The DOJ Only Wants to Control (and Limit) Apple’s iTunes

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iTunes OverlordThe U.S. Department of Justice doesn't want much, just control over Apple's entire iTunes business. This, because Apple had the audacity to do something that same DOJ had failed to do, which was bring competition to the ebook market.

We've covered the news aspect of this twice today—once explaining the DOJ's proposed remedy, and a second time explaining Apple's outraged response to that proposal. I found myself needing to rant about the bigger picture, though, because the big picture item is larger than Apple.

To me, the DOJ's suit was misguided and Apple's conviction is difficult to fathom, but the DOJ's remedy hands unprecedented power to Apple's competitors.

That proposed remedy would prohibit Apple from entering into publisher deals that result in Apple not having to compete on price (i.e. no MFN clause); force Apple to let Amazon, Barnes & Noble, and other book retailers sell books through App Store apps without paying Apple a cut; require Apple to hire two antitrust compliance positions that would have broad authority in the company; and, give the DOJ broad oversight over the rest of Apple's iTunes business.

Pullquote

It's the last component that Apple called draconian, unprecedented, punitive, and overreaching. It's Apple's job to frame this stuff in the most negative light it thinks it can get away with, of course, but I agree on at least three of those adjectives, draconian, punitive, and overreaching.

Total Control

I'll add perplexing. For the life of me, I can't understand why the DOJ wants—let alone thinks it deserves—control over Apple's iTunes business deals.

Look at the wording: under the proposed remedy, Apple would be prohibited from entering into any agreements with, "suppliers of e-books, music, movies, television shows or other content" that "are likely" to result in an increase in price for those same products at any Apple competitor.

That's total control over everything related to Apple's media business. It is apps, it is movies, it is TV shows, it is books, it is music, and it is everything else that might come down the pike. Everything.

Even though Apple has not been accused of violating antitrust regulations in those markets, or of colluding in a price fixing scheme with other parties in those markets, and even though there is a thriving market for all of those products—a thriving market where Apple is often the most expensive retailer—the DOJ is arguing that it should have oversight over Apple's entire media business.

That's pretty whacky to me, and it's why I agree with Apple that this remedy is punitive in nature. The DOJ is looking to punish Apple for fighting the charges in the first place. That may be understandable in that the DOJ believes that Apple did something wrong to begin with, but it doesn't make it right.

So Why?

I think the problem is that the DOJ has wrongly fixated on consumer pricing as the holy grail of consumer protection. I've argued repeatedly that in the book business, there is far more to what is good for consumers than price alone. In particular, there is the quality of the product, availability of the product, and in ebooks, there is the user experience itself.

As Amazon garners more and more power—now with the help of the DOJ—margins slip lower and lower. Already we have one less major publisher competing because Pearson and Penguin merged in June. No margins needs fewer new authors being groomed by the publishers and it means fewer and fewer editing resources.

My colleague at The Mac Observer, John Martellaro, noted to me earlier that framing the book business in terms of consumer price alone is a false narrative. I think he's right, and I think the DOJ has wrongly concluded that customer cost is the only issue, and that it has completely disregarded the preservation of competition as being in the consumer's interest.

How else can you explain that while the DOJ has gone after Apple and the five publishers it has:

  • Restored Amazon's ability to regain monopoly power in ebooks.
  • Hastened consolidation in the publishing world, which further consolidates power in Amazon's hands. Remember that Amazon is a publisher and a retailer.
  • Hastened the collapse of the book retailing market. Borders went under after this case started, and Barnes & Noble is struggling, in part because its Nook business can't compete with Amazon's dumping.
  • And if the remedy is adopted, it will eliminate Apple's ability to negotiate other content deals, which strengthens the power of Amazon and Google.

Going Back to the Beginning

There is no doubt that there is more competition in the ebook market today than there was when Apple entered that market in 2010. Amazon has gone from dumping ebooks to gain monopoly power to merely owning a majority share (about 65 percent) of the market. Of course, Amazon is free to dump again, but that's because of the DOJ.

