Why the Apple e-book trial should be over already: The DoJ has an open-and-shut case

45 Comments

The federal antitrust case over collusion and price-fixing in the e-book industry entered what will likely be its final chapter on Monday, with opening statements in court from the Department of Justice and Apple (s aapl) — since all of the accused publishers have already settled. And while Apple is undoubtedly going to make an impassioned defence of its innocence over the next few weeks, the fact is that the DoJ has what amounts to a slam-dunk case: no matter how you look at it, the company colluded with publishers to keep e-book prices high.

In fact, the government’s case is so compelling that the judge in the trial has already said she thinks it will prevail, despite Apple’s protests to the contrary. In pretrial comments, U.S. District Judge Denise Cote said she believes the government “will be able to show at trial direct evidence that Apple knowingly participated in and facilitated a conspiracy to raise prices of e-books, and that the circumstantial evidence in this case will confirm that.”

Apple: Amazon made us do it

Not surprisingly, Apple has complained that this amounts to pre-judging the case, but it’s not hard to see how the judge arrived at that conclusion: Emails sent from Steve Jobs and other Apple executives to various publishers as they tried to strike a deal make it obvious that the computer company wanted to see a united front from the book industry before it agreed to any terms, and that it essentially pressured publishers to collude in order to achieve that.

Apple-slide-one

In the run-up to the antitrust trial, Apple and the Big Five publishers who were named in the lawsuit tried to make their case in the court of public opinion, and their argument was that while their behavior may have looked an awful lot like collusion, they needed to do so in order to blunt the effect of Amazon’s (s amzn) virtual monopoly over e-books — which they suggested was a far worse danger than cutting a deal with Apple, the underdog in the market.

In an open letter about the case published a year ago, Macmillan CEO John Sargent denied that his company colluded with anyone when it decided to move to what is called the “agency model” of pricing (in which the publisher gets to set the price for e-books, rather than the retailer), and argued that doing this was necessary to blunt the force of Amazon’s hold on the market. At the end of the letter, he quoted Authors’ Guild president Scott Turow:

“The irony of this bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition. This would be tragic for all of us who value books and the culture they support.”

Were consumers harmed?

Inside Apple

Very little of this is likely to be part of Apple’s legal arguments in the current trial, for the simple reason that it would never fly as an excuse for encouraging or facilitating collusion and price-fixing. If the major players in an industry get together and effectively agree on a strategy for keeping prices artificially high, it’s not enough to say “But your honor, we had to do this because our competitor is too large and it was the only way we could compete with them.”

As we’ve tried to point out in posts about the accusations against Google for its behavior, antitrust law in the U.S. isn’t designed to help prevent competitors from being squashed by a large player in an industry — even if that player has what amounts to a monopoly position. The key point is whether that particular company’s behavior alters or damages the marketplace in a way that harms consumers. And when it comes to that, the DoJ is on rock-solid ground.

As the Justice Department pointed out in its opening statement, the price of e-books climbed by as much as 50 percent in the weeks following Apple’s agreement with the Big Five publishers. Those two groups can — and have, on many occasions — make the argument that keeping prices higher than they would have been otherwise is in the long-term interests of the publishing industry (although that is also debatable), but that’s not what the DoJ or the court is interested in.

Apple-slide-two

Apple took a risk, and it lost

Apple’s only argument is that while e-book prices rose and stayed high for some time as a result of its actions, they eventually came back down — but the judge is unlikely to find that persuasive either. In effect, Apple would be saying: “Yes, we colluded with publishers, but our attempt to keep prices artificially high eventually failed due to other market conditions we were powerless to affect.” That’s admitting guilt, but hoping to get a pass anyway.

So why is Apple bothering to fight this case, even though it knows that it will probably lose? Some of it could be sheer bloody-mindedness, but the company may also be worried about the potential implications of the ruling as it pertains to what are called “most-favored nation” agreements, which give partners the right of first refusal when it comes to pricing. As Zach Seward notes at Quartz, these agreements are everywhere in the entertainment business, and if they amount to collusion then Apple could find it harder to strike deals in other areas.

