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Editorial: Apple wronged by Supreme Court e-book pass
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NewsPoster
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Mar 8, 2016, 05:40 PM
 
Apple's three-year legal case over price-fixing of e-books has ended, with the US Supreme Court saying that it will not allow the company to appeal. The court will not listen to Apple's contention that a 2014 settlement requiring it to pay $450 million in costs and damages is wrong. That's the Supreme Court's right, and all legal cases have to end somewhere, even if more nebulous ones do seem to go on for a lot longer. Yet this isn't a nebulous case -- and the result, in my opinion, is wrong.

Apple is now legally proven to have colluded with publishers Hachette, Macmillan, Penguine, HarperCollins, and Simon & Schuster to "eliminate retail price competition in order to raise e-book prices." That's from Judge Denise Cote's 2014 ruling, where she concluded that it was Apple's "orchestration" of this that made it work. What Apple really did was offer to sell e-books where the publishers set the price, rather than Apple. Compare that to Amazon, which imposed prices and in fact imposed low ones. If you tell publishers they can set the price, they're going to set them higher.

That's what happened, and you would think that this was retail pricing as per usual: businesses set a price, and then adjust it as they try to find the sweet spot between number of sales and profits per sale. It's what they do with cars, it's probably what they do with houses, yet when it came to e-books, suddenly it was a problem worth taking to the Supreme Court.



You could suspect that it's because the cost of an e-book is of course nothing. Yet there have been plenty of legal cases against drug companies, where any one tablet costs pennies and the courts have no trouble comprehending that it's the second tablet that costs pennies, the first costs billions of dollars. E-books don't cost billions, but they have a real cost -- and they are a real business for huge numbers of people from marketing to design to the writer.

It's not fair or reasonable to say that courts don't understand technology, you can't possibly apply a sweeping statement like that to an entire judiciary -- yet the Justice Department demonstrated a similar position when it failed to side with Hachette. That publisher had taken legal recourse after Amazon's pricing thoroughly destroyed bookshops, and it needn't have bothered.

I believe I do understand technology, and I am using it as both a reader and writer of e-books. Let me declare a bias here -- an earned bias, borne of easily-describable experience, but a bias nonetheless. I like Apple's iBooks Store, I like iBooks, and I prefer it to Amazon Kindle. I very much prefer Apple's straight-down-the-line 30 percent fees compared to the confusing mess of Kindle's pricing and financial reporting, which often results in authors and publishers getting quite a bit less than the promised 70 percent.

So the quality of Kindle puts me off, and the pricing model of Amazon is the reason my chair has a circle of hair all around it, yet I still buy a lot of Kindle books to read. I do so solely because there are more titles: even if I stumble across a book on Amazon, I will check iBooks to see if it's there before I buy. What's more, I do this fully knowing and accepting that Apple will often charge me more for the same book.

Yet there's the thing: Apple has always been accused of charging more for e-books than Amazon, and in my experience that varies from just-about-true to very-very-true. Charging more is indeed what Apple regularly does, but the argument here is that by charging more -- and specifically by corralling publishers into charging more, Apple was cutting out companies who charge less.

If it were that Apple had a lock on the publishers, and forced them to charge higher prices everywhere, that might even make sense, but it is a matter of record that Apple did not do this. Apple went to publishers and said that it would take 30 percent of sales. There was nothing about what price they must charge, there was actually the opposite: Apple said the publishers could charge whatever they liked.

That sounds like typical retail pricing: you charge what you can get, and when you can't get it, you alter your price. Quite quickly, you find a sweet spot between the number of sales and the profit per sale, and that's your price.

So the publishers charge what they like, Apple takes 30 percent: that sounds more of a route to poor sales than it does a path to the Supreme Court. I want to say what happened next, but actually it's more what happened before, during and then next: the publishers did get together. Of course the publishers worked together: Amazon was selling books below cost, and that hurt publishers a lot more than it did the Kindle maker.

They were hurting long before Apple came along with iBooks, and they conspired to disrupt Amazon's pricing model. We know that because the publishers admitted it. Everyone knows that, because the publishers admitted it. So it's undisputed that Apple did not lead the conspiracy, yet that is precisely what it was accused of, and precisely what it has now been ruled as having done.

Apple is also accused of acting to lock out other companies, and that's also unsupportable. Apple's actions made iBooks more expensive than Amazon, so it cannot lock out other companies by aggressive pricing. Amazon, on the other hand was selling books at below cost, therefore below a price that smaller companies could match.

