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On newspapers and ebooks, the Justice Department’s antitrust theory is obsolete

22 March 2016

From The Los Angeles Times:

Almost every antitrust case turns on the definition of the market at issue, whether by product or geographically: Is a monopoly threatened in the market for all passenger vehicles or only two-seater sports cars? Are we talking about detergent sales nationwide or only in Wyoming?

The Department of Justice’s lawsuit that effectively killed a bid by Tribune Publishing Co., owner of The Times, for the Orange County Register involved just such a distinction: The agency’s antitrust lawyers said Tribune’s takeover of the Register threatened to create a monopoly over English-language print newspapers in Orange County; Tribune’s response was that newspapers are no longer a relevant market by themselves, given competition for news consumers from TV, radio and the Internet.

. . . .

As Gabriel Kahn of USC’s Annenberg School for Communication and Journalism told my colleague Andrew Khouri, trying to create a monopoly in print newspapers is “the equivalent of cornering the market in horse-drawn buggies.”

. . . .

This isn’t the first time the Department of Justice has been accused of misreading the influence of new technologies in publishing. In 2012, the DOJ sued Apple and six book publishers for colluding to fix ebook prices. Many in the publishing industry thought the agency had picked exactly the wrong targets: The publishers had desperately sought a way to break the near monopoly in ebooks held by Amazon, which had attained 90% of the market by systematically selling ebooks below cost — in fact, at least one publisher had pleaded with the DOJ to file suit against Amazon. Apple’s offer to let the publishers set their own prices (within limits) on its iBookstore was a lifeline, they argued. They lost.

The danger in these cases is that the DOJ’s focus on promoting lower prices for newspaper readers and advertising or for ebooks could undermine the business models of publishers already eroded by technology. That could mean less news and fewer books. As media analyst Ken Doctor put it recently, “newspaper readers are today likely only to see their news coverage further diminished as likely collateral damage of DOJ’s attempt to represent the citizenry.”

. . . .

Amazon’s 90% share of the ebook market terrified the publishers, especially since the online merchant showed it wouldn’t be shy about pushing book publishers around. In 2010 Amazon removed the “buy” button from the online display of books from Macmillan, which was insisting on controlling the pricing of its ebooks. For months in 2014, a similar dispute provoked Amazon to make it hard for customers to order books from Hachette, the owner of Little, Brown and other imprints.

Amazon purchased books wholesale from the publishers and set its own retail price, typically a loss-leader $9.99. Publishers felt that price diminished the value of their hardcover sales and preferred to set their own ebook prices. There also were fears in the industry that Amazon’s pricing could put booksellers out of business, including even giant Barnes & Noble, which would be even worse for publishers. But individual publishers had almost no leverage with Amazon.

Enter Apple, which wished to create its own online bookstore for iPhone and iPad users. Apple’s deal with six major publishers allowed them to set their own ebook prices on the iBookstore, with Apple taking 30% of sales. But Apple didn’t want to be undercut by Amazon either, so it insisted on a “most favored nation” deal which allowed it to sell ebooks at the lowest price available from any other merchant online. That gave the publishers an incentive to present a united front to Amazon; most eventually achieved the right to set their own prices.

The publishers saw their effort as a blow against Amazon’s predatory pricing; to the Justice Department, resembled price fixing. Noting that the deal had helped cut Amazon’s share of the ebooks market to 60% from 90%, U.S. Appeals Judge Dennis Jacobs found that “Apple’s conduct … was unambiguously and overwhelmingly procompetitive.” But his finding was the lone dissent in a 2-1 ruling upholding trial court’s verdict in favor of the Justice Dept. Apple’s to the Supreme Court was turned down this month. It will have to pay $450 million in credits to customers who bought books on iBookstore at supposedly inflated prices.

Taken together, these cases show how technology is making a hash of markets that were reasonably stable for decades. Defining a market in antitrust cases was not always straightforward. But it can hardly have been as complicated as it is today, when an Orange County “newspaper” can serve readers anywhere in the world and a Google search can bring up local news items from dozens of sources. Lower prices today may look good for the consumer in the short term, but if they’re just the precursors of a world with less news or fewer book-buying choices, there’s trouble on the horizon.