The bottom line is that Apple engaged in risky behavior with publishers because it felt it had to do so in order to break Amazon’s iron grip on e-books, and offering higher prices to publishers if they cut a deal with the company seemed like the best way to do that. Apple may even have been correct in that assessment — but collusion is still collusion. The only question now is how large the judgement against the company will be in terms of damages.

Post and thumbnail photos courtesy of Shutterstock / tlegend

45 Comments

Rowena Cherry

Woe betide anyone who tries to charge higher prices than the business entity that can afford to sell at the lowest price possible, regardless of copyright law.

The DOJ is wrong to take Amazon’s preferred prices for ebooks as the baseline. Other publishers (some members of EPIC) sold ebooks for years before Amazon entered the ebook selling business.

If Amazon was not the first, why is Amazon’s price assumed to be the standard? If $9.99 was not the original price but rather the price recommended as a loss leader to stimulate sales for the e-reading hardware, why does the DOJ case rest on “raising prices”?

The baseline should be the price that ebooks are sold by businesses that do not also sell a reader.

Indie Publisher

Collusion to fix prices across the market is anti-trust. Price-fixing does not allow market forces to dictate prices and harms the consumer. Hence, this lawsuit. Outcome, results or Amazon’s business model are irrelevant. The attempt to fix prices is the only relevant issue.

I am an Indie publisher. Amazon never told me how much to charge for my books. Amazon paid a wholesale price (based on a percentage of my retail price) to which I agreed, then sold the books at the price they chose (not less than their cost), and paid a negotiated royalty percentage (which I accepted) for each book sold. This was for books printed on paper.

As for e-books, how do you sell digital content at less than cost in the long term? There is almost no material cost to produce a digital book except for storage and the initial capital investment in the hardware and software. The rest of the costs are for writing/purchasing the rights and formatting, which amounts an increasingly smaller percentage for each e-book that is sold. Amazon offers attractive royalty incentives for me to keep e-book prices below $9.99, which I can accept or decline. This is a completely legitimate market practice. Amazon never dictates what prices I must set for the books I publish upon threat of not doing business with me. That would be price fixing.

StevenN

“There is almost no material cost to produce a digital book except for storage and the initial capital investment in the hardware and software.”

Do you value your time creating the material you publish? You know darn well actual production costs are actually a very small part of printing, especially in any volume. Real book or e-book, the actual production costs are small compared to the price of most books. The value is not in the actual paper but the content ON the paper or the screen.

When Amazon is dumping e-books books at 50% BELOW their cost, they are devaluing the content on both the digital screen and the paper. This hurts the industry and may force publishers to window their material causing significant harm to the consumer. Makes you wonder why the DoJ did not go after the monopolist player doing these behaviors. They had the wrong target.

In this case, there has been zero evidence presented to point to collusion to fix prices. Apple was offering a much better deal to the content owners and there is no law against maximization of profit even in books. Does Apple like the agency model? Absolutely. They use in on Apps and Music. They really wanted it on books as well. That is not illegal. MFN clauses are not illegal and are actually encouraged to allow new entrants to compete with established players.

Dennis Saeva

Amazon bought books whole sale and sold them discounted, this is how things usually work. The $9.99 price range was what Amazon chose to sell books THEY paid for at cost. Then comes the Apple introducing the Agency Model to publishers and having it change the market. That is what this is about. Who is affected – book readers. But selling for retail, the book publishers made cash, Apple did not -this is where this all is relevant. Apple negotiated a deal which the publishers loved of course in which they made more money. Apple did as well because they initiated this change to Agency Model. Amazon is going to do the same as they were publishers wanting it – Amazon did not create this Agency Model. It is up to the court to decide if this Agency Model is illegal. What Apple did sure looks like collusion. It did what collusion does, it changes the market and raises prices for consumers. This is about breaking the law and tempting publisher who are already is selling lots of books at wholesale – to make more money and screw the consumer. Amazons practice of selling books at $9.99 or below cost has nothing to do with this. If that is wrong for any reason, I am sure the courts would have done something about it already or will soon.

