The Anti-Trust Division of The Justice Department announced this week that it is considering filing charges against Apple Computer and 5 of the largest book publishers for violating anti-trust laws. The issue, at least as far as I can determine, is whether there were illegal agreements made between Apple and the 5 publishers to fix the retail price on e-books. It is illegal under anti-trust law to make agreements to “restrain trade”.
I know a little about anti-trust law. When I was a bookseller, I was involved for about 20 years in various anti-trust lawsuits having to do with unfair competition by chain stores. I won’t go into detail here about anti-trust except to say that the laws are incredibly arcane and usually hinge on “facts” that are murky at best. And I do not know the specific facts of this case that would either incriminate or exonerate the putative conspirators.
So let’s talk about what this means in the real world. Here’s the back story. In 2010 when Apple was poised to release the iPad, Amazon controlled about 90% of the e-book business. Amazon sold books in the proprietary Kindle format which could only be read on Kindle readers. If you had a Kindle reader (and at that time most e-book consumers did), you had to buy your e-books from Amazon.
As is their wont, Amazon began selling newly released best selling e-books at $9.95, below their cost which was typically about $12.50. This was anathema to publishers for a number of reasons. 1) The prices were so low that it had the potential effect of eviscerating sales of the print on paper editions. Publishers recognized that e-books should be cheaper, but not that cheap. 2) Related to this, publishers felt that Amazon’s selling below cost would discourage entry of other potential vendors in the e-book business. This would leave publishers completely beholden to one vendor, Amazon, whom they have never really felt comfortable with. 3) Finally this kind of pricing would put into the heads of consumers that there was an inherent value to an e-book of $9.95. Presumably Amazon had no intention of selling below cost forever and they would eventually use their monopolistic power to force publishers to reduce the prices on e-books books. Amazon would then have a sustainable business model. But publishers probably wouldn’t.
Enter the Apple iPad. At last the publishers hoped that they could break the Amazon monopoly by throwing themselves into the arms of the only company with the resources to compete successfully against Amazon. Apple Computer has the highest capitalization of any company in America, probably the world. Compared to Apple, Amazon is a mere street peddler. Apple and the publishers worked out an alternative system for selling books that was similar to the relationship iTunes had with music publishers.
Most products for sale in retail stores are purchased at “wholesale” for a low price, and the retailer can set any price they want. Thus the old saw that all you need to know in retail is: “buy low, sell high”. But Amazon had the resources to buy low and sell lower, to sell below cost for as long as it took to drive out the weaker competition. After all, they could make up the lost profits by selling more Kindle Readers and driving business to their other products. Cameras, shaving cream, what have you.
Apple and the six largest trade publishers adopted a new model. Rather than giving a lower wholesale price to a vendor and letting the vendor set the retail price, under the new “agency” model, the publisher would set the retail price of the book and give the vendor (say Apple or Amazon) a 30% commission on the sale. There were many complicated deals made (that may or may not have been legal) that would force Amazon to accept this new “agency” model. Amazon would have to sell the e-books at the same price as their competition, thus defeating what has always been Amazon’s competitive strategy.
The Justice Department argues that this new “agency” model is bad for the consumer because it tends to insure that e-books are selling at a higher price than they otherwise would if the retailer was able set its own price. Publishers argue that the “wholesale” model would create an unhealthy monopoly by Amazon that would not be in the long term interest of book buyers and society at large.
Yesterday, the Author’s Guild weighed in on this issue. The president of the Guild, Scott Turow, sent a letter to all of its members calling the decision by the Justice Department to challenge Apple and the 5 publishers: “grim news”. As most of the followers of this blog know, I have frequently expressed my own concerns about the sometimes unhealthy power of Amazon in the book business.
Turow was speaking for the interests of authors, but he makes some powerful points about the ultimate impact of a de facto monopoly by Amazon. He is concerned, as are publishers, that predatory pricing of e-books will attenuate the ability of physical bookstores to compete. He says that it is as if: “Netflix announced that it would stream new movies the same weekend they opened in theaters.”
