Some Thoughts on the DOJ Lawsuit Against Apple and the Publishers

Now that the dust has settled on the lawsuit filed against Apple and five of the major publishers, the commentators have come out in force.  The line-up of opinions seem to be, on one side, that the suit is ill-advised as the wholesale model used by Amazon and apparently favored by the Justice Department will destroy the publishing ecosystem as we know it.  That’s because Amazon (90% market share at least two years ago) could easily prevent new entrants to the e-book market with predatory pricing. 

As the New York Times puts it, “Previously, Amazon’s $9.99 subprofit price was a virtually impenetrable barrier to entry for anyone who couldn’t afford to lose millions in order to gain market share.”  It would seem the only way for the market to grow, at least from this point of view, is if everyone charged the same price.  The Justice Department alleges that Apple’s contract with the publishers using the agency model did just that.  Not only did the agency model give Apple the lowest price, it effectively forced the same selling price on every distributor.  This effectively forced Amazon to raise prices for consumers.

One of the fears expressed by publishers is that the $9.99 price point would stick with consumers and market forces would prevent them from effectively raising prices down the line.  I’m not so sure about that.  It’s well known that Amazon was pricing books at that level as a loss leader to build overall sales and customer loyalty.  The publishers weren’t necessarily losing money as Amazon made up the difference between cost and sales as a matter of doing business.  I suppose the publishers could raise wholesale prices and let Amazon decide if it wanted to raise prices as a result.  I agree with the Times about new competitors having no incentive to entering such a market.  However, the Justice Department is not bringing a predatory pricing action against Amazon.  At least not yet.  But there are options for other existing competitors in the market that can compete with Amazon if they want to.

The Guardian (UK) takes the point that this fight is less about book pricing than competing distribution channels with the publishers caught in the middle:

Although in many ways not at all surprising – the justice department is after all representing the interests of consumers – the antitrust initiative reveals a fundamental problem with market regulation in a converging world. What we have seen on both sides of the Atlantic, and in any market where groups of services are offered by the same distributor, is that each will ruthlessly cut the price of that which is of least value to it to attract customers. A classic example of this might be that Sky would offer cheaper broadband to customers who take its exclusive sports packages, while BT might offer cheaper TV services to retain broadband and telephony customers. 

Books, then, are merely one of the commodities that sell iPads and Kindles, which are in turn gateways to more sales of other digital commodities to consumers.  I take it from this point of view that the pixilated word, which allegedly has the power to move and stimulate the soul, is merely a vehicle to lock consumers to one distributor or another.  I’ll take a side view that the mass marketing of books, music, and video is less about art than the various content providers would like us to believe.  The same argument that suggests it’s all about the protecting the artists and authors belies the fact that the producer/distributor is notorious for seeking product that sells in a big way.  Big content takes very few chances in picking the creators of that content to fill out the catalog.  If publishing houses are patrons of art, art is surely limited to what is saleable and widely commercial.

I think the publisher’s bigger problem is not what Amazon charges for an e-book.  Rather it is the fragmentation of the technologies that allow for mass distribution of online content.  Apple has iOS.  Google has Android.  Amazon has a different flavor of Android.  Microsoft is getting into that game by transforming Windows into the Metro interface with its own content store.  A consumer picks one and all the digital content is formatted (or DRM’d) for that platform and can’t be easily transferred to another. 

I’m aware that Amazon has a Kindle app for the iPad which in theory renders part of this format lock-in moot.  At least until Apple uses the power of its closed system (the walled garden, as it were) to insist on 30% of the take for sales made through that app.  I’m not suggesting this is wrong on the part of Apple.  It’s market power and a form of competition.  The reactive competitive action in this case takes the form of Amazon writing an HTML version of its e-book reader that runs through the iPad browser rather than as an app.  And it will go on.

Given this landscape, what I think is happening here is that Apple simply doesn’t want to get into a pricing war with Amazon.  The most favored nation clause in Apple's contract with publishers was a way to avoid that and preserve book sales on the iOS platform.  As Google plans to create Android tablets, and as Microsoft’s Metro tablets and phones penetrate the market, so will their stores.  These billion dollar entities can decide whether they want a price war on digital goods to promote their platforms.  That’s the marketing world the publishers face.  It’s time they should get used to it.  Consumers are buying Apple, Amazon, Microsoft, and Google.  Content, sadly, is secondary.  [MG]