Should Justice Drop the Apple Ebook Lawsuit?

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Mark Lennihan / AP

The Kindle Fire is shown at a news conference on Sept. 28, 2011 in New York.

When the news of the Department of Justice’s antitrust suit against Apple and five of the nation’s largest book publishers became public earlier this spring, it took many by surprise. The suit accused Apple and the publishers of illegally colluding to resist Amazon’s aggressive strategy of pricing many new and bestselling books at $9.99 — well below the prices charged for hardcover copies and below what many in the industry say it costs to produce those volumes.

The popular conception of an antitrust suit involves the government going after a corporation that’s using its market dominance to keep competitors at bay, like the famous Microsoft case in the 1990s. But in this situation, the targets of the government’s suit were publishing houses — a group of companies whose influence and power are obviously on the wane — and Apple, a company that was only just entering the ebook market and trying to challenge Amazon’s near-monopoly.

When the details of the case emerged, however, they looked pretty damning for the publishers. The Justice Department accused them, and Apple, of collusively agreeing to sell books using a so-called agency model under which the publishers would set ebook prices and retailers would take a per-book commission — but be unable to compete with each other on price.  By forcing the agency model on all retailers this way, publishers could keep consumers from getting used to paying only $9.99 for new releases and best sellers.

(MORE: Sued: DOJ Brings E-Book Antitrust Lawsuit Against Apple, Publishers)

The strategy more or less worked: Once the publishers had the agreement with Apple, Amazon was forced to accept the agency model or forgo selling some of the most popular releases. According to the Justice Department’s complaint:

“Beginning no later than September 2008, the Publisher Defendants’ senior executives engaged in a series of meetings, telephone conversations and other communications in which they jointly acknowledged to each other the threat posed by Amazon’s pricing strategy and the need to work collectively to end that strategy. By the end of the summer of 2009, the Publisher Defendants had agreed to act collectively to force up Amazon’s retail prices.”

According to Charles James,  a former Assistant Attorney General in charge of the Justice Department’s Antitrust Division and current adjunct law professor at Arizona State University, the case against the publishers represents “as mainstream an antitrust case as you could possibly imagine.” Says James:

“Whenever a group of competitors are getting together to try to force a result on someone in the next level of distribution, that is your classic cartel behavior. The most obvious thing they were doing here was acting as a group to achieve something that they couldn’t do individually, or were reluctant to try individually.”

(MORE: Judge Comes Down Hard on Publishers, Apple in E-book Case)

But the idiosyncrasies of the publishing industry, and Amazon’s previous total dominance of the ebook market make the case a little more complicated that just that. In recent weeks there has been a lot of pushback against the Justice Department suit, as well as a settlement that three of the publishers have reached with the Justice Department. The main arguments against it were summed up in an op-ed in last week’s Wall Street Journal by New York Senator Chuck Schumer. Schumer’s objections are based around three basic arguments:

  • Competition and innovation in the ebook market actually increased competition after the publishers instituted the agency model, and the pricing scheme gave companies like Barnes and Noble the ability to develop their own ebook readers and force Amazon to continue to innovate. As Schumer writes, after the Apple/publishers deal, “Amazon’s market share quickly eroded to 60%, and consumers had multiple platforms through which to purchase digital books. Amazon was forced to expand its catalog, invest in innovation, and reduce the prices of its Kindle reading devices.”
  • While the deal caused prices to go up for some new releases and bestsellers, according to Schumer, the average ebook price actually went down from $9 to $7.
  • It was actually Amazon — not Apple or the publishers — that held too much market power and was using a predatory pricing to drive the publishers out of business. In a comment on the settlement filed by Barnes & Noble, the company argues that without the shift in pricing strategy from the publishers, it would have been unable to develop its own competing e-reader. According to the comment:

 “As a result of Amazon’s pricing (which priced most bestselling books sold by Barnes & Noble below Barnes & Noble’s, and Amazon’s direct costs), Barnes & Noble was losing substantial money in an effort to compete with Amazon’s pricing, and was unable to gain significant market share. Other potential e-book distributors declined to enter the industry.”