Link to the rest at The Los Angeles Times

PG will note that many of the markets which have been “reasonably stable for decades” are markets where competition is constrained and consumer-friendly innovation is discouraged.

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36 Comments to “On newspapers and ebooks, the Justice Department’s antitrust theory is obsolete”

  1. “The danger in these cases is that the DOJ’s focus on promoting lower prices for newspaper readers and advertising or for ebooks could undermine the business models of publishers already eroded by technology.”

    No, they focused on companies breaking the law, big difference.

    Another ‘apple & the qig5 are the underdogs here! Well, at least they got the dogs part right …

    • They keep glossing over the “raised prices” part of the conspiracy.

      Amazon discounted *some* ebooks, some of the time (the same as their ebookstore competitors and the same as most B&M bookstores) while the conspirators raised prices on *all* books *all of the time*. The goal was clearly raising prices, not reducing Amazon’s share: Amazon share was already down to 54% *before* Agency went into effect in June 2010. After that, it went *up* not down.

      Since US antitrust is about consumer harm first and protecting competition second (if at all) the dissenter at the appeals court level was wrong. As the appeals panel majority put it, you do not boost competition by squeezing consumers. Not in the US.

      “Thou shalt not get away with it.”

    • The DOJ didn’t care one bit when the USA Today paper doubled its newstand price to $2.

  2. Mmm, more tasty, tasty schadenfreude.

  3. They should be sure to expound on this theory in the courtroom, with pictures and diagrams and maybe even PowerPoint. Judges just *love* being told they don’t understand the law. 😀

  4. Seriously. The more I read these convoluted misinterpretations of antitrust law, the more I think… maybe they went to a different law school than I did?

    • The only law school they went to was the press school of ‘Public Opinion’ …

      .

      Its name is Public Opinion. It is held in reverence. It settles everything. Some think it is the voice of God. — Mark Twain

    • Actually, they are trying to import european-style protectionist “antitrust” theory. (Where protecting “competitors” trumps protecting the consumers. Especially when the “competitors” are old established firms facing new competitors and new business models.)

      And that movement of trying to import foreign legal theories isn’t limited to antitrust. I’ve seen more than a few pundits bemoaning the US separation of powers model because it doesn’t allow party leaders (and especially the prez) to dictate how the legislators vote(like in parliamentary systems) or rule by decree, banana republic-style.

      After all, those approaches work so much better for the people…
      …or at least the “right” people.

      • Felix, Thank you for articulating that argument. Kudos.

        Your argument against law based on European principles is the reason I oppose US adherence to the Berne Convention. The Berne Convention is based on French law. To be precise, it is based on Victor Hugo’s demands for authorial protection.

        That is not the purpose of US copyright as given in the Constitution:

        To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

        The current duration of copyright (life of the author plus 70 years) does not “promote the Progress of Science and useful Arts” but hinders it.

        IMO copyright should run for the same period as patent: 20 years. A short period better promotes the progress of the arts than a long one.

        YMMV.

        • There was a pretty strong reaction back in 2005 when Justice Kennedy based the bulk of a split court decision on a precedent from a foreign legal system. The controversy remains. If you’re interested in some of the constitutional issues, you might want to check this out:

          https://www.wcl.american.edu/faculty/anderson/docs/foreign_law.pdf

          It is probably the most controversial approach to US Law in recent times, second only to the invention of “implied rights” that launched the ongoing culture wars.

          As I’ve said before, how things are done is often more important than what is actually done, drawing opposition to things that might otherwise be accepted without controversy.

          Process matters.
          In politics, law, and business.

          On the matter at hand, the corporate publishers could have easily steered clear of antitrust issues (and saved a few hundred million) if they’d followed the example of the airlines, who collude without formal agreements, intermediaries, or smoking gun documentation. And they do it out in the open, all wink-wink, nod-nod, and within the letter of the law.
          But the BPHs didn’t trust each other that much, despite their decades of not so discrete contract term collusion.
          They brought it upon themselves.

          • Felix, Thank you for the link to the law review article. I do not agree with all Professor Anderson says, but I agree with the direction of his article.

            Frankly, I am sick of the elites in Washington trying to emulate European (that is, French) practices. Let Europe be Europe. America can never be accepted by the Europeans as European. We can only be a second-rate France, but we can be the best America there is.

