Weekly Update

The Justice Department thinks different

Last month, the judge hearing the U.S. Justice Department’s e-book price-fixing lawsuit against Apple and two leading publishers set the trial date in the case for June, 2013, dashing the hopes of the defendants for a quick resolution of the charges. This week, the Wall Street Journal published an op-ed by U.S. Senator Charles Schumer calling on the Obama Administration to drop the case and to “reassess its prosecution priorities.”

As the senior Senator from New York, Schumer represents a big swath of the U.S. publishing industry, a reality he acknowledges in his op=ed, so to some extent he was simply sticking up for an aggrieved home-town constituency. But Schumer is also a key administration ally in the Senate and a member of the Senate Democratic leadership, which ratchets up the political stakes in the case by several notches. He is also member of the Senate Judiciary Committee and sits on its Antitrust, Competition Policy and Consumer Rights Subcommittee, which writes antitrust laws and has oversight of the Antitrust Division of the Justice Department, which means the Department cannot simply ignore his concerns.

In his op-ed, Schumer calls the Department’s action against Apple and the publishers “unsettling” and suggests it will strengthen Amazon’s “dominant position” in the e-book market to the detriment of publishers, authors, and ultimately readers.  “As our economy transitions to digital platforms, we should be celebrating and supporting industries that find ways to adapt and grow,” he wrote. “I am concerned that the mere filing of this lawsuit has empowered monopolists and hurt innovators. I believe it will have a deterrent effect not only on publishers but on other industries that are coming up with creative ways to grow and adapt to the Internet.”

Those concerns largely echo the objections raised by Apple and the publishers in their respective formal responses to the government’s complaint in the case. But there are signs the Justice Department is working from a very different script that could prove even more unsettling to the publishers and other traditional media providers than Schumer and the defendants realize. And it concerns what the government seems to presume was the motive behind the alleged price-fixing.

In the government’s telling, the publishers were less concerned with raising the price of e-books per se than in preserving their dominant positions atop the publishing industry hierarchy.

From the complaint:

The Publisher Defendants believed the low prices for newly released and bestselling e-books were disrupting the industry. The Amazon-led $9.99 retail price point for the most popular e-books trouble the Publisher Defendants becasue, at $9.99, most of these e-book titles were priced substantially lower than hardcover versions of the same title. The Publisher Defendants were concerned these lower-ebook prices would lead the the “deflation” of hardcover book prices, with accompanying declining revenues for publishers.


The Publisher Defendants also feared that the $9.99 price point would make e-books so popular that digital publishers could achieve sufficient scale to challenge the major incumbent publishers’ basic business model. The Publisher Defendants were especially concerned that Amazon was well positioned to enter the digital publishing business and thereby supplant publishers as intermediaries between authors and publishers.

The aim of the publishers, in other words, wasn’t so much raising prices as staving off disruption from new, digital entrants by preventing price deflation from becoming a wedge those new entrants could use to establish their own niches in the business.

The publishing business, moreover, may not be the only traditional media business where the Justice Department is focused on digital disruption and on whether incumbent firms are acting illegally in their efforts to stave it off. The Department’s current investigation of the cable TV industry seems very much focused on those same questions.

The issue in the cable TV case is not price fixing but the cable operators’ use of most-favored nation clauses in licensing contracts with the networks that discourage programmers from making their content available to new, over-the-top streaming services. The thrust of the two investigations is the same, however: to see whether incumbent media providers are abusing their dominant positions within traditional distribution chains to squelch competition arising in new, digital distribution chains.

So, while the Justice Department will no doubt take Sen. Schumer’s concerns seriously, as his position requires, they may be talking past each other.



Question of the week

Should the Justice Department continue its lawsuit against Apple and the publishers?