Thursday, July 11, 2013
The Justice Department's Quixotic Antitrust Attack on Apple
Jeff Bezos is one of the great entrepreneurs of the Electronic Era. He created Amazon and built it into a retailing juggernaut. Steve Jobs is one of the great entrepreneurs of the Electronic Era. Apple is his legacy. (This blog is typed on an IMac) Amazon and Apple are slugging it out in electronic books, but Amazon has an unfair advantage; the Justice Department is prosecuting Apple. Amazon made the electronic reader a market success. As a successful pioneer, it gained 90% of the market. As with its initial entry into the hardcover market, it engaged in cutthroat pricing, selling at a loss, to gain market share. It was pricing best sellers at $9.95 to the dismay of the publishers. Success invites competition. Barnes & Noble, Borders, and especially Apple entered the market. Apple had a different approach in creating IBooks, building on the success of ITunes. Instead of buying the books at “wholesale” from the publishers, it would act as an agent, letting the publishers set the price with Apple taking a 30% commission. Apple entered into individual agreements with the major publishing houses. The agreements also provided that if the books were offered at a lower price elsewhere, Apple could match that lower price. The publishers priced their best sellers at $12.98, which would cost the consumers more than $9.98. Apple claimed it offered consumers an alternative: a higher quality technology interface and E-books found on no other site. Amazon responded by raising its prices to $12.98. The Justice Department sued five publishers and Apple claiming that Apple entered into a price fixing scheme with the five publishers, Hachette, Harper Collins, Macmillan, Penguin, and Simon & Schuster, The government could show the five talked among themselves about pricing – a classic case of horizontal price fixing. Thirty-three state attorney generals filed an antitrust complaint against the six defendants, followed by a private class action antitrust lawsuit. The five publishers settled quickly with the government, agreeing to drop the “agency” pricing arrangement. Apple refused to settle, arguing it did not engage in price fixing. It entered into a series of unilateral vertical contracts with each of the publishers; Apple claimed ignorance of whatever the publishers had been discussing among themselves. Judge Denise Cote in New York City as expected ruled against Apple yesterday, holding that Apple was part of the conspiracy. Apple proclaims its innocence and vows to appeal. She held that Apple not only joined the conspiracy, but also facilitated it. In the meantime, Borders has gone out of business, and Barnes & Noble lost $177 million last quarter on the Nook, its electronic e-reader. The Nook business dropped 34% in sales to $108 million. The company bet its future on the Nook as it slowly reduced its retail book inventory- not a wise bet. Amazon continues to hold onto 60% of the market and Apple is up to 20%. Both Jeff Bezos and Steve Jobs are driven competitors. Judge Cote was influenced by some of Jobs’ comments. For example, after Apple entered into the agreement with Macmillan, the publisher got into a dispute with Amazon over pulling books from Amazon. Steve Jobs commented in an email “Wow, we really lit a fuse on a powder keg.” Steve Jobs played hardball with the record companies, and in the end everyone benefitted: the artists, publishers, Apple, and consumers. What would the Judge do with Best Buy, which kept a chart in its headquarters of its competitor around America, and then, one by one, x-d them out as they failed? The Justice Department is patting itself on its back with the victory over Apple, but has it looked at what’s happening in the marketplace? The book industry is shrinking while Amazon is increasing its market power. Purchasers may notice, that aside from certain bestsellers, Amazon is raising its on-line prices as it consolidates its power. Barnes & Noble is also struggling on-line against Amazon. The Justice Department should also be leery of impeding technological innovations in a rapidly evolving industry. Apple has proven itself the most innovative product company in the industry and Amazon the most innovative marketer. Success should not be penalized. Let them fight it out in the marketplace. The consumer will win. But not if the field is left to Amazon!