US vs. Apple

From The Wall Street Journal:

Politicians and social critics who worry about “the curse of bigness”—and vow to rewrite antitrust law to break up Facebook and Google—forget what happened the last time the government used the law against a Silicon Valley company. In 2012 the government successfully sued Apple for daring to compete with Amazon in selling e-books. The unintended result was not exactly a victory for the consumer or for competition: the continued dominance of Kindle, Amazon’s e-book format and reading device; increased e-book prices; and suppressed e-book innovation.

Chris Sagers, a law professor at Cleveland State University, explains in “United States v. Apple: Competition in America” what he sees as confusion about antitrust law. His analysis can be helpful—he notes the long history of companies invoking claims of “predatory pricing” as a cudgel against more efficient competitors and stresses that consumers often benefit when industries and companies are driven out of business—but he is confused about the case itself.

His thesis is that Apple’s entry into the e-book market was so clearly a violation of antitrust law that critics of the case must not believe in competition. But critics object to an interpretation of antitrust law that ended up punishing Apple for introducing a new pricing approach—an approach that is now common in every other area of online sales. Mr. Sagers forgets the guardrail rule of antitrust: Don’t bring cases against innovations that create more competition.

Consumers were delighted when Amazon launched its Kindle e-reader in 2007, and book publishers were happy to sell books in digital form. But there was an unusual feature. In its selling of e-books, Amazon operated according to the same pricing arrangement that had governed the sale of print books—that is, it bought e-books wholesale and chose its own price for them, just as bookstores had long done with print books. Brick-and-mortar bookstores needed this pricing flexibility for many reasons, not least to clear their inventory of unsold books by means of lower prices. The arrangement let Amazon sell e-books for years as a loss-leader—at the low price of $9.99—to boost profitable sales of its Kindle devices.

Around the same time, Apple had set about licensing music, video and games so that consumers would have reasons to buy its iPad. Apple realized that, for digital goods, there was no reason to follow the wholesale model. It could simply set up a revenue-sharing formula. Content owners and app developers—think of an iPad or iPhone game, such as “Minecraft” or “Fortnite,” that offers premium features—could pick their own price, even choosing to offer content free, and Apple would take 30% of any sales as a commission.

When Steve Jobs decided to include e-books on the iPad in 2010, Kindle had a 90% market share. So book publishers were again delighted—that Apple would be entering the market with its revenue-share model and letting publishers set the prices for their e-books. The largest publishers met among themselves to agree on the terms for licensing their books to Apple. The government sued, claiming an unlawful conspiracy masterminded by Apple.

Mr. Sagers sees this as an open-and-shut case of an unlawful pricing conspiracy and expresses surprise that there was so much support for the book publishers and Apple. He rightly dismisses the self-serving argument that books are so culturally important that publishers and Apple deserved an antitrust exemption. He is also right to note that Amazon was not, despite its huge market share, an unlawful monopolist—big is not always bad.

. . . .

Mr. Sagers believes that opposition to the Apple case shows that Americans are ambivalent about competition. There are times, he says, when “competition seems destructive.” When antitrust law requires firms to compete in such circumstances, then “antitrust itself has seemed like a failure.” The government claimed that Apple conspired with book publishers, risking higher prices, but the case was perceived as a government favor to Amazon, which it was.

Indeed, people objected to the Apple case because it was ill-advised—limiting consumer choices and blocking lower prices. Appeals Court Judge Dennis Jacobs made this point, writing in his 2015 dissent that Apple’s conduct “immediately deconcentrated the e-book retail market, added a platform for reading e-books, and removed barriers to entry by others.” With Apple in the game, Amazon’s 90% market share fell to 60%. Now it’s back up to 83%, according to the latest industry estimate. As competition decreased, prices increased. The typical price for a Kindle best seller is now in the range of $14.95.

. . . .

The Apple case violated the first rule of antitrust: First, do no harm.

Link to the rest at The Wall Street Journal (Sorry if you encounter a paywall)

PG hasn’t read the book that is the subject of the WSJ review. However, the author of the review wildly misstates the purposes, activities and actions of Apple and all but one of the largest publishers in the United States.

