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DOJ compares Apple and publishers to big oil in ebooks case

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In its response to recent filings from Apple (s AAPL), publishers and booksellers on its proposed ebook settlement with three publishers, the Department of Justice addresses few specific complaints (PDF; full filing embedded below). Rather, citing the “unmistakable consumer harm that has resulted from the conspiracy in this case,” the DOJ calls on Judge Denise Cote to approve the settlement without a hearing.

Last week, attorney Bob Kohn and the Authors Guild sought permission to act as “friends of the court” in the proposed settlement and filed amicus briefs. We have not yet seen a filing from Judge Cote granting their requests, but both parties are listed as “amicus” on the docket report, along with Barnes & Noble (s BKS) and the American Booksellers Association. However, the DOJ does not respond to Kohn or the Authors Guild in its response.

The DOJ shoots down the argument that ebooks are different from print books but doesn’t elaborate on why they are the same (and doesn’t respond to the criticism that it has failed to take interrelated markets, like those for e-readers, into account). Rather, it says, “Railroads, publishers, lawyers, construction engineers, health care providers, and oil companies are just some of the voices that have raised cries against ‘ruinous competition’ over the decades,” and publishers should not be granted special treatment.

Response to Apple

Last week, Apple argued that the DOJ’s proposed settlement, which it has not joined, affects its interests by forcing it to tear up existing contracts. As such, Apple says it’s entitled to a trial before the settlement is approved. The DOJ says Apple “is not entitled to preclude the United States and Apple’s co-defendants from obtaining the immediate benefits of their settlements, as it is well established that the United States ‘need not prove its underlying allegations in a Tunney Act proceeding.'” (The Tunney Act relates to anti-trust proceedings).

The DOJ claims that “in reality, what troubles Apple is that the decree returns pricing discretion not just to Apple, but also to its retail competitors.”

Response to Penguin

Last week, Penguin argued that the DOJ has not proven that ebook prices across the board rose under agency pricing. Penguin, which along with Macmillan is holding out against the settlement, also provided evidence showing that even prior to agency, Amazon (s AMZN) priced many of its new titles above $9.99.

The DOJ does not respond to this specific point, but rather presents charts (chart 1-PDF, chart 2-PDF) showing that “Penguin did indeed raise its prices as soon as it gained power to do so. “In four weeks spanning the time when Penguin took retail pricing power from Amazon, the average price for a Penguin e-book sold through Amazon increased 17 percent, and the average price for a Penguin ‘new release’ e-book sold through Amazon increased 21 percent.” Here are the DOJ’s charts (1, 2) and accompanying methodology.

Penguin had argued that the DOJ should turn over all of its research on ebook pricing, since that research is apparently the basis for its conclusion that ebook prices rose across the board under agency pricing. The DOJ refuses, citing case law: “There is simply no basis for Penguin’s assertion that the United States must produce internal economic analyses to support its settlement.”

Response to Macmillan

Macmillan echoed Penguin’s demand for the DOJ’s research on ebook pricing and also asked the DOJ to show, as required by antitrust law, that the settlement would not result in Amazon gaining a monopoly. The DOJ responds by saying that there is no evidence that the settlement would result in Amazon gaining a monopoly because of “competition from established companies such as B&N, Google (s Goog), Apple, and Sony (s SNE).”

The DOJ says “the recently announced investment by Microsoft(s MSFT) in B&N’s e-book business, and Sony’s release of a new e-reader, do not reflect any reluctance on the part of sophisticated companies to expand their sales of e-books.”

Response to the ABA and Barnes & Noble

In their amicus brief, the booksellers argued that the number of public comments against the proposed settlement vastly outweighed the number of comments in favor of the settlement. The DOJ responds that “it is not unprecedented for parties to oppose a settlement because they have a stake in an anticompetitive status quo,” and claims “the majority of the comments received opposing the decree did not come from those seeking to represent the public interest, but rather from those that benefited from the conspiracy and that have a vested interest in maintaining the status quo.”

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15 Responses to “DOJ compares Apple and publishers to big oil in ebooks case”

  1. David Thomas


    “The bottom line here is collusion is collusion and the greed factor for a virtual product that doesnt relate to the production cost of said virtual item was manipulated and the players got caught period.”

