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Whether Apple Wins or Loses Their Appeal, The Consumer Still Comes Out Ahead

3233710827_34294f21b1[1]With  the Amazon-Hachette dispute settled and DBW not happening until next month, there’s a shortage of fireworks in the digital publishing industry at the moment.

Apple’s brief hearing today helped make up for that lack, but I don’t think the show is going to last long or be as favorable for Apple as some would suggest. From GigaOm:

In a new twist in the long running antitrust case against Apple, an appeals court on Monday cast doubt on the Justice Department’s theory that the company brokered an illegal conspiracy among book publishers, and asked instead why the government’s focus has not been on Amazon.

The 90-minute hearing, which took place at the Second Circuit Court in Manhattan, represented a major shift in momentum in a case that has until now gone completely against Apple. On Monday, the three appeals court judges suggested that District Judge Denise Cote might have been too quick to conclude that Apple’s pricing arrangements with five publishers violated antitrust laws.

“Would it not matter that all those people got together to defeat a monopolist? It’s like the mice that got together to put a bell on a cat,” U.S. Circuit Judge Dennis Jacobs told the Justice Department’s lawyer, Malcolm Stewart.

Sounds bad for the DOJ and good for Apple, right?

Not necessarily.

As I read the coverage of Apple’s hearing, I’m reminded of the several lawyers I know who have remarked that they would like to know what Apple’s in house counsel were thinking when the lawyers didn’t warn their bosses that the deals with publishers were veering into antitrust territory. And then there’s the 160 page ruling against Apple, and the fact that after 17 months  no one has shown that it is unsound.

But even if Apple does win their appeal, I’m fine with it. With the 5 conspiring publishers having settled rather than going to trial, I already have what I want: real competition restored to an ebook market where  even Apple is now competing on price.

And what with S&S having signed a deal with Amazon which sounds an awful lot like the terms for KDP, and Hachette also tied down with a contract, it’s going to be difficult to impossible for the publishers to conspire again (even if they didn’t have antitrust observers watching their every keystroke).

In short, no issue I care about is going to be decided in this appeal, so I plan to just sit back and enjoy the show.

Pass the popcorn.

image by kyz

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William Ockham December 15, 2014 um 11:09 pm

The market will be very different if Apple loses. Apple won’t be able to enter into deals like the Amazon deals with Hachette and S&S. Which means those deals will have to be renegotiated. I think you underestimate what is at stake.

Nate Hoffelder December 15, 2014 um 11:27 pm

An Apple loss would mean Amazon’s deals would have to be renegotiated? Say what? (Or at least that is what I thought you meant.)

If Apple loses then the deals they have now are the ones they will be stick with for a long time. The current deals block Apple from pursuing Agency, so I don’t see what is so bad about Apple losing.

Apple winning, on the other hand, could potentially mean that Apple would be free to pursue agency again. But with Hachette and S&S under contract, there’s no way to force Amazon to go along. And if Amazon won’t go along, no one else is going to be able to do agency either.

Or did I miss something?

Mike December 16, 2014 um 12:44 am

Maybe the publishers will demand their settlement is vacated.
LOL if the Obama Justice Department is crushed and Amazon is warned.
Worst/best case scenario could make Amazon’s stock look like the Hindenburg.

Mackay Bell December 16, 2014 um 2:33 am

I am certainly going to enjoy saying, "I told you so," if Apple wins.

However, I agree that at this point it probably won’t make a huge difference in the market.

First, as I have always said, it is quite possible that the DOJ was right that the publishers conspired (that much is clear from their emails) but wrong that Apple conspired with them. (Publishers were on the other side of the negotiating table and Apple had to make the best deal they could with companies that were in lockstep).

So even if Apple wins, I think the publishers won’t rush to try to vacate their settlements or rush back into full out conspiracy mode.

Secondly, the marketplace has changed considerably, and for the better. By embracing self-publishing, Amazon has really strengthened it’s hand in the ebook market. And I think right now, big publishers are more scared of the growth of self-publishing than low ebook prices. Sure, they want their books priced higher, but not too high. I think their original dreams that all ebooks would be a minimum of $14.99 are fading fast.

Chris Meadows December 16, 2014 um 8:08 am

I’m wondering if the judge talking about belling cats didn’t read Judge Cote’s opinion, given that she specifically addresses that point.

Timothy Wilhoit December 16, 2014 um 9:24 am

There’s an old aphorism "two wrongs don’t make a right." Even if Amazon were engaging in antitrust, that wouldn’t give the five publishers and Apple free reign to engage in collusion. As Judge Cote correctly noted, the correct course of action was to inform the DoJ and let them handle it. Vigilante justice is no justice at all. I’m frankly surprised that a sitting judge would make such a remark.

Tim F. December 17, 2014 um 2:04 pm

It all comes back to her per se logic versus the rule of reason. Cote claims Apple’s defense doesn’t carry even under rule of reason, but she barred mounds of evidence that would have been allowed under rule of reason. That Apple was never allowed to describe the market circumstances prior to their entry or to explain Amazon’s role in dominating the market is very critical to a proper rule of reason defense.

