e-books: What is Apple's defense?

[Do_Not_Taunt]

The facts as I understand them:

1. Once upon a time, Amazon negotiated a wholesale price for an e-book with the publisher, which is what Amazon would remit to the publisher for every copy of the e-book that they distribute. Then independently, they would set the retail price for that e-book, which was often $9.99, and was often less than the wholesale price. Therefore, Amazon was taking a loss on each copy of an e-book sold, but did so because they thought they were building a market.

2. Publishers were unhappy with customers getting used to a $9.99 price, and thought that would lead to future pressure to lower the wholesale price of e-books. However, there was little they could do about it, because Amazon owned the market. Enter Apple: with the launch of the iPad, Apple was seen as a new, large player in the e-book market, and negotiated the ‘Agency’ model, wherein the publisher sets the retail price, and splits the proceeds with the retailer 70/30. Amazon tried to resist, but ultimately folded and went along with the Agency model (under which they made more money, ironically.)

3. Enter the DOJ: they sued the publishers and Apple over the agency model, claiming it was anti-competitive. I’m not a lawyer, but this seems consistent with my understanding of the law in the United States: a manufacturer/publisher cannot set the retail price of an item, and they certainly can’t require that all retailers charge the same price. MSRP has always been a recommended price, and the manufacturer cannot take any action to prevent the retailer from charging less - or more. Even electronics manufacturers, who have long tried to protect full service retailers against discounters and now internet sellers, have to use a minimum advertised price restriction in their contracts, because they cannot set the retail price, or even a floor for the retail price.

So do I have this right? If so, what is the defense that Apple and the non-settling publishers are using?

[Kenm]

There’s this:

Apple’s filing doesn’t try to defend the five publishers the DOJ has accused of colluding to fix prices. In fact, it basically throws them under the bus, pointing out that if there was a price-fixing conspiracy among its co-defendants – as alleged – they kept it secret from Apple.

Meanwhile, the government’s lawyers are going to have a hard time proving that Apple violated antitrust laws because the company’s market share in the e-book business before the launch of the iPad was essentially zero.

They can’t make a case against Apple for collusion because whatever the publishers may have said to one another, there’s no evidence that Apple conspired with its competitors.

They can’t even use as evidence the blunt quotes taken from the Steve Jobs biography because they are hearsay.

That page has a link to a pdf of Apple’s full response.

There’s also this:

Sen. Chuck Schumer (Dem., NY) is the latest to suggest that Obama’s DOJ got this one wrong

FORTUNE – From the day it was filed there seemed something ill-conceived about the Justice Department’s antitrust suit against Apple (AAPL) and five of the six major book publishers.

The optics, as political operatives like to say, were wrong. Here was the government helping Amazon (AMZN) regain monopoly control of the e-book market by attacking companies in a wounded industry that were, as author Jim (“Chaos”) Gleick put it, “gasping for air.”

[Mr.Moto]

I’m sure the fact that many publishers are headquartered in New York had nothing to do with Senator Schumer’s position here.

[Do_Not_Taunt]

Thanks for the response, Kenm. I guess what confuses me about the Fortune article is that it seems like

a) The agency model is prima facie illegal. It is the publishers specifying the retail price for all retailers. I didn’t think this was generally legal.

b) The defense seems to somewhat rest on the claim that Apple isn’t a monopolist in the e-books market. While I assume everyone agrees with that, I didn’t think it was relevant. I understood that no market participants could fix prices, regardless of whether they were a monopolist, major player, or pure nobody.

Is Apple’s defense basically that they aren’t challenging that the agency model is illegal, but that they didn’t collude to create it?

[Tim_T-Bonham.net]

@Do_Not_Taunt

2. Publishers were unhappy with customers getting used to a $9.99 price, and thought that would lead to future pressure to lower the wholesale price of e-books.

Just what goes into this wholesale price of an e-book?

Certainly not the production cost (like in printing a real book). Not even the minimal cost of dupe’ing and sending me a CD – now they send it electronically, over internet service that I pay for. Their cost in maintaining servers & webpages is pretty small when spread over their whole catalog. Seems like their production cost is pretty close to $0.

There are royalties paid to the author, but those seem to be far below $9.99 per copy. More like pennies per copy.

There are editors to be paid. But given the poor quality of many books lately, there doesn’t seem to be much editing being done. (How can you release an e-book without even running it through a spell-checker?)