It also seems fair to say that when Apple entered the market, neither Apple nor Amazon was doing anything illegal (note that Judge Cote and the DOJ disagree and that my legal opinions are worth their weight in HTML).

Yes, Amazon was dumping books to gain monopoly power, and yes, Apple's most favored nation clause resulted in higher consumer prices for some best sellers, but dumping isn't necessarily illegal, and price fixing when entering a market controlled by a vertical monopoly isn't necessary illegal, either.

Accordingly, I don't think the DOJ needed to do anything against either Apple or Amazon. But if the DOJ did feel compelled to do something, why go after the party that helped usher in improvements to the overall market?

I can't think of a single reason.

Image made with help from Shutterstock.

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18 Comments Leave Your Own

BurmaYank

I can’t think of a single reason.

Maybe the DOJ’s task force on this case is led by units of the Apple WalledGarden-loathing fanDroid Borg Collective

wmac

Maybe the DOJ should focus on the things that have brought this economy to its knees by going after the investment banks. Or maybe they should focus on bringing to justice the people who are responsible for torturing innocent people under the guise of “fighting terrorism”. To grant Amazon near monopoly status in the ebook market how long will it be that they are the only game in town and then the consumer has to dance to Amazon’s music? There is something completely wrong-headed with these so-called remedies.

BurmaYank

If the DOJ’s task force WAS led by the fanDroid BorgCollective, then obviously, Apple’s resistance is futile.

skipaq

Why? Somehow Apple has gotten on this administrations bad guys list. Perhaps it is the $150 billion it doesn’t like being outside the reach of the IRS. Perhaps it has something to do with Apple execs being blunt about why manufacturing is also outside the US. There is hardly an area of the economy this administration hasn’t tried to muscle to its’ will. This is just another power play by these thugs.

d'monder

He who lives by the courts, dies by the courts.

daemon

Bryan,

I agree that these remedies are draconian and punitive. But that’s what a punishment is supposed to be, draconian and punitive. I don’t agree that they’re over-reaching.

Look, Apple did wrong. Apple conspired with publishers to fix ebook prices. It doesn’t matter if you’re all open about it like Steve Jobs was, it’s illegal. You can’t do that.

xmattingly

daemon, there is no “price fixing” involved when you do not control the market, which Apple does not for e-books, by a long shot. And the fact that you are NOT forced to buy books through Apple in order to use them on an iPad is another level of absurdity to this farce.

Publishers and content creators have rights also… like, the right to sell your product for what you think people are willing to pay for it? I agree with Bryan: Amazon has just been handed a lot more leverage over this.

But hey, that’s the nature of our current idiot bureaucracy: picking winners and losers, wrapped up in a ridiculous claim for consumer advocacy.

daemon

xmattingly,

Clearly, you’re definition of “price fixing” doesn’t match the legal definition.

Bryan Chaffin

There’s price fixing and there’s mutually, yet silently, agreed on price fixing. One is usually illegal. The other happens all the time. Gasoline prices in the U.S. are a great example of the latter. Neighborhood gas stations (or their corporate offices) gravitate towards the price that said neighborhood will pay, and all of the stations in that neighborhood then that amount, with tiny variances for perceived value, services, and convenience.

The book industry itself has a more or less silently agreed on set of prices. Paperbacks from all imprints and publishers are all priced within a dollar or two of each other (with a few exceptions), while hardbacks are priced more by what the publisher thinks an individual book and author will earn. The higher the expectations, the higher the price. Again, those prices tend to be very similar across the industry.

It was the same with ebooks before the iPad, more or less, though here we have more tiers. There are back catalogs, for instance, and digital books have near infinite shelf lives, allowing those back catalogs to be quite varied in pricing. Best selling ebooks, though, were all priced about the same, $14.99 to $19.99 (but consistent, in terms of tiers, across all competitors), with a wholesale price of $12-14. I’m using very rough numbers, so if anyone can correct them, please do.

The problem was Amazon’s dumping. Best sellers were sold at a loss for $9.99 on Kindle in order to promote the Kindle platform and the very notion of ebooks. Amazon paid $12-$14 per, and then sold them at a loss.