Ben

The key here is publishers admitted their own guilt. Apple has not and nor should they. Apple provided a platform alternative to Amazon’s pricing practice and that is all there is to this BS case. Publishers were not going to join Apple’s platform/agency model unless they can get more publishers on board. IF this is colluding with Apple then by the same faulty logic, their entire music model is shit too. By this definition, wall street and bankers should be on trial for a lot of stuffs. Yet we don’t see that happening…I wonder why?!

The only thing DOJ is proving here is publishers are guilty or force to collude due to Amazon’s destructive pricing and simply pinning them up against Apple as witnesses.

I said this elsewhere, Apple can change their ebook rules now either by stop selling consumer ebooks for a year or require all ebooks be created by iBook Author. There will be no more colluding BS and publishers can cry more about doing even more work and get even less ROI with Amazon.

I think we are kidding ourselves if anyone thinks Amazon is a victim here, which is what DOJ is trying to portrait them as. We are really kidding ourselves if anyone thinks readers are victims here as well…the ebook pricing under agency model is still cheaper than new HC books.

John Nemesh

The REAL reason Apple is fighting this case, is because, WHEN they lose, they will have further investigations and litigation as to their business practices with the movie and music publishers! This is not the only market where Apple has come in and colluded with industry execs to fix pricing!

Pablo

Lot of Apple/publisher defenders on here it seems. I come from this from the angle of the consumer which is where this case will actually get proven or disproven.

As a real consumer of 100’s of books a year, I know for a fact that the Apple+5 actions affected my pocket book. Prices went up, and unnaturally so. I took screenshots at the time in case I ever wanted to blog about it (but was too lazy to do so).

Now, I think folks are trying to make the argument here and elsewhere that that is short term pain that I should have to suffer in order for there to be a competitive market in the long term, but book prices will not come down in the long term, it’s about making the device market competitive so that book prices won’t HAVE to come down, even when the e-books are decidedly cheaper to produce.

Lee

You miss the point…anti-trust laws are about companies CORNERING the market so that consumers have no choice (which was what Amazon did…and did it so that they could also force people to buy their Kindle to read their dirt cheap books).

Amazon was acting in an anti-competitive manner, and THAT IS ILLEGAL.

The price paid by consumers, regardless of being too high or too low, is NOT what the law is about. It is a side effect, whereby, EVENTUALLY when there is no other competition at all, the remaining one or two vendors (e.g. Amazon) could then charge ANYTHING they wish since they had “bought” the market.

Hence, any decent third year law student could argue this case for Apple and beat the pants of off these dimwitted DOJ attorneys.

The LAW is on Apple’s side…and in court, THE LAW IS WHAT RULES.

Even if a few judges are so anti-apple and try to make the case and rule against Apple, it will be appealed, and Apple will ultimately win.

Pablo

Lee, let’s agree to disagree and we’ll see how this turns out. I guess you’re already planning your defense that the judges are “anti-Apple”.

As I said above you are making the point that I should pay more now in the short run in order to defend a theoretical long run of more competitiveness. For the record, it’s not illegal to “corner the market” (i.e., be a monopoly), it’s illegal to abuse such a position (which Amazon is less likely to do, as book selling, and even device selling, is no longer their value proposition…their #1 corporate mandate is customer satisfaction).

As a side note, there is no requirement to buy a Kindle device to read Amazon ebooks, even DRM’d books. There is a Kindle app available across all device types (including Apple’s). Not sure if that is true of the iBookstore (it wasn’t last year).

TomM

You talk about choice but I see Apple’s agreeements with the publishers removing my choice. Yes, I could go to any of the retailers and buy a book from Harper Collins but it did not matter which retailer I went to as the books were always the same (higher) price.

So as a consumer I lost the ability to shop for a book based on who had the best price. Retailers lost the ability to compete against other retailers on price. I am not sure how that promotes competition.

keninca

Apple “colluded” with publishers to allow them to set their prices, but not to allow them to all set their prices the same. Amazon was forcing a price on publishers, which is more of an anti-trust violation, as they controlled most of the market.