(MORE: Justice Department Threatens Apple, Publishers over E-Book Pricing)

So is the Justice Department going after the wrong party here? If what the publishers did actually increased competition and lowered prices, why are they the ones being sued?

Essentially, it comes down to the child-rearing standby: Two wrongs don’t make a right. While there is a lot to the argument that the ebook market is better off now than before the agency model was put in place, that doesn’t excuse breaking antitrust laws. As James puts it: “Even if you assume that Amazon was acting anti-competitively, the book publishers don’t have the legal right to gang up on it and promote their own mob justice.”

It’s perfectly reasonable to have reservations about Amazon’s influence over the publishing industry. Large companies with commanding market shares are subject to fewer checks and balances, and should be watched closely. But remember how Amazon achieved this level of dominance: through revolutionizing the way books are distributed and read, and consumers have unquestionably benefited from lower prices and the convenience of ebooks. There may come a time when Amazon’s dominance stifles innovation and authorship in America, but that hasn’t happened yet. And the idea that we should ignore antitrust laws that have served this country well for over a century because legacy firms in the industry are convinced that the the vibrancy of authorship and readership depends on their continued existence is more than a little tough to swallow.

MORE: Where Are America’s Most Well-Read Cities?

12 comments
georgedick2000
georgedick2000 like.author.displayName 1 Like

The trouble with all anti-trust laws is assigning  government the power to interfere in the marketplace. In this case, it looks like their actions may hurt consumers -- and publishers as well.

What everyone is so quick to ignore, is that while the marketplace is not perfect, and some people/companies may act unethically, no monopoly has ever lasted over any substantial length of time. UNLESS it was protected by the government.

So the best protection against monopolies or those who collude to raise prices is MORE UNFETTERED competition. Not the government!

Gary McCray
Gary McCray

The modern corporate motto is maximum profits and destroy the competition. 

Period! 

No holds barred.

Those rules that can't be ignored should be subverted by any means necessary.

This is a war and we, the people, are bound to lose.

Not only should they not drop their antitrust suit, they should make sure that the consequences are actually severe enough that Apple and the conspiracy of book publishers seriously regret it.

Fire for effect!

Premdayal Gupta
Premdayal Gupta

A book is written by an author and assigned to a publisher. The book is published, distributed, and en-cashed by the publisher. The author has no control over his own book once it has been assigned to a publisher. Then, why should a book be sold in the author's name? Better to delete the author's name. Let the publisher name the book and sell it! The faulty Copyright Law has provided disproportionate advantages to the publishers. It may have been justified in the early period of publishing technology. Not now. The Copyright Law is in serious need of an overhaul. There will be more clarity and less controversy afterwards. 

Gary McCray
Gary McCray

The large corporations have vigorously pursued all possible avenues of disproportionate reward versus individual efforts.

They have won.

We have lost.

www.dai1ynews.blogspot.com
www.dai1ynews.blogspot.com

The Senator's Op-Ed piece is somewhat tainted by the fact that the Big Six all headquarter in the U.S. in his state.By the way My friend gets more than $2500/Month  working few hours on his personal computer , to Read D Article (copy the link on my profile name)

H_Phillips
H_Phillips

The publishing industry is old school.  What they fail to realize is that the digital age has freed them from overhead.  Unfortunately for them, through online customer reviews and such, the internet has simultaneously eliminated the need for the "filter" that publishers apply to the millions of manuscripts.

That is to say, what do the publishers actually DO?  Unlike the movie studios which have tons of overhead and after-production, most of the work is done by the books author.  It was different in the print and brick and mortar days, but now, they just aren't as necessary and AMazon and ebooks prove that.

