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A look at the "flawed" antitrust decision against Apple

US District Judge Denise Cote last week ruled that Apple colluded with book publishers to artificially raise the price of e-books across the industry.

In the wake of that decision, the Macs Future website took a thorough look at Cote's ruling and points out a number of reasons why the reasoning upon which the decision lies is flawed.

If you recall, the case is rooted in Apple striking deals with a number of publishing companies and convincing them to agree to the agency model of publishing wherein the publishers themselves set the price for e-books.

In the court's decision, Cote notes that Apple could have chosen to follow Amazon's lead and go the wholesale route whereby the retailer sets the price of e-books. But Apple, Cote writes, did not want to compete with Amazon on price.

To that end, Macs Future astutely points out why competing with Amazon on price wasn't something one could reasonably have expected Apple to do.

But the record is clear that one of the reasons that Apple didn't want to enter the ebook market using the wholesale model because the biggest player in the ebook market, Amazon with 90% market share, was pricing books at a loss or break even. The Court refused to consider how ridiculous and anticompetitive it would have been for Apple to engage Amazon in the competition of "who can price ebooks further below the wholesale price".

It's worth mentioning that Amazon, with a lion's share of the e-book market, can afford to sell books at little to no profit since it can make up for it with sheer sales volume. Apple, entering the e-book market for the very first time, could not realistically compete with Amazon on price and hope to make much of a profit.

Indeed, Eddy Cue, during his testimony, drove home the point that Apple was less concerned with what Amazon was doing and was more focused on securing deals capable of ensuring that Apple's iBookstore would be a profitable venture.

Macs Future adds:

If Apple engaged Amazon in an ebook price war, Apple could have violated the antitrust laws by engaging in predatory pricing as its prices would have been below wholesale prices. Moreover, Apple could have been accused of using its dominant market share in the smartphone market and the new tablet market, to drive ebook competition out of the market. Could you imaging the internal dilemma Apple's executives would have faced if they considered selling ebooks at a loss through their iOS ecosystem? What if they had destroyed Amazon's ebook market share by selling ebooks at a bigger loss than Amazon could have afforded? Wouldn't Amazon have complained to the Department of Justice that Apple was engaging in predatory pricing?

In many respects, it seems that Apple was stuck in a classic "damned if you do, damned if you don't" type of situation.

Another point lost on Cote is that the agency model of publishing can actually operate to further competition in the marketplace.

Before Apple entered the market, Amazon, with its 90+% share of the e-book market, was effectively calling all of the shots. The agency model, however, returned a lot of that e-book control to publishers. Instead of Amazon setting the price of e-books as low as possible in an effort to attract new customers and keep old ones, the agency model gave publishers the opportunity to try their hand at the tried and true game of supply and demand.

If publishers set the price of an e-book too high and subsequently noticed a drop off in sales, it stands to reason that they would simply lower the price. Further, with Amazon not setting any of the prices, publishers would be competing against one another on price.

But the Court ignores that instead of having one company, Amazon, setting the retail price of ebooks, the agency model provided the six largest publishers and countless other publishers to set the the price of their own ebooks. That creates massive retail price competition. One publisher can't greatly raise the price of a notable book because another publisher (or author) with a book of the same quality and in the same topic can undercut that price and sell more books. When Amazon sets the price of 90% of the ebooks the consumer is set with no recourse but to rely on Amazon's goodwill on the retail price. The agency model allows many players to set the retail price. Thus in the long run, such competition is likely to result in the lowering of price.

All solid points.

The entire post over at Macs Future is well worth a read if you want a different take on Apple's legal battle with the DOJ. Meanwhile, Adam Engst over at TidBITS also has a comprehensive look at Judge Cote's decision that's worth poring over.