Apple returns to courtroom once again to contest ebook shafting

Well done, US courts – you're creating a monopsony

Analysis Apple is back in court this Friday to contest the punishment it received in the US ebooks pricing trial.

The government has tried to show how serious it is in several ways. Firstly, it ruled that Apple had to end its contracts with the five publishers and be prevented for five years from entering contracts that the Justice Department says would restrict Apple from competing on price.

If the ruling stands, Apple will also be forced to add an internal antitrust compliance officer to its staff and hire a court-appointed external monitor.

Rarely can a single court case determine the fate of a sprawling and diverse industry.

The real winner in all of this? Amazon, of course.

Instead of being investigated for predatory pricing, Amazon appears to have pulled off a remarkable victory thanks to the DoJ. The remedies applied to Apple more or less seal its dominance of digital book retail.

While competition legislation is conventionally used to break up monopolies, its use here instead could arguably be said to have created one: a dominant retailer, technically called a monopsonist*.

This was a thin case that relied heavily on conspiracy and innuendo. The lasting "harm" to the public by Apple and the five publishers – who were bullied into private settlements by the DoJ – is even harder to discern. Apple had zero market share, against Amazon's 90 per cent share, when it entered the market.

If Apple's agency model briefly raised the prices of a few digital bestsellers – blink and you'll have missed it – Amazon nevertheless continued to discount the vast majority of ebooks heavily across the line.

Apple merely promised publishers it would not sell at a loss. Publishers maintained their wholesale agreements with Amazon. Retail prices briefly flickered from just over $8 to just under $10, and were more widely dispersed after Apple's unsuccessful entry. Apple produced a study showing that the market grew and prices actually declined.

Of lasting significance is that Amazon had gained 90 per cent market share using below-cost pricing. The injunctive relief means a rival will have to sell books at a loss.

'Apple must not raise prices for any music, movies, TV shows or books for two years'

The punishment that the courts are proposing to hand down to Apple goes beyond requiring it to terminate its ebook agreements with the publishers. It must not compete on price with Amazon (or any other retailer) for five years, while it must allow Amazon and Barnes & Noble access to its own customers without paying a fee. And amazingly, it extends beyond books: Apple must not raise prices for any music, movies, TV shows or books for two years.

Apple's proposed punishment goes far beyond that of the publishers, who had begun to meet to discuss Amazon's dominance months before Apple made contact with them. The argument that can be made that Apple is being uniquely punished because it refuses to be cowed – for refusing to sell at a loss. How, then, did we get here?

Few gave the DoJ's sketchy case much of a chance before the trial started. However, Judge Denise Cote had supervised the publisher defendents' settlements and had already rejected Apple's arguments once. Cote said she was confident the US government's case would prevail.

For it to prevail, Apple had to be regarded as a co-conspirator. But Apple is a vertical player, one which had zero market share in the ebook business when the alleged horizontal conspiracy was hatched. A different legal standard applies to vertical actors, the "rule of reason" test, and higher courts are much more reluctant to intervene.

As former criminal attorney-turned-editor Roger Parloff noted at Fortune: "The Supreme Court has expressed far more reluctance to intervene in alleged vertical price-fixing conspiracies than in horizontal price-fixing conspiracies, due to having much less confidence in the former context about what constitutes reasonable commercial behaviour and wherein lies the public interest."

Once the trial regarding the injunctions is over, Apple will take an appeal to the Second Circuit, and most likely, all the way to the Supreme Court.

What's not in dispute is that the ruling leaves a monopoly seller free to sell below cost, while putting price constraints on its rival. Apple is certainly no saint, and it may cause some readers cognitive dissonance to find Apple arguing for an open and healthy retail market. But that shouldn't cloud one's thinking: the consequences of anointing an monopsonist do not require a PhD in economics to predict. ®

* Where the product or service of several sellers is sought by only one buyer... cf monopolist – where the vendor or firm is the only seller of said product or service.