Publishers and authors loved this at first. They got the money they wanted, and Amazon was suddenly moving a lot of books. ch-ching! Then it dawned on folks that this practice was training customers to value best sellers at $9.99. It was only a matter of time before that meant the publishers got $6 or $7 instead of $12-$14, and those sales were coming directly out of the very lucrative hard back business, where books sold for $20-$40ish.

According to Apple, the publishers already knew this, but didn’t know how to get control of the situation. The publishers may or may not have colluded on the topic—note that three of the five settled faster than you can say, “Who should make the check out to?”

Also according to Apple, once Eddy Cue came up with using an MFN clause to ensure that iBooks would always be competitive—a common practice that Apple didn’t invent—Apple stopped worrying about what Amazon charged.

Barnes & Noble had figured this out, too, and was supposedly working on the same concepts concurrent to Apple. I think there’s some room for interpretation on this front, however, or surely Apple would have been found not guilty.

But it was Apple asking for agency and MFN that gave the publishers the backbone to demand the same terms from Amazon. They then set their retail prices, as they always had, but now those prices were enforced at the checkout stand, too.

Actual price fixing or de facto price gravity?

Judge Cote said Apple’s witnesses weren’t credible. I wasn’t there, but PED was and he found them very credible. Turns out that Judge Cote’s opinion matters more, but I will say that reading through everything I could get as presented by Apple and the DOJ, Apple’s story was credible to me and the DOJ’s own evidence contradicted its claims.

Again, it turns out my opinion matters [s]little[/s] not, but it does, by definition, inform the editorials I have written, including this column.

I don’t think Apple price fixed. I don’t think Apple cared once it had MFN. I think Apple will win on appeal. If not at the appellate level, at the Supreme Court.

In the meanwhile, the DOJ demanding control over all of iTunes because of iBooks is unreasonable. Had Apple been accused, let alone found guilty, of colluding to fix prices or some other antitrust violation in these other businesses, that would be one thing.

That’s not the case, however, making the DOJ’s remedy outrageous.

williambanzai7

Maybe the DOJ is lead by a :  http://www.flickr.com/photos/expd/9382320612/

windwalker

So this is why you yanks are so afraid and distrusting of your government institutions.
There is no judgement or discernment anywhere in the system.
People arbitrarly wield the letter of the law as a club to reach their career goals.
There is no regard to the desirability of outcomes for society at large.
Make no mistake, this is a direct consequence of who you are and what you value.

Andy Prokhorov

What “dumping” are you talking about? Why hardcovers are more expensive than paperbacks, ever thought about that? Maybe it has something to do with production costs, what do you think? Well, guess what, production costs for ebooks are virtually zero. That means Amazon’s $9.99 is not “dumping,” it’s, actually, ripping customers off—yes, because of Amazon’s monopoly power. If there was really competition in ebook market, prices would be MUCH lower, like $1 for a book.

Oh, and I guess you like paying inflated gas prices, right? Own any stock in oil companies? The theory of why a monopoly is bad is precisely because it can raise prices—precisely to the point, as you put it, “that said neighborhood will pay.” Whereas competition is good because it lowers prices to the point that is just a bit over the production costs so the producers would still survive and have an incentive to produce.

Yes, there are cases of “silent” price fixing that are hard to prosecute. And, yes, it happens all the time. But that doesn’t mean that that’s a good thing.

wytworm

So. Publishers have rights to sell at whatever price they wish to. Which was never in question. They sold to Amazon at whatever price they wished to. Amazon exercised the same right. Legally. As could have Apple should it have chosen to follow the law. Where’s the issue?

daemon

There’s price fixing and there’s mutually, yet silently, agreed on price fixing. One is usually illegal. The other happens all the time. Gasoline prices in the U.S. are a great example of the latter. Neighborhood gas stations (or their corporate offices) gravitate towards the price that said neighborhood will pay, and all of the stations in that neighborhood then that amount, with tiny variances for perceived value, services, and convenience.