As for the notion that we lose something by not being able to browse a book store--so what?  The fact is, that while a few people really like the stores and will miss them, the experience they offer is subsidized by the multitude who just want to go in and get the latest best-seller.

If publishers want the brick and mortar stores to stay in business, they can subsidize them in the same way that car dealerships are subsidized or corporate stores like those of Sony, Microsoft, Samsung, etc.

lmgold
lmgold

The Senator's Op-Ed piece is somewhat tainted by the fact that the Big Six all headquarter in the U.S. in his state.

rhonin
rhonin

Say what?  Not prosecute and move forward?

The real life outcome of this move by the publishers and Apple resulted in the consumer paying more and the authors seeing no increase to themselves.

So, which payroll is this article coming from? 

Publishers or Apple?

cmorris262
cmorris262

I think you missed his point. His last sentence sums up his position.

Marc Telesha
Marc Telesha

No the underlying issue is that this move raised the prices of eBooks globally and was coordinated. Also anyone notice the fact that this benefits the publishers and Apple's 30% tax but not the author????

If we are going to get real about protecting Intellectual Property why is it that the content creator is the one that is never protected. Just look at Def Leopard who had to make a COVER Album of their own songs.

David S. Spivak
David S. Spivak

 Sorry, but $9.99 for a book just isn't enough money unless the book just has slim pickings for content. Say the e-book is sold in a 3rd party e-book reseller that takes 50% of the profit after Apple takes 30%. Publishers are only making $3.49 per book and then on top of that have to give some of those sales to the content creator. Amazon was the one at fault here for creating an unsustainable demand for ebooks at prices that were ridiculously too cheap to begin with. I believe an ebook should cost about 50-75% of what the print book sells for. No more, no less.

Fatesrider
Fatesrider

You don't understand how the model works for e-books.

Traditional publishing requires the editing and formatting, as does e-books.   Both require promotion if they're to sell well.  Those costs are what they have in common and amount to no more than 20% of the overall wholesale cost of the book - depending on the units sold.

After that, the cost of e-books is entirely in hardware, but the cost for traditional books skyrockets and is market dependent on consumables that aren't repairable.  Paper, ink (or whatever is used to print/color it), cardboard, transportation, fuel and far more electricity and personnel.  There's also the fact that a printer can only create one of these books at a comparatively limited rate.  The more you print, the more expensive it gets.  That overhead is why printed books are so expensive.

But e-book "printing" and distribution only requires a server and one person to maintain it in order to be put into the devices of the reading public.  The overhead after the creation and promotion part is minuscule for any number of books.

We're talking pennies per e-book, depending on the units sold.

The rest is profit, pure and simple.

Ten bucks for something that cost pennies to deliver and print is ludicrous, let alone tens of dollars.  Given that e-book promotions  don't HAVE to have printed banners and posters, you can deliver the promotion material straight from the artist to the reader via the Internet, also lowering postage, shipping and printing costs considerably.

The retailers are charging too much, wanting in on the gravy train.  It costs them less than pennies to store the book, they can't have too many in stock, they never run out of stock.  And that is the whole problem with trying to go with a traditional publisher these days.

If a traditional publisher wants to stay in business, they'd go the route Amazon and other places have.  They let the authors do the leg-work if they want to and charge them for any services.  Amazon Kindle for example lets authors e-publish their work - including the option for on-demand printing - taking a cut of every sale, but giving the author 35-70% of the sales price (depending on the country where it's sold).  It's up to the author to do the promotion, or they'll do it for them for a fee.

THAT kind of service is where traditional publishing is going to go.  Trying to fix prices to stay relevant is similar to what the music industry is trying to do - to stay profitable using a business model that is obsolete.

Times change.  So do business models.  Businesses that don't adapt to that change will fold.  Or they'll collude to break the law in order to stay afloat.  I have philosophical objections to businesses breaking the law.  The cost of an e-book is too high at $9.99 each.  With the rapid acceptance of the new media, it's time those prices started coming down, not going up.