    – Actually producers under the Agency plan made less per unit — something they gave up to gain control of the product. The manipulation of the price happened at Amazon, where the price was artificially low.

    “Apple lured them into a situation that they more than likely wouldnt have gotten themselves into if it werent for apples desire to supplant Amazon marketshare.”

    — If Apple lured them in as you say, where is the collusion? Collusion implies that all parties participate in a price fix. Publisher’s were more scared of product devaluation at Amazon, and a huge cut in margin whenever Amazon squeezed them to make the wholesale price 4.99, so they could take a 50% cut of the 9.99 price they invented to promote Kindle.

    “In the end Amazon priced ebooks at logical levels that their customers indicated they would pay for. ”
    — That’s not market demand establishing price, that’s a monopoly setting the price.

    “The publishers didnt like that price point and thought to control it in an anti-competitive way.” — By gaining control of the price, publisher’s were able to ensure that prices were uniform across all dealers. This permitted competition between dealers to be fair, considering that in at least two situations and 70% of the market share was dictated BY THE TYPE OF DEVICE.

    “Busted is busted and it is good to see that the consumer is still a part of the product price point.” — Hunh? The consumer dictates a book purchase between books, and rising demand doesn’t affect the price very much at all. The e-book selling for 12.99 at around 15,000 units per year cost the same as an e-book selling for 12.99 at around 150,000 units per year.

    Given that so many free downloads and 99 cent titles sit unread on devices (this is in recent reportage) its hard to argue that price determines demand here.

  2. Arielle Smith

    The ABA and Barnes and Noble make a good point: the comments made against Amazon far outweigh those in support of the company. I thought the DOJ was supposed to take the public’s opinion into account in their final decision.

    • Rebecca

      I hate that they claim only people with a financial interest sent opposing comments. I sent an opposing comment as a consumer who wants to keep the option to buy print books at the physical bookstores I prefer, and I saw a couple of other similar comments as well. True, that’s only a few comments out of 900+ – but I also only noticed a few consumer comments that wanted cheaper e-books as well; there were just not many consumer comments period, on either side, but those that were sent in were not all pro-settlement. Most of the pro-settlement comments seemed to come from self-published authors with a personal dislike for large publishers.

  3. @Peter, that is some fine mental contortions you are working through. There is no logical basis for thinking of the agency agreement and MFN as separate. They were part of the same negotiation. And after this deal was complete, the publishers each went to Amazon and demanded new terms.

    Amazon’s “token” resistance involved turning off all ebooks from certain publishers for days. Amazon does not like giving up sales. Also Amazon has made it quite clear they will lower prices as soon as they have the freedom to do so. Your contention it was Amazon’s choice to raise prices is non-sense.

    • David Thomas

      Your defense of Amazon is understandable, but Peter was correct that MFN and agency pricing, though in the same sales contract, performed completely different functions. Second, you are correct that Amazon did not choose to raise e-book prices for titles from Agency publishers — they still had complete freedom to charge whatever they wanted on non-agency titles. The agency plan is essentially a contract of ownership, which recognizes that the e-book, being dependent on a device for use, is very different from a physical book and the actual responsible owner of the product is the producer/vendor, and nothing of it is actually “owned” by the reseller whether it was Amazon or Apple. The price, therefore, was set by the producer/vendor. MFN, in concert with that power, guaranteed that the producer/vendor would not be able to have two different prices for the same title at different vendors. Studies have shown, however, that agency plan e-book prices overall dropped…the ire from a consumer standpoint is that brand new (and presumably highly desirable) e-book titles by leading creators which Amazon sold below net cost for approximately two years suddenly jumped an average of four dollars. In economic terms, there was a falsely perceived consumer surplus created by the monopoly reseller with their own share of the producer surplus. The producer reset the terms and the defined the dealer’s share of the producer surplus so that it could not be used to deceive the consumer.

      • ricdesan

        The bottom line here is collusion is collusion and the greed factor for a virtual product that doesnt relate to the production cost of said virtual item was manipulated and the players got caught period.

        Apple lured them into a situation that they more than likely wouldnt have gotten themselves into if it werent for apples desire to supplant Amazon marketshare.