Bryan, in Wisconsin there is a minimum markup law:

http://legis.wisconsin.gov/lc/publications/im/im_2006_05.pdf

Gas stations minimum price is a regulation of government, Apple’s minimum price for ebooks was an attempt at illegal price fixing.

Do you see the difference?

daemon

The book industry itself has a more or less silently agreed on set of prices. Paperbacks from all imprints and publishers are all priced within a dollar or two of each other (with a few exceptions), while hardbacks are priced more by what the publisher thinks an individual book and author will earn. The higher the expectations, the higher the price. Again, those prices tend to be very similar across the industry.

Bryan, when was the last time you went to a book store and actually bought a book at it’s listed retail price? Cause I haven’t done that since I got my first discount card at Waldenbooks.

I don’t know if you’re aware, but there’s entire sections of book stores where they have deeply discounted books, some going for a little as $1.

xmattingly

Bryan, thank you for the well-informed and articulate response. Could have made a “part 2” article out of that one! smile

daemon, don’t pretend to lecture me about the definition of “price fixing” when you’re not able to see the full scope of the situation through the fog of your own opinion.

Did Apple lock down their iOS devices to the point where the ONLY way you can get an ebook on them is by purchasing from them? Nope. Does Apple have a monopoly on ebooks? Far from it. In lieu of Amazon’s near-monopoly status, the DOJ should have given considerable pause to this before they decided to stick their beak in. Obviously, forethought is not a virtue at this particular bureaucracy.

Apple requires all partner retailers to sell their hardware at the same price. Is that price fixing? How about the fact that they’ve forced the music industry to sell all of their songs at a fixed price (*cough*), where they DO have a near-monopoly… and why didn’t the DOJ jump on that?

Cry “conspiracy” all you care to, but by your definition, pretty much every purchase you make every day goes to a crooked business. I’m as miffed as anyone else when I see gas prices suddenly spike 50¢ a gallon in a day, but with your level of cynicism there’s probably a nice, remote cabin in Montana waiting for you. And maybe a new career as a dental floss tycoon.

Substance

A good rule of thumb I was taught to apply to these situations a long time ago was “it’s ok to act like a monopoly when you don’t have a monopoly”.  Apple doesn’t have a monopoly on ebooks so if they want to control the price on the platform, so be it.  If Apple ever did get to the point that they controlled the vast majority of ebook sales, then you would have grounds for antitrust action. 

A couple other points that strike me as odd about this whole case:
1. Everyone calls out Amazon’s actions as “dumping”, which I thought was illegal.  I can only assume that much like what Bryan said about price-fixing, there’s a difference between dumping and ‘dumping’?

2. I feel like we’ve seen way too much relaxation of antitrust law in other media industries, where the vast majority of what we read, watch and hear belongs to only a few hands.  So why is the DoJ so eager to step into the relatively small market of ebooks and essentially play favorites and attack one perceived monopoly and clearly hand it to another one?

daemon

1. Everyone calls out Amazon’s actions as “dumping”, which I thought was illegal.  I can only assume that much like what Bryan said about price-fixing, there’s a difference between dumping and ‘dumping’?

It helps if you know how the bookstore business works. See for years prior to Amazon bookstores would enter into purchasing agreements with publishers. They would buy X amount of New York Times bestselling author’s work along with X amount of other books from the same imprint or related imprints (Tor, Forge, and Orb are all imprints of Macmillan). In movie theaters these extra conditional sales to get the real movies were referred to as “B Movies.” At some point it was ruled that Movie distributors couldn’t force movie theaters into purchasing the “B Movies” to get the “A Movies.” That was never really litigated in the bookselling business. So bookstores tended to get lots of overstock, now they could return the ripped off covers of the books they didn’t sell to the publishers for credit on new books, but that still left them with a pile of dejacketed books to get rid of. Believe it or not, that can get expensive. So what bookstores would do instead of just ripping off the covers and sending them back for credit is try and sell those books, even for as little as $1. Cause it was economically better for them to sell the books at steep discounts, than to send the ripped off cover back to the publisher and be left with a book that needed to be shredded.

So when the entire industry is in a dumping cycle how is it that Amazon meets the illegal definition of dumping?

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