So where does the rest of the money go? Seems like it must support a lot of overpaid publishing executives, and excessive profits for the publisher.

If we have an ‘agency’ system, I’d rather see one where the money goes 50% to the author, and 25% each to the publisher & e-seller. Seems like that would be more likely to encourage the creation (writing) of more books!

[Cillasi]

I believe it also has something to do with the way the law is worded. Only competitors can be guilty of price-fixing, so the publishers may be guilty, but Apple cannot be guilty. I don’t think it’s illegal to require retailers to sell your product at a certain price, as long as you don’t discriminate between retailers. It can’t be okay for some to charge less (or more) but not others.

Publishers are not only worried about how the cost of e-books will affect the market, but how the price of e-books will affect their ability to sell dead-tree-books. There is a lot more involved in publishing than just setting the words on a page. As many have noticed, lots of indie books have not been proofed - and even back lists from major publishers have been converted to digital format without much proofing being done. There are lots of conversion artifacts in many older books. However, proofing is a major service that publishers offer, along with promotion and advertising and even where the book sits in a brick and mortar store. Does it get to be in a window? On a table? New Releases? Or is it just shoved on a shelf in alphabetical order by genre. I’m not defending the publishers, but many expenses are not going away because of e-books. However, the indie and self-published market is making it even more difficult for big-house publishers to make money. There are a lot of choices out there that were never there before, and despite there being some books-done-badly, there are many more that are more entertaining than some of the stuff the big publishers put out there.

[Kenm]

@Do_Not_Taunt

Is Apple’s defense basically that they aren’t challenging that the agency model is illegal, but that they didn’t collude to create it?

I reached Page 12 of the very easy-to-read pdf and will read the rest tomorrow. But this quote from the first link in my previous post seems to be accurate:

But what makes Apple’s (AAPL) response, filed Tuesday, such a great read is the clarity and precision with which it cuts the government’s case to shreds.

At least as it applies to Apple.

But IANAL.

[Do_Not_Taunt]

@Cillasi

I believe it also has something to do with the way the law is worded. Only competitors can be guilty of price-fixing, so the publishers may be guilty, but Apple cannot be guilty. I don’t think it’s illegal to require retailers to sell your product at a certain price, as long as you don’t discriminate between retailers. It can’t be okay for some to charge less (or more) but not others.

Is it your claim that a publisher is allowed to tell a retailer what to charge for, say, a paper book? I don’t think this is true, though there certainly may be subtlety to the law I’m not familiar with.

@t-bonham@scc.net

Just what goes into this wholesale price of an e-book?

Yes, yes, this debate has been had. But let’s note that this is in GQ, and isn’t about whether or not publishers a charging a fair price for e-books.

[Exapno_Mapcase]

If you really want the case pulled apart, you might take a glance at Scivener’s Error. Charlie is a top intellectual property lawyer. He is also very opinionated and his blog gets, um, colorful.

I have not read through the tens of thousands of words on that page. I think his blog epitomizes why bad formatting on a computer screen is a sign of the apocalypse.

Anyway, here’s a summary:

the underlying logic of the Answer is fairly clear:

@paraphrased version of Apple's legalese

“We din’t do nothin’ wrong, and you can’t prove it anyway. But if you can prove it, the Big Brazilian River was worse, so anything we did was justified and you should be ashamed of yourself for not going after only the biggest bully instead of Our Gang. Nyah, nyah, nyah.”

To say the least, I find this approach… unpersuasive.

[Simplicio]

Here’s an earlier thread about the topic if someone is look for a less GQ discussion of the issue.

@Do Not Taunt

Is it your claim that a publisher is allowed to tell a retailer what to charge for, say, a paper book? I don’t think this is true, though there certainly may be subtlety to the law I’m not familiar with.

My understanding is that they can. A publisher can require a contract with the seller before they sell the books to them, and that contract can specify the retail price. Of course, the seller can just take a pass on buying the books from the publisher altogether. The problem here is that Amazon might be able to play hardball with one publisher or another, and stop carrying their books until they caved and abandoned their attemtpts to get Amazon to accept the agent model. But if all the publishers as a group show up and pressure Amazon, Amazon can’t stop carrying all books so its forced to accept the publishers pricing models.

I don’t think anyone in the current case is contesting the legality of the “Agent model” as a general concept. What the publishers were found guilty of was acting as a group to get Amazon to accept the agent model. If they’d acted individually, there wouldn’t have been any case.