Understanding the Apple vs. USA ebook price-fixing debacle

Understanding the Apple vs. USA ebook price-fixing debacle

Last week Apple lost the antitrust suit filed against it by the US government for ebook price fixing. Apple will appeal, of course, and given Apple's statements-to-date, they'll likely appeal it all the way. It's a complex issue that could decide who controls the ebook market for the foreseeable future: Amazon, or everyone but-Amazon. I kid. A little. Adam C. Engst read everything involved and, combined with his years of ebook publishing and his skill as a writer, put together an excellent explanation for what's really going on here. From TiBITS

Cote’s 160-page opinion is remarkably well-written and is a fascinating read, at least if you’re interested in the chronology and minutia of this case. I’ve read the entire thing, and have found it far more compelling than the soap opera media coverage of the trial, which took place from 3 June 2013 through 20 June 2013. It also clarifies numerous points and questions that came up during and since the trial. Rather than attempt to summarize the entire opinion, I’m going to focus on answering questions surrounding it, based on what Judge Cote wrote.

Engst also directs readers to Philip Elmer-DeWitt's excellent article on the strengths and weaknesses of the six major arguments of Apple's defense, including this doozy. From Fortune.

It's only in this, the final section of her opinion, that Judge Cote addresses the elephant in her courtroom: Amazon (AMZN), which before Apple arrived controlled 80% to 90% of the e-book market and was selling the most popular titles below cost.

"If Apple is suggesting that Amazon was engaging in illegal, monopolistic practices, and that Apple's combination with the Publisher Defendants to deprive a monopolist of some of its market power is pro-competitive and healthy for our economy, it is wrong," she writes. "Another company's alleged violation of antitrust laws is not an excuse for engaging in your own violations of law."

Perhaps. But it does raise a question that begs for an answer even more loudly now than before her verdict: Why the Justice Department chose to prosecute the new entrant in the e-book market, and not the monopolist.

If you're at all interested in ebooks and the future of the ebook market, give both a read.

Source: TiBITS

Rene Ritchie

Editor-in-Chief of iMore, co-host of Iterate, Debug, Review, Vector, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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Understanding the Apple vs. USA ebook price-fixing debacle

38 Comments

I get the feeling the author knows the answers perfectly well, but chooses to ignore them because they do not fit a desired viewpoint.

1) Because Amazon has not been legally established as a monopolist

2) Because being a monopolist in and of itself is not illegal; it is only when one uses that market power in certain proscribed ways that the DoJ gets involved

3) The "new entrant" here engaged in one of those specifically proscribed ways -- orchestrating erstwhile competitors to act cooperatively to the detriment of consumers. Prices on relevant titles jumped 30-40% due to Apple's involvement.

4) The "new entrant" may not have monopoly authority in books, but they certainly leveraged their power in one market to break into another - in direct violation of multiple antitrust statutes. Apple entered this into evidence themselves at least once, when Eddie Cue emailed to Steve Jobs that Random House agreed to Apple's terms in part because Apple "prevented an app from Random House from going live in the app store." [ http://www.cultofmac.com/227871/why-apple-cant-be-trusted-with-the-app-s... ]

So on hand, we have a company with large share, but has not (yet) done anything to merit any sanctions. On another hand, we have a company actively soliciting illegal cooperation to raise prices on consumers, and leveraging its market dominance in one area to break into another.

I'd say it is patently obvious why the DoJ went the way they did.

See PaidContent: "the DOJ’s original complaint ... alleges that in legal terms, Amazon engaged in a clear case of ‘predatory pricing,’ an exclusionary practice that is illegal under federal and state antitrust laws."

Yup, that's why I said "yet" -- Amazon may yet be investigated and/or found guilty of monopolistic behavior, but that a separate issue than Apple's actions. Apple, by their own documentation (and Jobs biography) provided evidence that made an Apple/publisher lawsuit too flagrant and too low-hanging fruit for the DoJ to pass up. Amazon may be next, but it will take longer to build a case.

The link stevesup mentions, for others:

http://paidcontent.org/2012/08/13/attorney-asks-doj-to-release-its-findi...

But then there's this. See Macs Future: "... what if as Apple argued those prior ebook prices were improper because Amazon was engaged in predatory pricing? Then the $9.99 price was never legitimate. So how can the Court not consider whether the $9.99 price that Amazon was legitimate when deciding if the defendants improperly engaged in conduct that raised prices? It makes no sense that a book price that was predatory would be then used by the Court as the bench mark as to whether prices were improperly raised."

