DoJ Investigates E-Book ‘Collusion’

Published April 9, 2012

Apple’s attempts to jumpstart consumer interest in its e-readers have prompted the U.S. Department of Justice to announce it will bring an antitrust suit against the company and five of the nation’s largest publishers. The DoJ claims Apple colluded with the publishers to raise prices of book downloads.

If the DoJ is successful in the threatened antitrust suit or forces the companies to settle beforehand, the price of e-books could drop substantially. Although this would be a boon for customers, some market advocates say it would discourage technological innovations in the future.

The DoJ threat stems from Apple’s endeavors to alter publishers’ pricing structure from the “wholesale model” to an “agency model” prior to the 2010 launch of the iPad. Under the former, publishers typically charge retailers 50 percent of the cover price of non-digitized books, and retailers can then charge their customers whatever price they wish. Under the latter, publishers establish the price of e-books to Apple’s customers, and Apple earns a 30 percent commission on each sale. As part of the deal, the publisher agrees not to sell the same book to other e-book retailers at a lower price.

‘Unintended Negative Consequences’
The five publishers allegedly colluding with Apple are Simon & Schuster Inc., Hachette Book Group, Penguin Group, Macmillan, and HarperCollins.

The agency model was developed by the late Steve Jobs, former CEO of Apple, in response to publishers’ displeasure at selling new bestsellers at $9.99 to build interest in its Kindle e-readers. Publishers stated continued application of the wholesale model for digital book downloads would result in customers expecting to purchase all new books at similarly discounted prices, thereby reducing the prices they could charge for blockbuster books.

Sheldon Richman, editor of The Freeman, a magazine published by the nonprofit Foundation for Economic Education, says the DoJ’s action displays a fundamental misunderstanding of market forces.

“The Justice Department once again shows that it does not understand the dynamics of the marketplace,” Richman said. “There is no ‘just price.’ Prices result from a process—called the market—in which producers, wholesalers, retailers, and consumers engage in free exchange for mutual gain.”

Richman added, “It’s a discovery process, the outcome of which cannot be foretold, and government tampering—in any form, including patents and copyrights—will produce unintended negative consequences. Market prices are fair prices, but to have true market prices, we need markets freed from government’s anticompetitive interference.”

‘Not Restricting Supply’
Book publishers assert agency pricing increases competition by allowing more e-book companies to participate in pricing decisions rather than having only one company (essentially set prices for the rest of the industry.

James Johnston, senior fellow for economic policy at The Heartland Institute, which publishes InfoTech & Telecom News, agrees with Richman. “Monopoly power is not necessarily present when there is just one supplier,” he said. “The distortion in the allocation of resources occurs only when a monopolist restricts supply in order to raise price above marginal cost.”

Johnston added, “New products like the Apple iPad create their own markets. So it is not a distortion that it has a large market share. An inventor like Apple is entitled to be the only supplier for a limited time because of patent laws.”

Johnston employs what he calls the “Dolly Parton Model,” in which he posits the singer and actress as the sole supplier of certain entertainment services through such varied media as her recordings, concert performances, and film appearances in addition to being the proprietor of the Dollywood amusement park in Tennessee.

“A not-so-new product like Dolly Parton is the sole supplier of Dolly Parton services because she is protected by copyright laws,” Johnston said. “Both Apple and Dolly Parton are not restricting supply. Indeed, they are trying vigorously to increase the supply.”

$970 Million Market
The European Union is also investigating the allegations against Apple and the five book publishers, and multiple class-action lawsuits have been filed and consolidated in a New York federal court. Apple moved for dismissal of the case in early March.

E-book sales accounted for $970 million in 2011, nearly double the number of digital books sold the previous year.

Sam Karnick, research director at The Heartland Institute, notes that Amazon, Barnes and Noble, and other retailers were already selling ebooks and Apple’s deal was strictly a way to increase prices, which the publishers imposed on Apple as the cost of allowing the company to distribute their e-books on the iPad.

“The price hike was the publishers’ ransom demand,” Karnick said. “They threatened to withhold permission to publish e-books on the iPad if Jobs didn’t knuckle under. Jobs was not any kind of innovator or visionary here; he was clearly anti-consumer as regards ebooks.”

Karnick continued, “What mattered most to Apple wasn’t what the publishers called upon the company to charge, because the company knew full well the same prices would be imposed on other e-book retailers, which removed any competitive disadvantage for Apple as long as they could get the books on iPads so Apple could sell more of the devices. The provision of e-books by Apple was not any kind of addition to the market at all and certainly not a monopoly.”

Bruce Edward Walker ([email protected]) is managing editor of InfoTech & Telecom News.