May 06, 2012

Three Observations Concerning the DOJ Suit Against Apple

by Alan Beatts

At the beginning of last month the United States Department of Justice announced that it was bringing suit against five of the six major U.S. publishers as well as Apple for violating anti-trust regulations, specifically prohibitions on collusion and price-fixing as described in Section 1 of the Sherman Act.  The complaint brought by the DOJ in essence says that Apple and five publishers (Macmillan, Penguin, Hachette, HarperCollins and Simon & Schuster) conspired to force adoption of the agency model for sales of ebooks on the retail industry with the aim and effect of raising prices for consumers and reducing competition.  Under the agency model, which was adopted by all five of these publishers over a period of six weeks in early 2010, the publishers set prices and the retailers (Amazon, Apple, Barnes & Noble, et al) cannot offer the book at a lower price.

I've been following the discussion about the suit since the news broke and it is interesting that the general tenor of the response has not been particularly in favor of the suit.  Specifically, there are a few things that seem to be generally acknowledged by most of the commentators, regardless of industry affiliation or political stripe.
1)  It seems very unlikely that the suit will be successful against Apple.  Since representatives from Apple were not present at the meetings between publishers where the collusion allegedly took place, and Apple is neither in the same business as the publishers nor does it dominate the ebook market, in the view of a number of legal scholars it seems unlikely that the court will find against Apple.
More here

2)  The suit is probably not consistent with the spirit of the law, even if it is within the letter of it.  In the simplest terms, the Sherman Act, along with subsequent anti-trust and antimonopoly laws, was put in place to encourage competition by stopping groups of companies in the same industry from conspiring to either fix prices at an inflated level or to prevent competitors from entering the field.  The actions of the publishers and Apple were designed to accomplish two things --

A)  To allow the publishers to individually resist Amazon's potential ability to set an industry-wide price for ebooks.

B)  To let Apple enter the ebook market on an even footing with Amazon (which in early 2010 controlled 90% of all ebook sales).

Neither item would tend to reduce competition; rather they would both tend to encourage it, a contention that is supported by the current proportion of ebook sales which is now spread among Amazon, Apple, and Barnes & Noble, with Amazon still well in the lead.  On the other hand, a return to wholesale pricing would benefit Amazon more than any other business, which would seem to help Amazon exert more control over the ebook market.
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3)  There don't seem to be many indications that there was any price-fixing per se.  The agreement reached among the publishers was what the sales model would be, not what the price of the books would be.  Given that the costs of producing a book are pretty much the same for all six of the major publishers, regardless of the author or the book, it doesn't require price-fixing for the publishers to arrive at the same general price for ebooks.  Without the element of actual price-fixing, the case is much weaker.
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Of course, over the past weeks I've run across a number of impassioned letters decrying the DOJ's action, notably one from Macmillan's CEO, John Sargent <> and another from Scott Turow, author and president of the Author's Guild <>.  But there were some surprises as well, like Charlie Stross' nice and concise explanation of the "interesting" (read as "scary and bad") thing about Amazon's position in publishing <>.

But probably the most surprising thing to me was that I haven't run into one article or reputable blog post that is damming of either the publishers or Apple.  That isn't to say that they aren't out there (I'm sure that they are) but it's intriguing that the reaction overall seems to be pretty one-sided.  Whether the tenor of the reaction will have much effect on the outcome of the suit, I don't know, but it looks better for Macmillan and Penguin, not to mention Apple, than it did when the suit was first announced.

If you're interested in more information about the whole thing, here are a few links that are informative.

The text of The Sherman Act --

The actual complaint, courtesy of Scribd --

An excellent point-by-point analysis of the suit from The Verge --

Details of the settlement that three publishers (Hachette, HarperCollins and Simon & Schuster) reached with DOJ from Wired --

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