Nate Hoffelder December 17, 2014 um 2:23 pm

Are you referring to the "it’s okay because Amazon was a monopoly" argument many have made?

That strikes me as a two wrongs make a right kind of argument, something which Cote debunked in her ruling.

Or did I misunderstand?

Tim F. December 17, 2014 um 3:27 pm

No, you misunderstood.

The argument against a per se ruling is that Leegin establishes the precedent for when rule of reason should be used rather than per se. (Leegin involved setting price minimums and maximums that were higher than those previously on the market, but rule of reason showed those higher prices were actually pro competition.) A rule of reason argument would NOT say, "Apple was wrong but that’s okay because Amazon was wrong first"; it would say, "Apple’s actions weren’t wrong, merely good business, AND they were correcting a wrong in the marketplace."

Nate Hoffelder December 17, 2014 um 4:00 pm

Okay, thanks for the correction. I’m going to read up on this just in case the appeals court does overturn Cote.

Timothy Wilhoit December 18, 2014 um 5:22 am

Pro-competition? How? Raising prices and fixing them to a higher level than they were hardly encourages competition. Instead of the revisionist history, let’s consider what actually happened. When Amazon launched the Kindle in late 2007, what was the e-book market? Less than 1% of all books sold were digital. Amazon didn’t crush anyone because there were very few companies selling e-books. Did Amazon’s actions prevent anyone from entering the market? Hardly. B&N entered the market by opening (another) ebookstore in the spring of 2009 and launched the Nook in late 2009. In a few months they had 25% of the market, perhaps higher. Not bad for a market that "needed" Apple’s intervention. B&N weren’t the only entrants, Google and Kobo both announced they were entering the market BEFORE the price-fixing scheme was announced. The price fix only succeeded in making Amazon stronger and the few viable independent bookstores were dead or dying by the time the agency prices were fully lifted. No, the market did NOT need Apple’s "assistance" in dealing with Amazon’s high marketshare…it was handling that situation just fine.

If Apple had entered the market in the right way, perhaps we would be seeing a more vibrant market today. We’ll never know.

Tim F. December 18, 2014 um 2:45 pm

"Pro-competition?" Yes

"How?" Many more competitors operating profitably and reducing the market share of a monopoly is more competition, not less.

"Raising prices and fixing them to a higher level than they were hardly encourages competition."

Certainly it can if no one is able to compete with an artificially low, fixed price.

"Amazon didn’t crush anyone because there were very few companies selling e-books."

I’m not claiming they did. I’m claiming calling $9.99 a natural, market-determined price a fallacy.

"Hardly. B&N entered the market by opening (another) ebookstore in the spring of 2009 and launched the Nook in late 2009. In a few months they had 25% of the market, perhaps higher."

Disputable numbers but even if I accept them, BN is really not a good argument for Amazon having healthy competition. A few months later they were cratering. But then they got another boost when everyone went to agency. And since the settlements/trial they are cratering again. Again, a good market analysis was not made, but I can’t see anyone seriously trying to argue that the market was competitively healthier prior to agency or after the DOJ imposed contractual limits on the publishers.

"B&N weren’t the only entrants, Google and Kobo both announced they were entering the market BEFORE the price-fixing scheme was announced. "

Google entered the market with the same agency agreements as Apple. Kobo competes in the market by providing non-DRM content, largely from the self-published, and non-Big 5 small, independent publishers — see price is not the only form of competition. Despite that competition along other vectors, Kobo does nothing to dent Amazon’s dominance of the industry as both a monopsony and a monopoly.

"The price fix only succeeded in making Amazon stronger and the few viable independent bookstores were dead or dying by the time the agency prices were fully lifted. No, the market did NOT need Apple’s “assistance” in dealing with Amazon’s high marketshare…it was handling that situation just fine."

Laughable. Who’s revising history?

Again, there are numerous industries where the same products or services are sold with little to no price competition and yet competition exists and flourishes. Price is not the only means of competition. Unfortunately, the US government has forgotten this so you have the absurdity of them claiming that they couldn’t find anything illegal about Amazon having 90+% control of the market and below cost-pricing but the best way for Apple to have combatted that reality would have been to complain to the DOJ to do something even though they had decided to do nothing after more than a year of investigating the matter themselves.

Tim F. December 18, 2014 um 3:28 pm

I think it’s important to really explore this because way too many people, particularly Americans, think lower costs is the sole source of competition. Price restraints, both minimum and maximum pricing restraints and MNFs granting competing resellers the same price, generates interbreed competition along two vectors: between the brands being sold by each reseller and between the resellers themselves.

Thus, even if you have a market where the majority of the bestselling books are offered at the same or nearly the same prices, you can actually drive greater competition between those high cost items and bargain, backlist, long-tail, and/or self-published "brands". It creates an opportunity to further distinguish new, bestselling books from the backlist from lesser selling books from the truly niche, marginal books from the self-published. Yes, this may for a time limit the sales of the big 5 books (for a time) and spur the sales of the non-big 5…. Hey, that, in fact, actually happened.

