use that monopoly power to raise prices!”

    Sorry. There’s too many if, mights, and maybes in there. Performing an illegal act in order to counter an illegal act that might occur is not acceptable behavior. “He’s carrying a gun! I better lock him in the closet just in case he decides to shoot someone!”

    By the way, if Amazon was going to become a monopoly, why did they have all these competitors in Sony, B&N, Google, and Microsoft? Wouldn’t these people have looked at the market and said, “Well, Amazon has it tied up. Why throw good money after bad?”

    For me, the PDF has two good quotes. First, the Steve Jobs quote, “The customer pays a little more, but that’s what you want anyway.” (footnote, page 53) So Apple was well aware of the plans, which makes them a co-conspirator. My other favorite is the response to Apple’s complaint that this agreement will put all eBook agents other than Amazon in peril: “Apple is not entitled to retain the benefits of any collusive agreement, much less one it participated in directly.” It’s like the kid who shot his parents and then asking the court to take pity on him because he’s an orphan.

  • http://twitter.com/ghodagadi Ghodagadi

    I think Apple should just exit the ebook market and focus on video instead.

  • Reality

    The problem with this “analysis” is that it misses one very important point. It does not matter if the Big Publishers colluded – they do not have the power to control the market. The Agency model simply placed control of the retail price for the product in the hands of the publishers of that product. This is done all the time in the various markets – why should Publishers be barred from choosing how they want to sell their product? If the Publishers believe lower prices on e-books hurt their business they have every right to refuse to sell through a company that insists on setting prices lower than they feel the product should sell for – and to sell through another retailer who will agree to their terms. The fact is that there has been no harm to consumers – not being able to buy a specific book at a low price is not harmful to consumers – pick another book.

  • RedMercury

    It does not matter if the Big Publishers colluded – they do not have the power to control the market.

    What?!!

    So what you’re telling me is that it’s okay if the top 5 booksellers get together to set the terms that all people who sell ebooks will have to pay?!

    So, I suppose, it’s okay if the top 5 gasoline refiners got together and agreed on a price for gasoline, right?

    Competitors cannot collude. Period. It’s illegal. It doesn’t matter if they didn’t “like” how the market was working. It doesn’t matter if they’re afraid of one company gaining too much power. They cannot get together in a smoke-filled room and decide that they’re going to band together.

    That’s what this is about. The publishers and Apple got together and came up with a way to mess with Amazon. It has nothing to do with the benefits of an Agency Model versus a Wholesale model. That’s just a smokescreen.

    The problem for the DOJ is that the damage is done. How do they undo the damage? How do they restore competition? And the answer is that they have to undo the contracts that were illegally made and make sure that the new contracts enable competition. Those new contracts can still be an Agency model if the publishers so choose. Of course, the publishers made more money from a Wholesale model, so they may decide not to go in that direction.

  • shockme

    People are somehow grievously harmed paying $2 more for a book? Look at all the brick and mortar stores driven out of business by Amazon’s mail order operation for physical books. Now Amazon decides to save money on physical shipping and warehousing by selling ebooks at discounted prices.

    Does Amazon encourage the use of the e-pub standard? No they don’t. They need a huge share of the market to make this low-margin scheme work. Next they will disrupt the publishers themselves without doing any curation or editing of the titles.

    Ironically, by then the novels will be worth exactly what Amazon charges for them. They won’t ever have to raise prices. The books won’t be worth much and no one but Amazon will make any money of books. It all sounds very efficient and good for the consumer, doesn’t it?

  • shockme

    Well done deleting my more substantive reply to you.

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