            Alexis de Tocqueville saw and respected the American difference a hundred and eighty years ago. Why can’t Justice Kennedy and his ilk read Democracy in America and learn from it?

            PS David Souter was an idiot. In evidence, I submit his concurring opinion in Nixon v. United States, 506 U.S. 224 (1993).

            • At least the BPH execs have the excuse that they are protecting the interests of their lords and masters when they try to import practices from yonder.

            • Btw, that particular breed has long been around.

              Edgar Rice Burroughs featured them repeatedly in his TARZAN books but he best captured the mindset a hundred years ago in a one of his shorter trifles, THE RIDER. A fun little romcom with some of his better explorations of human nature. (And one of the best closing paragraphs I’ve seen.)

              The key to understanding them is that the US is at heart a frontier society–at its best when facing a unifying challenge, at its worst without one–and like most such societies in history it includes people who don’t like living on the edge and seek comfort and validation in pretending to be “civilized”. Rather like the authors who prefer to live in tradpub poverty than Indie solvency.

              Humans are funny.
              Like Heinlein said; “…not a rational species, but rather a rationalizing one.”

              Publishing, politics… all irrational, absent a clear direction.

    • They are following the Progressive economics ideas of 100 years ago. This idea said consumers should be willing to pay more to ensure the health of suppliers.

      That idea never really went away in progressivism, but it did lose out as experience showed markets did very well without protecting suppliers.

      The progressives told us their experts knew what should be available to he rest of us. Therefore, they knew best what the mix of suppliers should be.

      This fits right in with the idea of book gatekeepers, curating the market, and maintaining literary culture, and keeping inferior independent books from the public.

  5. Al the Great and Powerful

    The ADS is strong in this one.

  6. Is anyone else curious with the newspaper they admit how newspapers compete with TV, Radio, and internet as competition. IE, they are taking too narrow view of everything.

    Yet when it comes to eBooks it just looks in ebooks as a separate entity and doesn’t consider print books, or the Tv, radio (music) and internet as ways to spend their free time and free income.

    • Come on! You expect logic and consistency in a political exercise?

      You might as well wonder about the little man behind the curtain…

  7. The publishers saw their effort as a blow against Amazon’s predatory pricing; to the Justice Department, [it] resembled price fixing.

    Well, it’s all so reasonable when you phrase it like that.

    “Pretty Boy” Floyd saw pointing a machine gun at a teller as a blow against money hoarding; to the police, it resembled bank robbery.

    I like this game.

  8. Please be aware that the losing (actually winning, but overruled) bid in this case came from the owner of the LA Times. This is not an objective source of commentary.

    Personally, I’m glad the highly biased (never met a tax they didn’t love) LA Times will not be taking over the Orange County Register. I would hate to have to cancel my subscription and be without a newspaper for the first time in my 66 years.

  9. Al the Great and Powerful

    What would you wrap fish in, or cover the bottom of your birdcage with, after all?

  10. Al the Great and Powerful

    Nice. I know what I’ll be wrapping Christmas presents in this year!

  11. Amazon’s monopoly, if you want to call it that, is from its technical platform. They have built the software and the infrastructure to deliver goods at much lower costs than their competitors. With lower costs, they can and do charge lower prices and get all their competitors’ champagne.

    Their competitors can’t compete because they lack the ability or the will to build a competitive platform. Until the competitors step up to Amazon’s level, Amazon will walk all over them.

    Amazon’s dominance in eBooks is pathetically simple: because their costs are less, they can open the doors to every author, pay them more, charge the customer less, and still net more than the paper sellers. It’s all in the platform.

  12. Can someone explain to me how lower-priced books will result in fewer book-buying choices? I’ve seen this suggested before and just don’t get it. Is the theory that publishers will publish fewer titles if ebooks are priced to attract more readers?

    • The theory is that people will become accustomed to lower prices and thereby refuse to buy full-price books, choosing to wait until they go on sale or paperback, thereby depriving the corporate publishers of their God-given profits and “forcing” them to cut back on manuscript purchases.

      So, according to the Prestons of the world, “entitled” consumers who refuse to pay full hardcover pricing are a threat to literature, culture, and all of civilization.

      http://www.teleread.com/author-douglas-preston-entitled-to-change-his-mind/

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