That is precisely what the judge wrote about --

"Another company's alleged violation of antitrust laws is not an excuse for engaging in your own violations of law."

Three points:
1) Using one's market power in one market to break into another is illegal, as Apple by their own claim did with Random House and the app store. That judgement is completely irrelevant to Amazon's pricing.

2) Inducing competitors to cooperate is illegal. The pricing behavior of Amazon may be relevant to determining the harm to consumers (and therefore any punishment), but the action itself is still illegal. For it to have bearing on Apple's case, it would have to be shown the Amazon the the power to keep prices artificially low, with the intent of keeping out rivals.

3) Had some prior case established Amazon's pricing as predatory, or Apple been able to (been allowed to?) *prove* it in this case, then the Judge could have taken this into account in deciding the case. As it stands she had no choice but to consider it ultimately irrelevant to the case at hand. Apple will no doubt make this a foundation for their appeal and/or attempt to get the DoJ to go after Amazon in the interim.

The judge is, in fact, herself basing her judgment on another company's practices and implicitly claiming that Amazon's prices are legit. She is also saying that ONLY wholesale pricing is legit. So Apple can sell books at predatory prices or not sell at all? Yep. It will be in the appeal.

Of course she is implicitly claiming Amazon's behavior is legitimate. Unless/until it is proven, in this case or in another that can serve as precedent, that they are guilty, they are presumed innocent. You seem not to appreciate that when it works against your favorite company, but that is the way our legal system works, in both criminal and civil law. If/when somebody takes Amazon to court and succeeds, then it can be used in court. Until then, it is irrelevant.

She is also not saying only wholesale pricing is legit. If you read the ful decision, any model can be fine if negotiated under normal business conditions. When competitors collude - as happened here, with Apple the catalyst, it is not.

I guess its just too bad Judge Cote held not even a pretense to a presumption of innocence on Apples's part from her very opening statement.

Are you aware that those comments were made AFTER looking at evidence?

And it is not unusual that a judge do that

Yes, Metamancer's cited article says that she made those comments after having looked at the evidence, It may be common for Judges to do that, but I would still try to jump on that were I Apple. (Not a lawyer, so I have no idea how successful this argument of bias is on appeal.)

Apart that the Philip Elmer-Dewitt article is very biased, you can look that Apple lawyer didn't had any problem with the Judge making that comment, he only disagreed about the outcome

It is true the Amazon was never proven to be a monopolist and it is true that being a monopolist is not illegal, but the question is why wasn't that looked at by the DOJ. Because one of the key ways to illegally gain or maintain a monopoly is predatory pricing or dumping. I'm not sure how else you can see selling things below cost as not potentially crossing that line.

As for the price hike (of only a small number of titles) it was directly related to Amazon's reversal of loosing money on each sale, which is not sustainable and I'd argue "artificial"!

Finally, the new entrant owned both zero % of the ebook market and zero % of the ebook reader market at the time of this action. WHAT DID THEY HAVE TO LEVERAGE? Most on lookers saw the iPad as an impossible long shot. The only leverage Apple had was a small percentage of the cell phone business which even with smart phone popularity today constitutes the smallest fraction of ebook reading.

At the time this case was undertaken I'd argue the evidence of potential wrong doing was much stronger against Amazon than Apple. The difference was the the current actions by Amazon could only be shown to hurt other companies (B&N, Apple, and the Publishers) in the short term and the DOJ is too stupid and short sighted to look to future issues.

So to sum up as you did. On one hand we had a new entry into a market with no market dominance in ebooks, ebook readers or physical books, make deals with 5 companies using 2 completely legal terms (agency pricing, and most favored nation). On the other hand we had a company with market dominant power over the entire book industry (ebook, physical books, and ebook readers), selling products below cost and even punishing a publisher by removing all electronic and physical books from their store to force them to deal.

Yep I can totally see which company the DOJ should have investigated.

The evidence of *potential* wrongdoing is not admissible in a court of law.

The evidence of *actual* wrondoing - inducing competitors to cooperate, denying App Store access without capitulation on book pricing - was compelling against Apple.

I'm not arguing Amazon is a saint here, just that Apple very arrogantly waved illegal behavior in the DoJ's face, so much so that the DoJ had a quick, easy case to prosecute. If they ignored behavior that flagrant for Apple, it would undercut their credibility in future proceedings. Amazon may yet get a comeuppance, but, at the very least, they have been quieter, and more circumspect, about any bad behavior.

