An appeal court’s decision finding Apple guilty of collusion with publishers reinforces just how cozy a cartel the industry was.
Apple may be trying to keep the spotlight on its latest foray into the streaming-music business, but it is also still trying to clean up the mess caused by its ham-handed entry into an earlier market: book publishing. A federal court on Tuesday rejected the company’s appeal of an earlier ruling that found it guilty of orchestrating a conspiracy with the major book publishers, in what the court said was a successful attempt to artificially inflate the price of e-books.
As Fortune‘s Jeff Roberts reports, the court found Apple engaged in collusion with what amounted to an oligopoly—namely, Harper Collins, Penguin, Simon & Schuster, Hachette and Macmillan—and that its actions were a clear breach of antitrust law. Apple argued that the deal it cut with the publishers was necessary to blunt Amazon’s dominance in the e-book market, but the appeals court didn’t buy that argument. Judge Debra Ann Livingston wrote:
“Competition is not served by permitting a market entrant to eliminate price competition as a condition of entry, and it is cold comfort to consumers that they gained a new ebook retailer at the expense of passing control over all ebook prices to a cartel of book publishers.”
One reason the court failed to buy this argument is that the major publishers clearly had zero interest in actually competing on price—in fact, they wanted to do exactly the opposite. Their interest in doing a deal with Apple stemmed from a desire to maintain the existing favorable price structure for books, which allowed them to milk the market for high-priced hardcover versions of new novels before eventually releasing cheaper versions. Amazon’s low-priced e-books were a threat.
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The fact that the book industry was a cozy cartel is reinforced by the court’s description of how the publishers behaved even before Apple came along: They “operated in a close‐knit industry and had no qualms communicating about the need to act together,” the ruling says, quoting from the lower-court decision: “On a fairly regular basis… the CEOs of the [Big Six] held dinners in the private dining rooms of New York restaurants, without counsel or assistants present, in order to discuss the common challenges they faced.”
Since the publishers didn’t compete with each other on the basis of price, the appeals court decision says, “publishers felt no hesitation in freely discussing Amazon’s prices with each other and their joint strategies for raising those prices.”
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After strong-arming Amazon into accepting the new “agency pricing” model—in which the publishers got to set the price for their books, rather than allowing the retailer to do so—the book industry got exactly what it wanted. According to research by the Justice Department, the price of newly released books rose by an average of 24% and bestsellers climbed by 40%.
It says a lot about the book-publishing business that doing this actually caused book sales to drop fairly dramatically across the board: research done by another expert using data from Random House showed that publishers who switched to the agency model sold close to 15% fewer books than they would have otherwise. So the industry was effectively willing to trade a short-term decline in sales for the increase in power that they got over pricing as a result of the deal with Apple.
Link to the rest at Fortune and thanks to Michael for the tip.