The Justice Department's antitrust suit over eBook price fixing is as deeply befuddling as it is important to the future of publishing.
A lengthy Wall Street Journal analysis of the Department of Justice price-fixing case against five publishers and Apple features a photo of Picholine, the swanky restaurant (Zagat calls it "one of the best restaurants in town") where, according to the government, the alleged conspiracy took shape. The lawsuit asserts that "meetings took place in private dining rooms of upscale Manhattan restaurants and were used to discuss confidential business and competitive matters, including Amazon's e-book retailing practices. No legal counsel was present at any of these meetings." In all that has been written about this case, nothing seems to have made a deeper impression than the image of the executives in a private room called "The Chef's Wine Cellar" agreeing to challenge Amazon's policy of deep discounts on e-books.
Personally, I find the notion of an exclusive cabal among the bibulous publishers intent on joint action far-fetched, although experts say it probably would have been better to have a lawyer present to assure antitrust guidelines were being followed.
All of the publishers, including the three that have settled -- HarperCollins, Simon & Schuster, and Hachette -- insist they have done nothing wrong. And that is doubtless their sincere belief. Those that accepted the Justice Department's terms said they did so to avoid a protracted and expensive litigation. Penguin, Macmillan, and Apple are ready to press their defense in the court battle that will now follow. What really did happen at Picholine, and in the other sessions where Amazon's overwhelming dominance of the digital book market was discussed among competing CEOs? Only those present know for sure, and considering the status of the government's case, they are in no position now to make any detailed statements. So, the rest of the publishing community and media commentators are engaged in a spirited debate about how to respond to the Justice Department's serious charges.
Based on my reading of the lawsuit, news articles, columns, and publishing industry blogs, what seemed a strikingly simultaneous accord among the publishers with Apple could reasonably have aroused questions in a Justice Department Antitrust Division on the lookout for potential targets. These agreements, reached in a matter of weeks with Apple in early 2010, had the effect of changing the long-standing business model of their dealings with retailers to "agency" pricing, which would enable the publishers to set the prices of books and pay the booksellers a commission, set at 30 percent. Under the "wholesale" model, which is still followed in most transactions with bookstores like Barnes & Noble and the independents, publishers sell their books to retailers at about half their listed price, and retailers then set their own prices.
What justifiably alarmed publishers and other booksellers was the prospect of Amazon's overwhelming position in the emerging e-book market. At its peak in 2009, Amazon's dominance of the marketplace was about 90 percent of digital sales because of the early success of its Kindle reader and the $9.99 price it set for bestsellers and new releases. Ironically, the comparison most often made at the time was the way Apple -- through iTunes, the iPod, and charging just $0.99 per song -- had so completely taken over the online music market that, in a few years, national stalwarts such as Tower Records and Sam Goody's went out of business as album sales declined by more than half. Conceivably, with the experience of Apple's music strategy in mind, the Justice Department chose to preempt the possibility of anything like it happening again by dissolving the publisher's agreements. Of particular concern to the government as evidence of price fixing were the so-called "most favored nation" (MFN) provisions that assured that no prices would be lower than Apple's. "Instead of an MFN designed to protect Apple's ability to compete," the complaint alleged, "this MFN was designed to protect Apple from having to compete in price at all." Sharis A. Pozen, the outgoing assistant attorney general for the Justice Department's Antitrust Division, in a valedictory speech at the Brookings Institution, said that the case is "most importantly . . . about lower e-book prices for consumers."
For the time being, the long-term impact of the Justice Department's case on the publishing industry remains unclear, but Amazon certainly comes out ahead, with its position as the leading retailer of e-books reinforced, which also benefits its role as a major seller of traditional print books, self-published books, downloadable audio, and now also as a publisher. Microsoft's surprise announcement Monday that it will invest hundreds of millions of dollars in Barnes & Noble's Nook division adds yet another major component to the electronic book market and assures that competition will intensify. Ultimately, with so many factors to consider, I agree with Senator Charles Schumer (D.-New York) who said, "I feel absolutely befuddled by the lawsuit. For the Antitrust Division to step in as the big protector of Amazon doesn't seem to make any sense from an antitrust point of view. Rarely have I seen a suit that so ill serves the interests of the consumer." On the other hand, according to the Wall Street Journal (in the piece illustrated with a color photo of Picholine), a consensus of antitrust experts agreed that the Justice Department had reason to believe the publishers were acting together. "Price fixing is kind of the first-degree murder of antitrust violations," Herbert Hovenkamp, a law professor at the University of Iowa said, and the government had to act on "what appears to be a strong set of facts that if true, are one of the most central of antitrust violations."
Lawyers and judges on the trial and appellate levels will have to resolve this dispute, and that could take years. Geoffrey Manne, an antitrust expert, told Bloomberg BusinessWeek that "one of the big problems with this suit as with others in the tech realm is that by the time it's concluded, the market is likely to have changed so much that it will become irrelevant." Until that happens, developments in the Justice Department's case are crucial to publishing's future.