Apple E-Book Fix For The Greater Good?


Apple E-Book Pricing
Attorney General Eric Holder speaks at a news conference at the Justice Department in 2012 regarding a civil antitrust lawsuit against Apple and major book publishers, charging that the companies colluded to raise the price of e-books.CREDITPHOTOGRAPH BY DOUG MILLS / THE NEW YORK TIMES / REDUX

Had you listened to the lawyers presenting oral arguments to the United States Court of Appeals for the Second Circuit between ten o’clock and eleven o’clock on Monday morning, you might have assumed that someone was suing Amazon. Much of the discussion centered on whether Amazon had a monopoly on e-book sales a couple of years ago. At one point, a judge even suggested outright that Amazon could be described as a monopolist company that engaged in predatory pricing.

But the case before the court that day wasn’t about Amazon—not directly, at least. It originated in 2012, when the Department of Justice sued Apple and five book publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) for allegedly conspiring to raise the prices of e-books in the run-up to the launch of the iPad, in 2010. Amazon, whose Kindle e-reader had a ninety-per-cent market share for e-books before the iPad’s introduction, had been buying them at the wholesale prices set by publishers, then reselling them at retail prices (typically $9.99 per book) that were often at or even below the original wholesale price. Amazon didn’t mind losing money on each sale, as long as the strategy helped sell Kindles and expand the e-book market. But publishers believed that the low retail price of e-books eroded the public’s perception of what books are worth. They also worried that the heavily discounted e-books were hurting hardcover sales, on which they depended for much of their revenue. (Ken Auletta wrote about the case for the magazine in 2012.)

As Apple prepared to launch the iPad, it offered a deal to the six biggest publishers in the U.S. The publishers could set the retail prices of e-books sold by Apple, up to a cap of $14.99, and they would get seventy per cent of the sale price. But if any other retailer was selling a given e-book at a lower price than the one a publisher had set, Apple could match it. Apple’s executives made one aspect of their plan very clear: they wanted a significant number of publishers to sign on to their deal before they would commit to an e-book marketplace. Five of the six publishers, after talking it over with Apple and with one another, agreed. Later, after the iPad launch, the same publishers individually went to Amazon with their own proposals—Amazon had to offer them a deal similar to Apple’s, or they would pull their e-books. During the publishers’ conversations with Amazon, some of the publishing executives involved were also in touch with Apple. The publishers succeeded in securing deals with Amazon, and the e-book prices over which they had wrangled began to rise. After the Justice Department sued Apple and the publishers, in 2012, the publishers settled, but Apple didn’t.

So why the discussion now of whether Amazon was a monopolist before Apple came along? According to recent case law, price-fixing schemes designated as horizontal (that is, coördinated among competitors) violate antitrust law, no matter the parties’ intentions or the effects on the market. But “vertical” price-fixing (between a retailer and a manufacturer) may not be a violation, depending on such factors as the companies’ motives and the outcomes of their actions.

Last year, a federal judge named Denise Cote found that Apple had, in fact, collaborated in a horizontal price-fixing scheme, not that it had orchestrated a vertical one. Cote noted that Apple executives kept the publishers informed about what other publishers were up to; she also pointed out that Apple made clear to the publishers that it was important for as many of them as possible sign on to the proposed deal. Both of these activities, among others, Cote argued, showed that the company had facilitated horizontal price-fixing. “Here we have every necessary component: with Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition,” she wrote. As such, there was no need for Cote to consider arguments, made by Apple’s lawyers, about the company’s intentions and the effects of its actions, which might have been used to justify vertical price-fixing.

Apple felt that Cote’s ruling took the wrong approach. It appealed, and the appellate court in New York is expected to make a ruling in the case sometime in the next couple of months. Apple’s lawyers say that it didn’t participate in horizontal price-fixing; its involvement was vertical, they argue, its intentions were good, and its actions ended up benefitting consumers. One of those good intentions, Apple argued, was to make it possible to compete against Amazon in the e-book market. And one positive outcome, the company said, is that Amazon’s dominance in the e-book market has been diminished—and, for some e-books, Apple’s entry has actually led to lower prices.

On Monday, comments from the appellate judges in New York—especially Judge Dennis Jacobs—suggested that they might be more receptive than Cote to Apple’s line of reasoning. According to Agence France-Presse, Jacobs said, “What we’re talking about is a new entrant who is breaking the hold of a market by a monopolist who is maintaining its hold by what is arguably predatory pricing.”

Harry First, a co-director of the Competition, Innovation, and Information Law program at New York University School of Law, paraphrased Apple’s argument for me as follows: “This is our effort to deal with a monopolist”—Amazon—”that has engaged in predatory behavior.” After reading about the judges’ reaction, First concluded, “They seem to believe it.” First is not so convinced. Even assuming that Apple wasn’t an active participant in a horizontal price-fixing scheme (which he feels has been tough for Apple to demonstrate) he’s not sure that it makes sense for the company to win an appeal on the grounds that it made the world a more competitive place. There are, after all, other, more obvious ways for Apple to pursue that goal.

According to the Associated Press, when one of the judges, Raymond J. Lohier, Jr., asked a lawyer for the Justice Department how Apple and the publishers “could have broken Amazon’s monopoly of the e-book market without violating antitrust laws,” The lawyer noted that Apple could have let the competition among companies play out naturally without pursuing explicit strategies to push prices higher—or it could have sued, or complained to the Justice Department and to federal regulatory authorities. First told me, “My view of this has always been that vigilante justice is not appropriate—it was not even appropriate in the Wild West.”

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