Moreover, the nearest thing to a smoking gun in this case was an email from Steve Jobs, where he suggested that higher prices were necessary to sustain a market. You can't ever imagine Apple wasn't out for itself, but Jobs's points included that a sustainable, profitable market would encourage new publishers, and new e-book resellers.



It's not as if I think Apple is above pursuing a buck, or that the company can't make bad decisions; I don't think that it's a prissily saintly firm. I just can't see that it raised prices, or that it tried to lock out other firms. I can see that Amazon actively did work to prevent other firms competing, I can see that Amazon's model was already destroying the book market. I also see that Amazon has an ability to paint itself as a victim, and that Apple has reached the Microsoft-like stage where it must be wrong because it's a big company -- and anyway, they can afford it.

There is an argument that Apple executives might even have the $450m in their wallets, and certainly that the company won't lie awake at nights worrying about the money. Yet your ability to pay has nothing to do with whether you're innocent or guilty, it has nothing do with whether the ruling is right or wrong.

This ruling is wrong. It's as wrong as rather similar case in 1995, when the Supreme Court also refused to hear an appeal case from Apple. Then, it was the way that Windows copied the Mac and then it was another situation where you look at what happened, and you look at the ruling, and you realize that right and wrong just ain't a part of this anymore. At least that time, it was genuinely a legal issue, in that Apple shot itself in the foot with how it worded a contract with the then more business-savvy Microsoft.

It's just a good thing that Apple doesn't have, say, any other legal situations going on that are likely to end up with the Supreme Court.

-- William Gallagher (@WGallagher)
( Last edited by NewsPoster; Mar 8, 2016 at 05:55 PM. )
     
chimaera
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Mar 8, 2016, 08:25 PM
 
I'm annoyed at Apple and Amazon over this.

Amazon: feels like product dumping. Selling below cost during a big sale is one thing, doing it regularly is product dumping.
Apple: price fixing. Agreeing with publishers on minimum prices, and adding most-favored-nation clauses so no one else can go lower.

Could you link to Judge Denise Cote's 2014 ruling so we can read it for ourselves? That way it's not just a popularity contest. And honestly, I like both Apple and Amazon. Both put the customer first on important issues.
     
Mike Wuerthele
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Mar 8, 2016, 09:09 PM
 
     
Charles Martin
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Mar 8, 2016, 10:12 PM
 
chimaera: we like aspects of both companies as well, we just think the original judge erred badly. The Court of Appeals undid some of the original judge's more egregious shenanigans, but upheld her overall ruling. The SCOTUS was, we feel, in error to not take the case -- but it could be argued that since the DOJ has made it clear that Amazon cannot, in its view, do anything wrong, there is no point in pursuing the case at this point (and from that perspective, we would reluctantly agree).

Hopefully a future administration and reformed DOJ will take another look at Amazon's monopoly abuse and take steps to curb it -- what the publishers did (before Apple came along) was in response to that abuse, a point the DOJ actively overlooks with it's "Walmart" view of e-book pricing (lower=better, no matter what).
Charles Martin
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chimaera
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Mar 9, 2016, 02:48 AM
 
OK, I read the history portion (about 2/3 of the ruling) and skimmed the legal analysis. I'm not seeing anything wrong with that ruling. One thing particularly bothered me. (page 19)
As the Publisher Defendants’ CEOs testified, the Publishers did not compete with each other on price; while they were serious competitors, their preferred fields of competition were over authors and agents.
So the big publishers don't price-compete with each other, and agreed (with Apple driving the negotiations) to remove price competition at all later levels. Their branch of the entertainment industry is special - they deserve to face no price competition at all.

Amazon was selling at approx their wholesale price, until the publishers all (together) raised their e-book wholesale prices. Amazon ate the loss and kept their $9.99 price, until the publishers restored their normal wholesale price. Instead, the publishers got together with Apple to change the business model. This doesn't look quite like Amazon product dumping after all. Though selling right around wholesale doesn't leave a profit margin, so it's still pretty close.

Overall, I'm afraid I side with the judge. The publishers all broke the law, and settled rather than face a ruling. Apple stuck it out, and the conspiracy was proven. Speculation about what harm Amazon might have done in an alternate future does not offset the real harm done to consumers in our real present.

The government is supposed to protect citizen interests, and has no specific obligation to protect large corporate interests. So sudden jumps in price that cost real people millions is a proper DOJ interest. That publishers would get a smaller profit margin is regrettable, but not something the government is obligated to fix. Call it a Walmart viewpoint if you like, but for once, they looked out for us little guys. How odd.
     
