Did Apple fix e-book prices for the greater good?
If you had listened to the attorneys present their arguments in the United States Court of Appeals for the Second Circuit between ten and eleven a.m. Monday morning, you might have assumed that someone was suing Amazon. Much of the discussion has focused on whether Amazon had a monopoly on e-book sales a few years ago. At one point, a judge even suggested outright that Amazon could be described as a monopolistic company that practiced predatory pricing.
But the case in court that day did not involve 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 e-book prices ahead of launch. of the iPad in 2010. Amazon, whose Kindle e-reader had 90% of the market for e-books before the introduction of the iPad, bought them at wholesale prices set by publishers and then resold them at retail prices ( usually $9.99 per pound) which were often equal to or even lower than the original wholesale price. Amazon didn’t mind losing money on every sale, as long as the strategy helped sell Kindles and expand the market for e-books. But publishers believed the low retail price of e-books was eroding the public’s perception of the books’ value. They were also concerned that heavily discounted e-books would hurt hardcover sales, which they depended on 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 largest publishers in the United States. Publishers could set retail prices for eBooks sold by Apple, up to a cap of $14.99, and they would get seventy percent of the sale price. But if another retailer sold a given e-book at a lower price than a publisher set, Apple could match it. Apple executives have made one aspect of their plan clear: they want a significant number of publishers to sign their agreement before committing to an e-book market. Five of the six publishers, after discussing it with Apple and each other, agreed. Later, after the launch of the iPad, the same publishers individually approached Amazon with their own proposals – Amazon had to offer them a deal similar to Apple’s or they would withdraw their e-books. During the publishers’ conversations with Amazon, some of the publishing executives involved were also in contact with Apple. Publishers managed to strike deals with Amazon, and the prices of the e-books they had been arguing over began to rise. After the Justice Department sued Apple and the publishers in 2012, the publishers settled down, but Apple didn’t.
So why the discussion now about whether Amazon was a monopoly before Apple came along? According to recent case law, pricing systems designated as horizontal (i.e. coordinated between competitors) violate competition law, regardless of the intentions of the parties or the effects on the market. But “vertical” price fixing (between a retailer and a manufacturer) may not constitute a violation, depending on factors such as the companies’ motives and the results of their actions.
Last year, a federal judge named Denise Côté found that Apple had, in fact, collaborated in a horizontal price-fixing scheme, not that it orchestrated a vertical scheme. Cote noted that Apple executives kept publishers informed of what other publishers were doing; she also pointed out that Apple had made it clear to publishers that it was important for as many of them as possible to sign the proposed deal. These two activities, among others, according to Cote, showed that the company had facilitated horizontal price fixing. “Here we have all the necessary elements: with the active encouragement and assistance of Apple, the defendant publishers have agreed to work together to eliminate retail price competition and raise e-book prices, and yet another time with Apple’s knowledge and active participation, they completed their project,” she wrote. As such, it was not necessary for Cote to consider the arguments made by Apple’s attorneys regarding the company’s intentions and the effects of its actions, which could have been used to justify the vertical fixing of the price.
Apple felt Cote’s decision took the wrong approach. He appealed and the New York Court of Appeals is expected to rule on the case in the coming months. Apple lawyers say it didn’t participate in horizontal price-fixing; his involvement was vertical, they argue, his intentions were good, and his actions ended up benefiting consumers. One of those good intentions, according to Apple, was to allow Amazon to compete in the e-book market. And one positive result, the company said, is that Amazon’s dominance in the e-book market has been reduced and, for some e-books, Apple’s entry has actually led to lower prices.
On Monday, comments from appellate judges in New York, particularly Judge Dennis Jacobs, suggested they may be more receptive than Cote to Apple’s reasoning. According to Agence France-Presse, Jacobs said: “What we’re talking about is a new entrant breaking the grip of a market by a monopoly maintaining its grip by what is arguably price predators.”
Harry First, co-director of the competition, innovation and information law program at New York University School of Law, paraphrased Apple’s argument as follows: “It’s our effort to deal with a monopoly” – Amazon – “that engaged in predatory behavior. After reading the judges’ reaction, First concluded, “They seem to believe it.” First isn’t so convinced. Even assuming that Apple didn’t actively participate in a horizontal pricing system (which he says was difficult for Apple to demonstrate), it’s not clear that it makes sense for the company to win an appeal on the grounds that it has made the world a more competitive place. There are, after all, other more obvious ways for Apple to pursue this goal.
According to the Associated Press, when one of the judges, Raymond J. Lohier, Jr., asked a Justice Department lawyer how Apple and the publishers “could have broken Amazon’s monopoly on the book market electronics without violating antitrust laws,” the attorney noted that Apple could have let competition among the companies play out naturally without pursuing explicit strategies to drive up prices, or it could have sued or complained. with the Department of Justice and federal regulatory authorities. First told me, “My view on this has always been that vigilante justice isn’t appropriate — it wasn’t even appropriate in the Wild West.”