The Apple E-Books Case: When Rescuing an Industry Violates Antitrust

If I’m revolutionizing your whole industry right out of business, do you have to cooperate? If cooperating means letting me sell your products at a price you think undermines your future, and the alternative to is to organize your industry to fight back, the government says you had better cooperate. It sued five leading publishers for resisting the Amazon revolution, and after they settled, it continued the case against Apple, which it says organized the resistance. Apple’s trial ended this week.

Before Apple entered the ebook business, Amazon was the leading seller of ebooks. It bought them at wholesale prices set by the publishers and sold them at retail prices it set. It sold some popular ebooks for $9.99—less, the government says, than it paid for them—in order to compete with hardcover books and motivate customers to buy Amazon ebook readers.

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Amazon threatened to eliminate the role of publishers altogether.

The publishers involved in the case—most of the big ones—disliked this low price, the government says. It undermined hardcover sales, a major source of the publishers’ revenue. It strengthened Amazon’s position in the market, potentially empowering it to negotiate lower wholesale prices. Most ominously—if you’re a publisher!—as Amazon solidified its role in selling ebooks to readers, it improved its position to buy books directly from authors, threatening to eliminate the role of publishers altogether.

But most of the books the public wanted were books the big publishers were publishing. So it’s hard to imagine Amazon accomplishing its revolution unless the publishers sold it their ebooks. If the publishers didn’t cooperate, there would be no revolution against the publishers, at least not imminently.

Yet Amazon was already important enough to the publishers, the government says, that they were afraid to stand alone against it and try to negotiate better deals. If Amazon refused to sell one publisher’s ebooks, or worse yet, refused to sell one publisher’s books in any format, that would be a substantial disadvantage to that publisher. But if Amazon stopped doing business with all the major publishers, it would no longer be much of a bookstore.

The publishers had the strength to fight Amazon—but only if they stood together.

If you’re a reader, and especially if you are or want to be an author, you might be cheering for Amazon in this fight. So am I. Amazon, after all, was making books cheaper and making it easier for authors to reach readers. From pretty much any perspective except the major publishers’, Amazon’s revolution is wonderful.

But if a commercial revolution that puts you out of business would be good for other people, that doesn’t mean you should help it along and participate in your own destruction. You should pursue your own best interests. And if that means working with other businesses that face the same challenge, well, making common cause with those who face a common challenge is a classic strategy in life.

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Should you participate in your own destruction?

Unfortunately for the publishers, it violates the antitrust laws when competing businesses work together to set prices. So each publisher faced three bad options: Help Amazon undermine its industry; resist alone and risk its relationship with its biggest retailer; or seek a united front and risk legal punishment by the government.

When Apple appeared on the scene, the publishers had a fourth option: use their contracts with Apple to restructure the market. Instead of giving Apple terms like Amazon’s, the government says, two publishers proposed a new model, known as “agency,” which Apple adopted, revised and shopped to all the major publishers.

Apple’s agency contracts empowered publishers to set the retail prices of their own ebooks, subject to certain limits. Apple would sell at those prices, keep a certain percentage as a commission, and pass the rest to the publisher. But if any of Apple’s competitors, such as Amazon, offered an ebook for a lower price, Apple could use that price and take its commission out of that.

Apple denies being concerned with the publishers’ terms with Amazon. But the government contends Apple knew that given the price-matching clause, the publishers would have an incentive to move to agency across the board—an incentive strong enough to create a united front that could go up against Amazon. Then they would be able to set prices above $9.99, not only in Apple’s ebook store, but on Amazon as well.

The government concluded that this was illegal. So where before the publishers had merely faced the threat of losing business opportunities, the government confronted them with a threat of being forced to pay damages. They settled. And that left Apple alone to face the government in court—for, by the government’s own account, nothing worse than riding to the rescue.

And why would the government condemn such a rescue? Antitrust law is designed to maximize businesses’ service to consumers, and Amazon’s price was good for consumers. Under our laws, the publishers did not have the right to unite against it—even if that was the only way to save themselves.

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