Collusion in a specific market would be where all the participants agree not to compete, but that’s not the case here. Apple was trying to force competition, but letting the market decide pricing, and not Amazon.

rmurante

“Amazon was not forcing a price on publishers”, but they were sure as hell forcing publishers to lose sales and higher profits on hardcovers and paperbacks. If Amazon forces publishers to window their hardcovers and paperbacks, doesn’t that hurt the ebook consumer? Amazon real goal is very selfish and with their market share is probably monopolistic: Shift more and more consumers to ebooks from paper by selling below cost and at the same time prevent other competitors from breaking-in. Ultimately, they plan to gather enough consumers into to such large base (also using their kindle devices given away at cost too) to lock-in greater than 90% of the market. When you use your other business revenue to keep your competitors out of a market , you are cheating.

Dano Williams

This article does not seem to address the facts of the case. That ebook prices rose after the advent of the iBookstore is not proof of price collusion. As other commenters have mentioned above, Apple simply has a different pricing model (that of the App Store) than Amazon has with the big publishers (a wholesale/list model). In the Apple model, publishers set their price and Apple sells at that price, period. Revenue is a standard 70/30 split. In the wholesale model, publishers sell copies to the vendor (at, say, 80% of the list price) and the vendor is free to sell at whatever price it decides, which may or may not be below cost. Somewhat ironically, Amazon itself uses the Agency model when it’s dealing with independent self-publishers through Kindle Direct Publisher. Self-publishers set their price, just as the Big Publishers do at Apple, except they’ve learned that they’re unlikely to sell many copies above a certain price level!

This kind of case was inevitable, since Amazon believes prices should be at one level, and publishers believe it should be at another. Amazon was willing to use the wholesale model to price ebooks where it thought the market was, regardless of the effect on its margin. Apple *did not need* to collude with publishers to convince them that their prices should be higher. Publishers wanted that already and the Apple model was a simple way to get the price they wanted.

Whether the Apple model is “good for consumers” is an open question, but it is unquestionably simple and consistent for both publishers (or developers in the case of the App Store) and for Apple itself. Is it price fixing? Absolutely. Is it collusion? That is unproven.

Todd

Why doesn’t anyone mention Amazon’s predatory pricing practices here. Selling below cost to push competition out is against antitrust laws. Hmm, maybe “Apple” in the headline will generate more buzz, kinda like the recent trip to the hill over taxes.

John Nemesh

because Amazon did not conspire with the publishers to artificially hike prices. They are allowed to resell goods for whatever price they wish…or they were until Apple and the big 5 publishing houses decided to switch to an “agency model”.

This would be akin to retailers suing Wal Mart because they have lower prices!

Glen Carter

I know you are desperately trying to defend Apple, but you`re really not getting this.

Todd

Glen & John,
Walmart makes a profit and enjoys economies of scale. Bad for “Mom & Pop” shops and American labor but it is what it is. Consumers can choose for a better experience, etc. with the “Mom & Pop” shop. Unfortunately many do not. Amazon is selling below cost and not making a profit – effectively tanking a market. That’s anti-competitive. Check it out.

Guest

This should be about long-term vs short-term. While in the short-term there may have been price increases, creating a market without a monopoly will over the longer term help prices and the consumer.

Tom

You might make the case that Apple had nothing to do with any price collusion that the publishers may or may not have done.

Their plan was publishers set the prices and Apple gets 30%. Which differs from Amazon only in that Amazon was forcing the publishers to cap their prices at $9.99. So how can you say Apple was colluding to raise prices when they deliberately chose to let any publisher set whatever price they chose. High, low, whatever.

Yes that caused prices to go up, but that’s the result of a free market as opposed to a market that squooshed was under Amazon’s iron boot.

Mark

Mathew,

I am with Tom. “Apple’s only argument”… is the publishers may or may not have colluded but they weren’t involved in either the collusion or price fixing — they were simply dictating their business terms… aggressively as usual… and that’s not illegal.