Charles Martin
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Mar 9, 2016, 03:29 PM
 
The problem with the ruling that you're missing is two-fold: first, the judge ignored strong evidence (direct testimony) that Apple did not lead the publisher conspiracy; it started before Apple appeared on the scene. Judge Cote also ignored some very obvious evasions and perjury from Amazon officials about their threats to publishers if the agency model was forced upon it.

The second issue here (ignoring, for the moment, that antitrust law cannot be used to convict a vertical reseller of leading a horizontal conspiracy) is that Amazon's loss-leader pricing was not a long-term consumer benefit: it was harming both traditional bookstores, publishers (by devaluing e-books below a sustainable price, as Jobs said), and preventing all but deep-pockets competitors from entering the market. That's monopoly abuse.

So even if you buy into the idea that Apple led a conspiracy or suggested (but never mandated) an increase in e-book prices, you're ignoring that this was a reaction to bigger crimes, as the DOJ ignored (and continues to ignore) it.
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Wayne McDonald
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Mar 9, 2016, 06:31 PM
 
The trouble I have with this is you are wrong on a few fundamental facts disproved at the trial but still thrown out there as zombie memes.

First, Amazon wasn't losing money on eBooks. The DOJ looked at Amazon's books as part of the trial. Amazon was buying a $14.99 eBook at roughly $7.50 and selling at $9.99 for the most part. Only Macmillan which had threatened Amazon into Agency first had a different deal. If I remember right the DOJ specifically found 51 books out of the 2+ million Amazon sells were under cost during the total time period.

Secondly, almost all the other eBook retailers that failed recently pointed at Agency as the reason. Why? Because Amazon often didn't have the best prices so they could undercut Amazon before and still make money. The same is true with Walmart for example. While both Amazon and Walmart generally have low prices, you can often find specific products elsewhere cheaper.

Third, anti-trust law is not about preventing harm to traditional bookstores or any other business. It's about preventing harm to consumers.

Fourth, it's easy to enter the eBook market with a few hundred dollars. It doesn't take deep pockets unless you plan on trying to price under cost, the same as people keep claiming Amazon was evil for doing (but ignoring the DOJ's results).
     
macwhiz15
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Mar 11, 2016, 10:10 AM
 
Sorry, but Apple really was involved in bad behavior on this one.

Prior to Apple's work with the publishers to move to the "agency model," e-book sales followed the same procedure as physical book sales or most other retail sales: the publishers sold the e-books to Apple and Amazon at a wholesale price, and the retailers then added a markup (or markdown) and sold the books at whatever price they felt was reasonable.

Under the "agency model," the publishers set a fixed retail price for the book, and gave the retailers a fixed percentage of that amount. As "agents," Apple and Amazon were unable to alter the retail price of the books. That lead to the price of the books being fixed. There was no longer any price competition between retailers; you paid what the publishers decreed, regardless of retailer. And astonishingly enough, you paid more than you did when there was retail competition.

The real smoking gun here has never come up, to my knowledge. Baen Books, a relatively small publisher, was an early leader in e-books. Very early on, they discovered that offering the first book in a series for free lead to improved sales. They ran their own e-book store, and sold their e-books at discounted prices. At a time where a typical new-release "hardcover" was $9.99 to $14.99 on the iBookstore or Amazon Kindle, Baen would offer theirs on their own bookstore website for $7. This e-book website was, by all accounts, very successful for Baen.

But Baen books were not available on the iBookstore. And ordering e-books from Baen's website and loading them into iBooks was considerably more clunky than the iBookstore.

Eventually, a while after the move to the agency model, Baen inked a deal with Apple. Baen books were now available on the iBookstore... at the prevailing prices of $7.99 for back-catalog "paperbacks" and $9.99 for "hardcovers."

And, _as part of the contract_, Baen was obligated to RAISE THEIR OWN PRICES on their own website to match those prevailing rates on the iBookstore. They were also required to cease publishing ebooks before the nominal release date for the book. Baen's publisher was clear that these terms were prerequisites for getting into the iBookstore.

Think about that: A small publisher apparently couldn't sell their books on the iBookstore at the price they'd been happy with on their own website; they had to set a price Apple had worked out with their competitors, and they had to agree to raise their own prices in their own store to match.

Sure, it's debatable whether the big publishers' deals with Apple were *really* anticompetitive. But it's hard to look at what happened with Baen and NOT see an anticompetitive, antitrust issue.
     
   
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