Wednesday, August 15, 2012

Is Amazon a predator or prey? New developments in e-books litigation

It may be Shark Week on the Discovery Channel, but in the Apple e-books litigation at least one person is alleging that Amazon might be the biggest predator in the water. But unfortunately for him and fortunately for readers everywhere, he's wrong.

For those of you not keeping score at home: Apple and several major book publishers are in litigation with the FTC over price fixing to raise the price of e-books. At issue is something called a "hub and spoke" conspiracy. The FTC claims that Apple offered the e-book publishers the right to have agency pricing (where the publishers set the price and Apple just acts as an agent rather than a reseller), and the publishers agreed they would pull their books from Amazon. The "hub-and-spoke" name comes from the fact that the various spokes (the publishers) need the hub (Apple) to give effect to their conspiracy. I've previously written about the public comments on a settlement the FTC wants to bring for some of the publishers. Now the court has to decide whether to accept the settlement.

Bob Kohn, who according to Wikipedia heads a company dedicated to royalty processing for various entertainment industries including book publishing called RoyaltyShare Inc., wants to intervene in the litigation. He has filed a motion asking for something called amicus curiae (friend of the court) status because he wants to plead that what Apple and the publishers did shouldn't be illegal and so the court shouldn't accept the settlement.

His argument is quite nuanced, but I think ultimately wrong. It basically boils down to three points:
  1. Amazon took a print book that was $26 and bought the e-book rights for $13, then sold that e-book for $9.99. That's selling below cost.
  2. Selling below cost is what you do when you're trying to drive competitors out of the market.
  3. You can see three different types of competitors that Amazon is trying to drive out with their predatory pricing: other e-book platforms, new entrants into the e-books market, and brick-and-mortar booksellers. There will also be negative effects on consumers when Amazon ultimately raises its price after driving these competitors out of the market.
Let's unpack that last point a bit.
  1. Consumers: they will have bought books on Amazon and they will be locked into the Amazon ecosystem.
  2. Other platforms: Amazon's below-cost pricing forces other platforms to lose money too, or set prices higher than Amazon that no consumer would be willing to pay.
  3. New entrants: they would have to lose money right from the beginning which would mean they'd never enter the market.
  4. Brick-and-mortar booksellers: print books are still a competitor to e-books and if Amazon can sell e-books below cost then brick-and-mortar booksellers will go out of business.
To Kohn the publishers who are settling have no interest in pointing this out because they just want to get out of the lawsuit, so someone else will have to do it and that someone should be him. Sure, maybe Apple and the non-settling publishers may also have an interest in pointing this out, but no mind: he may still be making a good point.

It turns out I used to litigate antitrust cases. I don't have any problems with Kohn or anyone getting to submit an amicus brief, but his arguments on the merits shouldn't be good enough to win. I'd have several legal responses to Kohn's brief:
  1. Below-cost pricing is a standard practice when entering a new market and that's an accepted practice. Would consumers buy an e-book for $13 when they were first introduced? Or did Amazon need to price below cost to open the markets? Remember: books are copyrighted so it's not like Amazon could go create its own versions. It had to pay whatever price the publishers asked. Kohn's argument would effectively say that the publishers could force Amazon to charge a certain retail price for e-books by way of their own sale price to Amazon. In the vernacular, we call that price fixing. And it's pretty much always illegal.
  2. The publishers e-book pricing is aimed at supporting a different business: their print books. After all it's not like an e-book actually costs $13/copy to produce. I'm not saying that e-books are free to produce - there's the payments to the authors, the staff costs, and a reasonable profit - but there is literally no cost of goods.
  3. The Amazon ecosystem isn't able to lock in consumers. Do you have an iPhone or an Android phone (or maybe even Windows Phone if your ZIP code is 98052)? Then you have a Kindle. And you also have a Nook. You can buy books for each of those platforms and read them on pretty much any portable device. Yes, if you buy a Kindle book you're unlikely to re-buy the exact same book for another e-platform. But buying "Hunger Games" on the Nook doesn't preclude you from buying "50 Shades of Grey" on the Kindle.
  4. Amazon uses its market share to try to force terms onto publishers and possibly, eventually, will do the same with indie authors. This could be Kohn's strongest argument (at least for the smaller publishers), but it collapses onto itself. For example he argues that the actions by Apple and the publishers should be permitted because they introduced competition into e-books, pointing out that Amazon's market share in e-books went from 90% to 60% once Amazon wasn't allowed to price all books at $9.99 any longer. But this argument is backwards. Kohn admits as much when he says that as between the publishers and Amazon it should be the publishers who get to set prices because at least maybe they might use that money to pay other authors to write other books. Putting aside that if you want to dine out on the largesse of a major publisher you will go to bed many nights very hungry, that shows a potential motivating factor for him here: higher prices means higher royalties. Everybody wins. Except the consumer.
  5. As for indie authors, one principle of judgments is that courts shouldn't make judgments on situations that haven't happened. He says Amazon might do bad things to indie authors in the future. That's not good enough for a court to permit illegal activities today.
A long post to make a short point, but the background needed to be there in order to allow my real point to be made. And here's the point: every single argument that Kohn makes is equally applicable against Apple. For all of his threatened markets and all of my responses above substitute Apple for Amazon, and record labels for publishers, and musicians for authors, and tell me I'm wrong. (If you think I'm not, go listen to your Zune.) When Apple started the iTunes store, it instituted the $0.99 single and the $9.99 album in a world where CDs cost $16.99 or more. The labels hated it and no one else could compete. But Apple never created an agency pricing model to make them happy or to allow competitors into the market. It only did this when it wanted to go into e-books. In its brief the FTC makes this point. And it's right, but it also misses one important thing.

Even though Apple did all of this below-cost pricing and other possibly anticompetitive activities (like DRM-locking the AAC file  format so it would only play on iPods), which is presumably supposed to keep out all competitors, it turns out that someone else was able to launch a digital music store anyway. That is, even the kinds of behavior that Kohn claims will create a monopsony (technical term for monopoly on the purchasing side) for Amazon such that no one else will ever be able to compete, and therefore Apple and publishers should be allowed to break the law in response, when Apple was doing that same thing someone came along and said "we'll get into this market anyway." And they did, launching the first real competitor for iTunes in music.

That competitor was Amazon.

Bob Kohn memorandum in support of motion for leave to become amicus curiae:
Legal Minimum post on Apple e-books litigation and comments:
Article on PaidContent:


  1. I've been watching this case closely and I love how you can "unpack" the twistier bits and put them in plain English. Bless you.

    1. Thanks for the support. Am working up a proposal for RWA13. Hope to get in and see you there!


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