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.
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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.”
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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.”
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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.