Frank Skornia

Perhaps you need to study up on the history of this issue before commenting. Amazon was not “forcing the publishers to cap their prices at $9.99”. Amazon was buying the books from the publisher at whatever wholesale price the publisher wanted to sell them at (most figures at the time pegged that around $13). Amazon then turned around and sold that book to the consumer at the price they chose. That is how the typical wholesaler->retailer->consumer system works. Once Amazon had paid the wholesale price, they’re entitled to sell that that product at any price they’d like, even at a loss. The only person they’re responsible to answer to for that decision is their consumers (who love it) and their shareholders (who may worry about the profit-margin).
What happened with agency-model is that the wholesaler (the publishers) essentially told the retailer (Amazon), you must sell this at this price, and only at this price because I don’t like you selling them cheaper.

Lee

Anti-trust issues (which if I remember my childhood history classes was the Sherman Act), was about cornering a market at the exclusion of others!

Apple had no market, and would not get the majority of the market by doing this.

Amazon should be targetted for anti-trust violations since it had 90% of the market, and was doing so by selling e-books BELOW their cost…THAT IS ANTI-COMPETITIVE BEHAVIOR! Just so that they could sell their e-readers.

Apple proposed a different selling model, and though the pricing to consumers may ultimately be higher, this wasn’t even PRICE FIXING since it would be the publishers who still got to decide what the retail prices would be (not Apple).

This is a slam-dunk case for Apple, not the other way around unless you are patently anti-Apple.

MarkS

I think having set comments prepared for tweeting could be considered “patently anti-Apple.”. I do hope this doesn’t become a standard in the world of OPINION writing.

Vandrvekn

What Amazon did or didn’t do is irrelevant to the case.

Five publishers colluded to raise the retail prices of their e-books. Apple was one of the retailers, and acted to facilitate the collusion.

whatdoiknow

Your whole theory for a slam dunk case seems to be: Apple entering field + higher prices = antitrust violation. i am no antitrust expert but i don’t think it is that simple.

Amazon had a monopoly on ebooks. it sold 9 of 10 ebooks, and sold them for 9.99, often at a loss. this is incontrovertible and is classic monopolist behavior, keep prices low for awhile so competition can’t break in. then when you’ve conquered the field utterly, raise prices. Amazon took a loss on ebooks for volume and to sell Kindles.

Apple came in and said here’s an alternative to Kindle. You, publishers, set the prices. the publishers set higher prices than 9.99. even if part of apple’s sales pitch to publishers was, hey use us and you can charge higher prices, i don’t think that automatically equals antitrust violation.

Apple may have violated antitrust laws; I don’t know. But the government will need to show that Apple colluded to set prices, not that it offered a different and credible distribution for ebooks that could pose a threat to Amazon thereby allowing the publishers the freedom to charge more.

whatdoiknow

As an example, pretend you’re a company trying to break into the banana market, which is dominated by Dole, which sells bananas at 2.50 per pound and insists retailers sell it at no more than 2.53. this limits competition because the margins are so low it only makes sense for a company as big as Dole. it’s consumer friendly in one sense because the prices are low. but there’s no variety and no competition.

but you are an intrepid banana visionary that wants to sell bananas grown in another part of the world using better methods. you go to the retailers and say, hey buy my bananas for 2.5 per pound, and charge whatever you want, you want to charge 3.1, go ahead, i won’t insist you charge 2.53 like Dole. i will advertise the heck out of these bananas as superior to Dole’s and the demand will allow you to charge more. well, the new bananas are selling like crazy because you and the retailers are marketing the heck out of them. the result of course is that the average prices of bananas rise from 2.53 set by Dole.

is that an antitrust violation?

Waynerro

This is the situation I see. I don’t understand where this antitrust stuff comes from when Amazon was clearly pricing their ebooks below a profitable price.

Waynerro

I forgot to mention that while Amazon pricing below profit is not collusion, it is damaging to the market.

I see Apple and the publishers as trying to save the market before it collapsed under the weight of Amazon. “We can’t keep selling these books at a loss.” seems more like desperation that it does collusion.

Look at how few companies are able to make money on the internet and you might be able to see how dangerous it is to price things below a profitable value.

Vandrvekn

Your analogy is wrong. Apple and Amazon are retailers.

Imagine a city where Amazon is a huge supermarket. They buy bananas from 6 different big producers at varying wholesale prices, and sell them all for $1.00 a pound. They make very money on their bananas.