        In the end Amazon priced ebooks at logical levels that their customers indicated they would pay for. The publishers didnt like that price point and thought to control it in an anti-competitive way. Busted is busted and it is good to see that the consumer is still a part of the product price point.

        Get used to it publishers. The music industry can teach you many lessons on what NOT to do.

      • @ric

        I think you’re glossing over a major issue.

        If you want to accuse the publishers of collusion to raise prices, fine. $12-$14 for an ebook seems high. It would be entirely reasonable for the DoJ to ask the PUBLISHERS (who are settling) to lower ebook prices, and possibly pay a fine, both of which they can totally do under the current contracts!

        But that isn’t what is happening.

        The publisher’s are being “punished” by agreeing to cancel their current contracts, industrywide, and replace them with new contracts that remove a standard clauses EVERYONE ELSE who sells an ebook (including Kindle Direct self-publishing authors) is required to sign. They are then free to resume jacking up the price of ebooks, only they will probably go even higher because they know Amazon will subsidize prices back down for their own customers, (never mind that it will raise prices for everyone else.

        The settlement doesn’t even attempt to address ebook price fixing.

        The DoJ needs to go back to the drawing board and come up with something that punishes the people they are actually accusing of wrong-doing.

      • Rebecca

        So in other words – let them keep “agency” pricing (pricing the same at all retailers) but the agency price has to be lower than it is now?

        Wish they would have done that. I have a strong preference for print books and physical bookstores, and I absolutely hate the thought of having less options, less places to buy, less choices because Amazon was given too much market power by the government with my own tax dollars. I am absolutely terrified of losing Barnes & Noble and I hate that only e-book consumers have been considered rather than the interests of all book consumers in general.

    • “Also Amazon has made it quite clear they will lower prices as soon as they have the freedom to do so. Your contention it was Amazon’s choice to raise prices is non-sense.”

      Stop drinking the Kindle kool-aid.

      Of course they’re going to SAY they intend to lower prices in the future- promises you don’t intend to keep are a great way to keep selling Kindles!

      But they know fully well that the proposed settlement has big legal loopholes and probably won’t make it past the judge as written. If it does, they can always find another bogeyman to pin the inevitable price hike on.

      Selling ebooks at a loss costs Amazon money, can you really argue otherwise? Any opposition from them is half-hearted at best.

  4. Midwestern Climatologist

    This is outrageously funny because Al Gore (who is about the biggest anti- big oil former U.S. politician on the planet) sits on the board of directors at Apple. Just what is it that Al Gore brings to the table at Apple’s BOD? Maybe Al should take an introductory course in meteorology and his book for the class could be an eBook (but first he’d have to collude with a publishing company like Elsevier to bring one of their books, such as Atmospheric Science 2nd Edition An Introductory Suervey [Wallace and Hobbs 2006] to the iPad)!

    • Apple’s contract included a ‘most favored nation’ clause. Amazon picked insisted on getting this deal too in self-defense. These deals not only raised e-book prices, but fixed them across all retailers. You don’t actually need to look anywhere else the way these contracts were written.

      Apple’s conspiracy was a brazen attempt to interfere with competition so that the market would have a margin that was tenable for Apple. The publishers engaged is this conspiracy to protect their margins.

      • This is the problem- people are mixing up the agency model, AMAZON’S price hike, and the MFN clauses like they are all synonyms. It’s three different things that happened.

        MFN clauses simply states that a reseller can lower prices to match a competitor and the supplier will lower their margin accordingly.

        The agency model is simply an agreement that the reseller will not raise or lower the list price set by the supplier.

        Prior to the agency model Amazon had been selling proprietary ebooks at a loss in order to force customer’s to buy overpriced Kindle’s. Apple’s contracts didn’t prevent this tactic at all, they simply neutered it. The MFN clauses would have allowed Apple to match Amazon’s loss leader price’s without selling at a loss themselves- the publishers would have been required to lower their margins to make up the difference- Amazon and the publishers realized this and went with the agency model as well, ending Amazon’s below cost sales.

        The prices on AMAZON went up, but that was their choice (in spite of token opposition for PR purposes) and the difference went straight into Jeff Bezos’ pocket- not Apple’s, not the publishers’.

        There’s a big difference between fixing prices and taking away a competitors incentive to sell below cost.