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The DOJ believes that Apple is forcing you to pay more for e-books

Pola Karolczyk, Berkeley Global Antitrust Blog, April 11, 2012.

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On April 11, 2012 the world of antitrust became abuzz with the news that the DOJ filed a lawsuit against Apple for its alleged participation in an e-books pricing scheme with the leading publishers: Hachette Book Group (USA), HarperCollins Publishers L.L.C. and Simon & Schuster Inc., Holtzbrinck Publishers LLC (which does business as Macmillan) and Penguin Group (USA).

The DOJ complaint alleges that these 5 publishers “agreed among themselves and with Apple to raise the retail prices of e-books by taking control of e-book pricing from retailers in order to stop the expansion of Amazon and its platform – Kindle”. The DOJ case will proceed only against Apple and two publishers: Macmillan and Penguin. The other three publishers – Hachette, HarperCollins and Simon & Schuster – decided to accept the settlement offered by the DOJ.

Apple’s alleged involvement in the scheme has been investigated for quite some time on both sides of the Atlantic. In January this Blog published a piece detailing the EU Commission’s investigation of this case as well as the class action filed on the same grounds against Apple and the 5 publishers in the Northern District of California.

The fact that on April 11, 2012 the DOJ announced its decision to step in and file the case against Apple has given rise to heated discussion within the antitrust legal world. Many commentators are predicting that the DOJ is setting itself up for a potentially embarrassing failure because its case against Apple is not as strong as it was against the publishers (the DOJ settled with most of them with the exception of Macmillan and Penguin who refused to sign the settlement and decided to try the case alongside with Apple). Those in favor of the DOJ’s actions claim that this move was overdue and that the DOJ needed to intervene in order to protect innovation in the e-books market. Let’s sort through the antitrust noise and take a closer look at the arguments of both sides.

The Government’s Perspective

According to the DOJ’s complaint, both Apple and the publishers named in the lawsuit were dissatisfied with Amazon’s aggressive pricing of e-books and decided to put a stop to it. In 2010 Amazon offered an ultra-competitive price (9.99 USD per e-book) which lead to concerns among the publishers, who were afraid that low prices of e-books would drive down the prices of print books and thus threaten their traditional business model. Amazon’s e-books marketing strategy was also a problem for Apple who worried that introduction of the Kindle (stimulated by attractive prices of e-books) will prevent Apple from making a successful entry into the e-books market. To address those concerns Apple and the publishers decided to introduce a new model of distribution in which retailers became publishers’ agents and no longer could control the final price of e-books. This transition to a different distribution model could have been successful only with the condition that all the publishers introduced it at the same time. Since the major price-cutter – Amazon – had a significant countervailing buying power, only collective action amongst the publishers could force Amazon to change its pricing practices.

A close reading of DOJ complaint also leads to the conclusion that the DOJ believes the Apple e-books case is not a simple price-fixing agreement among competitors with the involvement of a distributor. What is lingering in the background of the complaint is yet another high-technology case involving a potential struggle for superiority between the two platforms – Kindle and Apple’s iPad. In addition, the DOJ perceives the case in terms of a war between the old and the new model of publishing (print books v. e-books). The DOJ seems to believe that its lawsuit against Apple is intended to protect innovation in the publishing industry and at the same time guarantee that consumers are not forced to pay above-competitive prices for e-books. Interestingly, supporters of Apple have a completely different vision of what has been taking place within the e-books market.

Apple’s side of the story

The official statement from Apple concerning the DOJ’s lawsuit has just been released. The spokesperson for Apple – Tom Neumayr – denied all the DOJ’s allegation:

The DOJ’s accusation of collusion against Apple is simply not true. The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry. Since then customers have benefited from eBooks that are more interactive and engaging. Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.

In addition, some commentators have voiced their concerns that the DOJ is likely to lose its case against Apple. Lack of evidence that Apple was in fact involved in the publishers’ conspiracy is so far the most commonly mentioned weakness of the DOJ’s case. Without the access to the DOJ’s file it is difficult to assess whether this claim has sufficient grounds.

Apple supporters also dispute whether pricing scheme can be alleged in a situation in which competitors don’t reach agreement on prices but rather limit themselves to an introduction of a uniform distribution model. This distinction between pricing scheme and distribution model, as appealing as it may seem at first glance, might have no relevance if the DOJ manages to prove that there is a direct link between simultaneous introduction of a new distribution model by publishers and price increase for the e-books that followed. After all, the antitrust law is not concerned with the means the parties used to raise the price but whether or not they managed to successfully implement an outcome with higher prices.

Some observers also point to current US Supreme Court case law which allows manufacturers to enforce a minimum retail price (Leegin Creative Leather Products, Inc. v. PSKS, Inc. 551 U.S. 877, 2007) and therefore the publishers named in the suit should be allowed to do so. The Leegin case is, however, distinguishable from the Apple case because it only concerned a vertical price-fixing arrangement, while in the Apple case there is an alleged horizontal pricing scheme involved (all publishers agreeing to sell their e-books at higher rates).

Finally, the DOJ has been accused of siding with the monopolist e-books seller (Amazon) instead of protecting the new entrant (also Apple echoes this argument in its official statement). The claim is that the DOJ failed to recognize the significance of Apple’s entry into the e-books market, which was previously monopolized by Amazon. According to these voices, the arrangement between Apple and the publishers enabled Apple’s entry to the e-books market and consumers are better off now due to the existence of competition. Assuming that this explanation is true, Apple will still have to provide justification as to why this entry did not lead to typical results associated with creation of competition and instead of driving prices down it lead to higher retail prices of e-books.

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