Apple is another supermarket that is just starting to sell bananas. They don’t think they can compete on price, so they go to the big producers and convince 5 of them not to sell bananas at wholesale prices to anyone. Instead, the big producers will require that all retailers must sell bananas at a price set by them. Bananas are now an average of $1.50 a pound to the consumer.

The publishers and Apple colluded to raise e-book prces. That’s the violation.

Roberto Javes

This situation is completely different. Publishers decide what price they sell to Amazon at. Often it is $10, sometimes more. THEY set the price, and they get that exact amount for every e-book copy. Amazon then sells each e-book copy at whatever price IT wants to. This does not harm the publisher or their margin at all. The publisher still gets whatever flat rate they require from Amazon.

The reason publishers don’t like it is because they are worried people won’t want to buy their high-priced, high-margin hard back books anymore. Too bad! Learn to compete. Or refuse to sell Amazon your books if you really hate their model so much.

StevenN

I don’t think you read what you wrote:

“Amazon then sells each e-book copy at whatever price IT wants to. This does not harm the publisher or their margin at all.”

And then a couple of lines later:

“The reason publishers don’t like it is because they are worried people won’t want to buy their high-priced, high-margin hard back books anymore.”

Does Amazon hurt the publishers margin or not. You state both cases that Amazon’s pricing has no impact on publishers (and authors) profits and then you deride publishers for complaining Amazon’s dumping of books hurts their higher margin hard backs.

What one of your statements do you mean?

Glen Carter

To show collusion is exactly what is being sought. The other publishers have already admitted this occurred.

Tim F.

No, they did not. They settled with no admission of guilt to any charges.

And that leads to the primary reason Apple is fighting this: they’ve already been penalized before the trial began in the form of these contracts being ripped up. All they risk now is fines of 10s to possibly low hundreds of millions… chump change. So why wouldn’t Apple fight it?

Also, the settlements tore up the contracts for X number of years (5, I believe). As soon as that period is over, everyone will immediately go back to them.

fredhstein

Hi Mathew:

Just focusing on the chart of prices pre april fools, and post:

1) You say prices jumped by as much as 50%. I see that the average went from just over $8 to just under $10, or about 20% (my eyeyball estimate). Just another view of the same data.

2) Pre and post: Pre prices were tightly clustered – not typical of an ‘open market’. Post prices were highly dispersed – indeed some new lows and well as new highs – typical of an open market.

Roberto Javes

Some publishers went from about $8 to about $12. Thus, about a 50% increase in some cases.

StevenN

Some publishers on some books went up 50%. Some publishers on many books went down in price and after stabilization (about 9 months or so) the average price was lower by 5-10%.

Pablo

Nice summary, and as a book lover and e-book buyer, I agree with your conclusion. When I saw/see pricing of e-books being more than paperbacks, I get a bit furious with the (what I considered) unnatural price tiering.

The extra happy news for the publishers, is that their pricing tactics forced a 40+ something year old book lover who’s bought books all his life, to teach himself how to bittorrent. Now look what they’ve wrought….

Lee

Pablo, you better go back to school and learn about the Sherman Act.

Whoever (including lawyers) that think this is open and shut anti-trust (or price-fixing) case against Apple, is really incompetent, clueless, anti-Apple, and/or can say a bold-face lie as good as Jay Carney.

The DOJ folks should be ashamed of themselves.
Then again, so should Jay (and the prior baboon mouth piece too for the WH).

How do some people live with themselves?
More amazing, is how can OTHER people live with these people?

Matt Ackeret

So you’re stealing. Why not just ripoff the books from the bookshelves of the book store? You’re doing the exact same thing.

Roberto Javes

Not quite the same. Stealing from the book store means the book store has lost an actual physical object with a real value that a customer will not be able to purchase.

A person who refuses to purchase a book at unfair prices downloading a digital copy in no way harms other customers’ ability to purchase, and does not deprive the retailer of a real object with inherent value, or of a sale that would not have taken place anyway.

Whether it’s ‘right’ or not is another issue, but it is not the same.

StevenN

No, it is exactly the same. You are depriving the owner of the material due compensation.

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