"denying App Store access"

That's not illegal either, even if Apple were a monopoly. Your characterization of that is wrong as well. Apple is very much in its rights to deny a book app from a publisher because that is not where they belong anymore. Apple was saving the publisher from shooting themselves in the foot. If you have a book, sell it as an ebook not as an separate app. Besides, single-book apps are stupid and annoying.

Actually, it is

http://en.wikipedia.org/wiki/Tying_(commerce)

Edit: the link above is mangled by the comment system....you land on a disambiguation page. If you care enough to click through, click the one with (commerce) in the link.

But tying together of two unrelated products has historically been regarded as an anticompetitive practice, and has been prosecuted successfully many times.

Nope, for anybody. The most famous such breakups were for movie studios, who used to force theaters to carry crap movies if they also wanted to carry popular ones - a practice known as block booking. This was found illegal, despite the lack of monopoly power of any one studio.

But your "tying" assertion is not applicable in this particular case. A retailer is within his rights to sell books from their designated book department and software programs in their designated software department. The particular publisher in question wanted sell a book in the App store, where it did not belong. If a dairy company wants to sell their perishable items outside of the dairy case, I as a consumer would appreciate not finding them in the dry goods section. Likewise, women might not want to have to go looking for feminine hygiene products stacked in the Men's Clothing section. To call an online retailer trying to similarly manage his virtual floorspace "anticompetitive" is a huge stretch.

A retailer is within their rights to sell things in a designated department, sure.

A retailer is *NOT* within their rights to dictate a business partner that for desirable contract A, they must also accept unrelated contract B, which is exactly what Cue boasted to Jobs that Apple did.

If Apple is this underhanded for a market like ebooks, imagine what they are doing for a market they truly care about.

It's good to see the corrupt get shut down once in a while, although I doubt this will change Apples habits.

.. and this: "Why the Justice Department chose to prosecute the new entrant in the e-book market, and not the monopolist.". Probably because a monopoly is not illegal and colluding to fix prices is. The DoJ is funny that way, prosecuting people who break the law while ignoring those who don't.

"Another company's alleged violation of antitrust laws is not an excuse for engaging in your own violations of law."

Perhaps."

There is no perhaps. The judge's comments are accurate. "The other guy has a monopoly/acting illegally." is not a defense to charges of collusion.

"Why the Justice Department chose to prosecute the new entrant in the e-book market, and not the monopolist."

It is not illegal to simply be a monopoly. It is illegal to what is called "market power" to impede competition. Microsoft was monopoly in the PC space. They however, most of the time did not use their market power to prevent competition. Apple and others could still exist in the market. One time when Microsoft was accused of abusing it's market power was when Microsoft was accused of using it's dominant operating system, a monopoly, to cut out browser competition in the form of Netscape, by requiring PC manufactures to bundle Internet Explorer with all operating systems. There is no prosecution of Amazon because there are no facts indicating illegal use of market power. Now if Apple had evidence of that then they should have brought it to the Department of Justice. But as of yet I've seen no evidence of that. One point, Amazon merely selling a product at a loss would not be illegal.

See PaidContent: "the DOJ’s original complaint ... alleges that in legal terms, Amazon engaged in a clear case of ‘predatory pricing,’ an exclusionary practice that is illegal under federal and state antitrust laws."

Maybe this is the outcome Apple needed. The market and now the court say forget the publishers; they simply don’t matter anymore. Apple can now freely and really fix prices. Just like Amazon does.

So Apple can set prices at a buck a book. It can use a bit of its bank to cover the dif. Result: Amazon takes it in the neck cus’ it needs ten bucks a book to subsidize the cost of its hardware.

The prices will fall anyway: All digital media will settle at a buck a title. Let’s get on with it. Certainly it’s hard news for book publishers and authors. As it was for music publishers and artists. As it was for games publishers. And on and on.

I must be in the minority. I don't want to see the content that your theory will provide.

"The prices will fall anyway: All digital media will settle at a buck a title. Let’s get on with it. "

Do you have an issue with creators getting paid?

See PaidContent: "the DOJ’s original complaint ... alleges that in legal terms, Amazon engaged in a clear case of ‘predatory pricing,’ an exclusionary practice that is illegal under federal and state antitrust laws."