Additionally, it’s obvious that the resellers will also compete for consumers even if they are offering the same product at the same price: do you prefer Apple’s ease-of-use and integration, or do you prefer Amazon’s universal access across any device, or maybe you prefer Google’s store which is less vertically integrated as Apple’s but not as universal as Amazon but which also provides a huge catalog of out-of-print, scanned books from their Google Books project, or maybe you prefer BN for trying to exclusively catering to the book/reading market, or maybe you prefer innumerable smaller, independent stores providing less mainstream content, not from the big 5? This is healthy competition with limited price competition.

Bob W December 17, 2014 um 4:45 pm

For your reading enjoyment –>

On page 6 it states "The rule of reason does not govern all restraints. Some types “are deemed unlawful per se.” Khan, supra, at 10. The per se rule, treating categories of restraints as neces- sarily illegal, eliminates the need to study the reasonable- ness of an individual restraint in light of the real market forces at work, Business Electronics Corp. v. Sharp Elec- tronics Corp., 485 U. S. 717, 723 (1988); and, it must be acknowledged, the per se rule can give clear guidance for certain conduct. Restraints that are per se unlawful in- clude horizontal agreements among competitors to fix prices, see Texaco, supra, at 5, or to divide markets, see Palmer v. BRG of Ga., Inc., 498 U. S. 46, 49–50 (1990) (per curiam)."

Judge Cote ruled it was a horizontal violation.

The Leegin ruling was that there was a net benefit to the consumer because the vertical price fixing allowed for additional products on the market. In the Apple case it’s clear to me that there was no net benefit to the consumer, prices increased, discounts were not allowed, Apple introduced no additional products. Apple is trying to argue that prices miraculously went down because of their entry in the market (although they rigged the market so there could be no price competition).

Tim F. December 17, 2014 um 5:12 pm

You aren’t telling me anything I don’t know. That doesn’t mean that many others including myself cannot disagree with Cote. Cote’s arguing that it was both a horizontal conspiracy with the attributes of a hub and spoke conspiracy with Apple at the center as the mastermind (a vertical conspiracy) is contradictory and potentially problematic.

Moreover, the simple fact that a rule of reason analysis (if permitted, I’d argue that Cote never considered or allowed it) could show pro competitive effects and that this would have been done through 100% legal business practices and basic economic motivations outside of antitrust, on its face, suggests that a per se ruling is not appropriate in this case.

None of what you say is clear is clear to me: I do see consumer benefit, I do see price declines in the broader market, discounts were allowed (the MFN did not preclude discounting or wholesaling), Apple did introduce additional products.

And to further clarify, there are innumerable instances of markets where there is little to no price competition (most vertical markets of this kind), but the market is still deemed competitive. Cote’s very brief consideration of the rule of reason, to me, makes very clear her error. Claiming that competition did not increase but decreased is on its face wrong and obvious.

Timothy Wilhoit December 18, 2014 um 5:51 am

William J. Dyer’s blog, I’ve posted it in the past, discusses the horizontal vs. vertical in comments 42 & 43. I don’t know how long you’ve been practicing law, but Dyer has been a practicing attorney for over 30 years.

Nate Hoffelder December 18, 2014 um 11:22 am

Thank you. I’ve added him to my folder of lawyer blogs I follow.

Tim F. December 18, 2014 um 2:01 pm

Yes, I read Beldar six months ago, and? His prediction for the Second Circuit seems to have gone horribly wrong. So what is this link supposed to tell me?

The argument that Cote did consider rule of reason is laughable. Rule of reason requires defining the market, assessing the market prior to the alleged anticompetitive behavior, and assessing it after the alleged behavior. She thwarted Apple’s attempts at every turn to do so — basically arguing that it was irrelevant because she had it in mind that it was a per se case all along — the only testimony relating to Amazon that got into the trial is when it benefited the DOJ (since the case was largely their creation anyway).

Cote has strongly stated there was NO pro-competitive effects, that Apple actually REDUCED competition. She thwarted any real attempt at market analysis, but even so, the Second Circuit judges aren’t foolish enough to believe that a market 90% controlled by a monopsony and monopoly selling at an artificial and below-cost price before any true competition developed was MORE COMPETITIVE than a market where that player’s market share was reduced to 60-65% and not only allowed Apple to enter but also Google, others, and brought new life to BN — and actually allowed everyone to profit.

Tim F. December 18, 2014 um 2:11 pm

And to clarify, I don’t know what the 2nd District’s questioning truly indicates but based on the little reporting we have from the hearing, I can say with absolute certainty that Dyer is 100% WRONG when he states: "Indeed, the very most likely appellate result is that the Second Circuit will say, 'We’re not going to even discuss whether this is 'per se' or 'rule of reason' because we don’t need to, since the answer won’t affect whether we affirm or reverse.'"

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