Apple vs. DoJ Lawsuit

Who is in the wrong here?

Yesterday, Apple Inc. filed a “memoradum of law” with the New York federal court presiding over the Department of Justice’s collusion case against the “Big Six” publishers and Apple. This was a revealing (and mercifully short) statement of protest against the court’s decision to suspend any agency pricing agreements for at least two years, thus breaking Apple’s established agreements with publishers. The memo calls this decision “fundamentally unfair.” Apple claims that the court’s ruling would invalidate its “bargained for” eBook selling contracts with these major publishers. The corporation is also complaining about not getting a chance to argue their personal case before the settlement between the DoJ and the Hachette Group, HarperCollins Publishers, and Simon & Schuster is finalized. According to Apple, any resolution between some of the parties would affect all of the parties. I am inclined to agree. If the court immediately forces three of the six to alter their pricing, they will have a major advantage in the market (perhaps one that they aren’t seeking). Things like this are great for consumers, but bad for corporations.

Here is an excerpt from their memo that presents their argument in detail:

This case is about an alleged conspiracy to force Amazon to adopt agency [pricing for eBooks]. Thus, a settlement enjoining collusion or precluding publishers from forcing agency on Amazon would be appropriate. Yet the Government goes much farther. The Proposed Judgement penalizes Apple in a manner that is inconsistent with the public interest and the law. Without Apple’s consent and without a trial, the Proposed Judgement automatically terminates Apple’s agreements and effectively bars Apple (and other retailers) from selling eBooks under the agency model for two years by mandating shared responsibility for pricing between principal and agent. This result also is inconsistent with the fundamental tenet of agency relationships, not justified by proven facts, and has been overwhelmingly opposed by the public.

The Government justifies the termination of Apple’s contracts before trial on the grounds that they are causing ongoing harm . . . The Government is seeking to impose a remedy on Apple before there has been any finding of an antitrust violation.

The other side of this argument, one that the courts are likely to support in final settlements, states that the six major publishing houses and Apple did in fact conspire to set eBooks prices to prevent competition. With the agency model there is no discounting, couponing, or loss-leading. This is why people who shop at the Kobo ebooks store frustratingly have their discount codes denied on most available titles. These publishers control the price of their eBooks, and the retailers must sell them for the price that they set, or risk legal action. This is blatant price-fixing, no matter what fancy name you give it (agency pricing).

Essentially, this case is about Amazon and its total dominance of the eBook market between 2007-2010. Their share of the market soared to 90% during the early years, when the Kindle was all the rage. Amazon got big, fast. The Seattle-based technology giant also insisted that eBooks, all eBooks, would be $9.99 or less. New York Times bestsellers, modern classics, indie titles, all of these books were sold at a huge discount from their hard copy list prices. Amazon pushed for the $9.99 standard with an iron hand, resulting in a variety of business conflicts, with both publishers and jilted authors. When the six largest publishing houses (Macmillan, Hachette, Penguin, HarperCollins, Random House, and Simon & Schuster) realized that people were flocking to eBooks in droves, looking for better deals, they knew that their physical book sales were in serious jeopardy. The book industry as a whole, both sellers and publishers, had been experiencing historic lows since the dawn of the new millennium and the digital age. Independent bookstores in the United States have been going out of business at an alarming rate, down from about 4,000 stores two decades ago to about 1,900 today. Borders famously collapsed under a sea of debt and mismanagement. Barnes & Noble was struggling against the headwinds of a down economy, and without major investment, faced the same fate as Borders. In the past century, the largest publishers had a comfortable (almost monopolistic) grip on the book industry. Technology changed all of this. Money was hemorrhaging from their corporations as print sales continued to dwindle.

This is the point where I believe publishers asked themselves, “how do we keep our physical book business alive?” The answer: make buying eBooks as unappealing as possible. Before agency pricing, eBooks were already a wasteful proposition for some. If you bought an Amazon Kindle eBook in the early days, you couldn’t read it on any other device, you couldn’t lend the book to a friend, and you could resell it either. DRM-protected files are not like regular books, and the term “disposable income” has become associated with the financial requirements of eBook purchases. $9.99 was too reasonable of a price. Why not sell books for $11.99, $14.99, hell, why not even sell some backlist titles by dead authors for $18.99? This became the publisher’s line of attack: hit the consumers’ sense of frugality. In order to assemble a decent modern library (Kerouac, Hemingway, Steinbeck, Faulkner, Amis, Rushdie, ect.), one would have to spend well over $400 for a mere twenty or thirty eBook titles. At these prices, the publishers could make their physical books look like a lot better deal in comparison. The customer may miss out on the Kindle reading experience, but at least they could lend the book to a friend, or trade it in for another book at their local flea market. They could resell an $18.00 book on eBay, but they couldn’t do that with an $18.00 eBook.

Agency pricing has gotten one thing right. It has prevented Amazon from totally overpowering every other eBook vendor in the market. Amazon has so much money to throw around, if they wanted to buy a Harry Potter eBook for $11.99, then sell it for $2.99 on Amazon.com, they could absorb the loss. This is what “loss-leading” is all about (Amazon is considered notoriously unscrupulous for doing this). Amazon has been using large discounts to attract customers for years, and despite the short-term losses they initially take, they come out on top by driving business to their site. The Kindle Lending Library started with this model.

Even though the publishers have managed to level the playing field, the real problem is that they are abusing the agency model. They are charging WAY too much for backlist eBooks. Should a classic novel written by an author who died in 1960 really cost $13.00-$15.00? The publishers are not just looking out for their authors or the valuation of literature, they are trying to redirect sales.

This argument will continue as the DoJ proceeds with its case, but I’m not quite sure which side to take yet. Feel free to add your opinion in the comments section.

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