Mac Musings

Ebook Antitrust: Is Apple or Amazon.com in the Wrong?

Daniel Knight - 2012.04.11 -

"May you live in interesting times."

This reputed English translation of an ancient Chinese curse seems an appropriate way to begin this article, as the US Department of Justice has filed an antitrust suit against Apple and several book publishers, accusing them of price fixing and collusion.

Antitrust laws are intended to prohibit anticompetitive behavior (which sometimes creates monopolies) and unfair business practices.

Monopolies

Standard Oil

These laws were used to break up Standard Oil, which controlled 88% of the refined oil flow in the US in 1890. Standard Oil of Ohio was incorporated in 1970 and either took over or destroyed most of its competition in Cleveland over a two month period in 1972 by undercutting prices, monopolizing the production of barrels used to transport oil, and even

"Dispatching thugs who used threats and physical violence to break up the operations of competitors who could not otherwise be persuaded." (The Dismantling of the Standard Oil Trust)

Technically a consortium of oil companies that had the same board of directors, Standard Oil became so powerful that it could obtain heavily discounted shipping rates that other oil companies couldn't touch. Congress pass the Sherman Antitrust Act in 1890, laws designed to bring an end to business practices that reduced competition in the marketplace. In 1911, Standard Oil was broken up into 34 different companies.

Over time, many of these companies merged and merged again, creating industry giants ExxonMobil, Chevron, Marathon, Sunoco, ConocoPhillips, and a huge portion of Anglo-American BP.

AT&T

Much more recently, antitrust law was used to break up AT&T, which had a virtual monopoly on telephone service across the US. AT&T was regulated by state public utility commissions and the FCC. The monopoly was dismantled in 1982, creating seven regional phone companies - Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West - and leaving AT&T as a long-distance company.

Over time, these companies also merged into larger ones, giving us today's AT&T and Verizon.

Price Fixing vs. Selling at a Loss

Although price fixing is common in some countries and actually the law in some markets (such a French book sellers), it's a criminal federal offense under the Sherman Antitrust Act. Apple has been accused of price fixing in the case of the iTunes Music Store, which originally sold all tracks at the same 99¢ price. However, there are competing music services, most notably Amazon.com's.

In the realm of physical merchandise, once a store buys something, it is generally allowed to set its own price. If it wants to charge full retail price, sell it at cost, or choose a price point in between, that's its choice. Amazon.com became an online retailing powerhouse by offering books, CDs, DVDs, and later all sorts of merchandise at greatly discounted prices, growing into the biggest reseller in many product categories.

Electronic distribution changes everything. Apple, Amazon.com, Barnes & Noble, and others no longer need to buy a printed book and sell it - their customers can order, pay for, and receive ebooks over the Internet. There is no inventory cost, which completely changes to profit equation for book publishers.

Amazon.com likes to sell ebooks for $9.99, even taking a loss on some titles to achieve that price, which is anticompetitive behavior.

When Apple created its iBooks Store, it wanted a level play field. Apple negotiated an agreement with publishers that it would be able to sell the same titles as Amazon.com, Barnes & Noble, and others at no higher a price than Apple charges its customers.

That certainly sounds fair to me. Unlike iTunes music, Apple hasn't tried to set prices for the ebooks it sells. It allows publishers to set the retail price, which they have always done with printed books. Apple's contracts with publishers only mean that iBooks buyers won't be penalized for choosing Apple's store instead of Amazon.com's.

Amazon.com doesn't like this. It had a good thing going with its $9.99 ebooks, selling some at a loss to grow its market - exactly the same thing it does with the Kindle Fire tablet. And exactly the same kind of thing Standard Oil once did to drive competitors from its markets.

Yet the Department of Justice is ignoring that and going after Apple, which is only asking that publishers treat them fairly by guaranteeing it the same retail pricing as any competitor offers.

If Amazon.com wants to buy physical books or Kindle tablets and resell them at a loss, that's one thing, but there are no inventory costs or risks involved with selling ebooks. Amazon.com can't argue that it's trying to unload old, unsold inventory, so choosing to sell ebooks below its cost can only be a chosen strategy to control the market. By negotiating with publishers as it did, Apple is creating a more competitive market by assuring that no ebook seller has to sell at a loss to compete with Amazon.com.

Kudos to Apple for working to create a level play field for the ebook industry.