Monday, August 27, 2012

DOJ says: Apple's objections to the e-book price-fixing settlement are rotten to the core

Especially after its recent success against Samsung, Apple may well think its interests in the e-book price-fixing lawsuit are best-served by taking its chances in court. It may come to regret this.

For those of you who need to catch up... In April the US Department of Justice brought price-fixing claims against Apple and 5 publishers: Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster. Even though 3 of the 5 publishers were willing to settle (Hachette, HarperCollins, and Simon & Schuster), the DOJ still brought the claims against all 5 of them.

Under a US law called the Tunney Act, any settlement of claims in an antitrust lawsuit requires the court to receive comments from the public and other interested parties. Those comments are in, and the DOJ has filed the papers to get the settlement enforced. Apple and various other entities replied, and on August 24 the DOJ responded. And this response makes one thing very clear:

If Apple wants a fight, the DOJ will give it one.

This seems pretty clear from the way the DOJ responded to Apple's complaints that the settlements are forcing the settling publishers to terminate their contracts with Apple. The DOJ's response is clear and short: yes we are, but they could have done this anyway, so what harm are you really suffering?

It turns out that the contracts between Apple and each of the settling publishers is able to be terminated on 30 days' notice. What that means: ignore this litigation and assume that Hachette just decided on August 1, 2012 that it was done selling books on the iTunes store. It could send Apple a notice to that effect. On August 31, that contract would be terminated. And there would be nothing Apple could do about it. So Apple's real complaint is: the DOJ is forcing Hachette (and others) to terminate these agreements that otherwise they wouldn't be terminating. Well yes, no one terminates a mutually-beneficial deal, even if it's illegal, without encouragement. So the DOJ is saying: we're providing the encouragement.

And once those agency deals are terminated, the DOJ points out, Apple actually gains some power over the publishers. Without the agency pricing model, Apple is still free to cut a deal with the publishers where it pays them a percentage of retail price. But under such a deal Apple has final power to set that retail price. As the DOJ points out, if Apple doesn't want that power then it can just decide not to use it: books all come with an MSRP (manufacturer's suggested retail price). Apple could just set a policy of pricing all its books at the MSRP, which would effectively allow the publishers to set their price without doing anything illegal. The DOJ asks, with some justification, why is Apple complaining about getting a better deal?

As far as the DOJ is concerned the answer is clear: because if Apple has the ability to set its own prices, so will its competitors, and that's the thing Apple doesn't want. Straight from the DOJ's document: "In that event, Apple's e-book customers might find less expensive alternatives." Put another way, Apple doesn't want to set its prices at MSRP unless all its competitors are forced to also. And, noting that Apple's entering into the agency agreements "almost literally overnight" caused price increases in e-books, the DOJ ends its submission by noting that Apple's objections to the settlement are totally self-serving.

There's an old saying about not picking a fight with people who buy ink by the barrel. I'd say that's even more true when fighting people whose lawyers are paid from the national budget. I didn't work there yet but I remember the news and commentary when Microsoft was having its antitrust troubles and the argument was that if Microsoft was found to be breaking the law then that would kill the entire Internet economy. It was, but it didn't. The DOJ seems to believe that even without a criminal conspiracy to fix prices, bookselling will survive too.

I bring up Microsoft for a reason. No, the company wasn't broken up after the antitrust judgment, but its business activities were massively curtailed. Imagine a world where Microsoft had been allowed to whatever it wanted into Windows or block businesses it felt were competitors. Google starts a search engine? Block it from IE. Want to find the Chrome or Firefox browsers? Same thing. Want to download iTunes onto your PC? Can't install it. Trying to use a social network? Doesn't work in your browser.

I'm not saying this would have been a good world for consumers. But imagine the computing landscape without Google, Apple, or Facebook. It's quite possible that these companies wouldn't exist without the DOJ's (and EU's) litigation against Microsoft. The DOJ seems to believe that Apple wanted that to be the way things would work for digital media: you'd buy it from Apple or from no one, and when a competitor came along that could threaten that environment Apple pushed back with every means at its disposal. Legal or otherwise.

According to the DOJ Apple has promised to keep going until it "has had its day in court". It appears Apple will get its chance. It may wish it hadn't.

MANDATORY WEASEL NOTE: Insert "allegedly" into the above text as many times as it takes for you to remember that nothing is proven, no judgments reached, Apple and all the publishers are innocent until proven guilty, etc.

1 comment:

  1. The Plaintiffs submitted a proposed settlement to the court in June 2012, in which Facebook would (1) make certain changes to its “Statement of Rights and Responsibilities structured settlement quotes


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