Let us review the actions and actors in this matter (which were extensively documented and discussed on TPV during the days of yore):

  1. While Amazon was not the first entity to sell ebooks, it was the first to sell ebooks from traditional publishers at a substantial discount from their list prices, which correlated with the suggested list prices for printed versions of the same books.
  2. Amazon also was revolutionary in permitting self-published books (including ebooks) to be listed and sold side-by-side on the same basis as traditionally-published books.
  3. The six largest publishers in the United States – Random House, Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster had developed a cozy little dinner group consisting of their CEO’s who met about every three months in a private dining room in Manhattan to talk about their mutual concerns – most often Amazon’s habit of discounting the prices of their books and what they could do about it. These six produced the majority of books sold in the US and were receiving complaints from their traditional bookstore customers about Amazon’s low prices. The publishers did not want to “cannibalize” their sales of printed books and were the recipients of a growing number of complaints from their traditional bookstore customers. No company attorneys were present during these dinner discussions.
  4. PG will note that private meetings of the top executives of large companies that dominate an industry to discuss the pricing of their products are almost always a bad idea and, by themselves, raise a big red antitrust flag. Competent corporate counsel would always advise against such a practice.
  5. Apple was planning to introduce its iPad in January, 2010, and include an iBookstore as one of the product’s attractions.
  6. PG notes that Apple has never been a fan of significant discounts for the products it sells.
  7. In December, 2009, Apple’s senior VP of Internet Software and Services, Eddy Cue, contacted the members of the Publishers dinner group to set up meetings.
  8. During these meetings, Cue said that Apple:
    1. Would sell the majority of e-books between $9.99 and $14.99, with new releases being $12.99 to $14.99, higher prices than Amazon was charging.
    2. Apple would use the same “agency pricing model” that it used in the App Store for ebooks.
    3. Agency Pricing allowed the Publishers control the retail price of the e-books with Apple receiving a 30% commission.
    4. Most significantly, Apple would require what is generically described as a “Most-favored nation” clause in its contracts with publishers that allowed Apple to sell e-book at the lowest price of its ebookstore competitors (read “Amazon”).
  9. PG doesn’t recall if the publishers had another private CEO dinner or not, but evidence at the later antitrust trial showed the Big Six publishers called each other over 100 times in the week before signing the Apple agreements. Everyone except Random House boarded this bandwagon.
  10. In January 2010, Apple held one of its typically flashy product launches for the iPad together with its associated ebook, music and video stores.
  11. During the post-launch mingling, Wall Street Journal reporter Walter Mossberg asked Steve Jobs why people would pay $14.99 for a book in the iBookstore when they could purchase it for $9.99 from Amazon. In response Jobs stated that “The price will be the same… Publishers are actually withholding their books from Amazon because they are not happy.” In other words, the publishers would force Amazon to raise its ebook prices to match those in the iBookstore.
  12. Amazon complained to the Federal Trade Commission and, rather than not being able to sell any ebooks of the major publishers, switched to the agency model after negotiations with the major publishers. This resulted in an average per unit e-book retail price increase of 14.2% for their new releases, 42.7% for their NYT Bestsellers, and 18.6% across all of the Publisher Defendants’ e-books.

For lots more information, see United States v. Apple on Wikipedia.

Back to the book reviewed in the OP, there was nothing wrong with Apple “introducing a new pricing structure” – agency pricing. Had Apple only done that, no antitrust violation would have occurred. However, when Apple conspired with a group of the largest publishers to force Amazon (and anyone else selling ebooks) to adopt agency pricing when such had not previously been the case, that was an antitrust violation, particularly in the light of what happened to ebook prices after the coordinated joint action took place.

Had the big publishers individually been willing to lose the highly-profitable ebook sales on Amazon as a potential consequence of telling Amazon it had to raise its prices and/or agree to let the publisher set the price, that would probably not have triggered any antitrust concern. Coordination between the publishers to use their combined power to force Amazon raise prices was where the publishers crossed a clear legal line.

With respect to what happened in the court case, each of the publishers admitted guilt, settled the antitrust claim and promised not to do any price-fixing in the future. Apple litigated the antitrust case to the max and lost at every stage.

Although Amazon was not a party to the litigation, Amazon won.

More significantly (in PG’s majestic and resplendent opinion), authors won. Indie authors in particular won. In June, 2010, a couple of years before any antitrust litigation had been commenced, Amazon introduced its 70% ebook royalty option which has put a great deal of additional money into authors’ pockets ever since.

2 thoughts on “US vs. Apple”

  1. Well turned sentence: ‘Although Amazon was not a party to the litigation, Amazon won.’

    The rest was also good, but that one stood out.

    Hadn’t heard of ALI (not my purview), but love ‘fusty’ here. I imagine mutton-chop whiskers and dusty black coats and dark old wood benches.

    Dickensian.

Comments are closed.