I wrote this a couple of weeks ago:
It’s true antitrust laws are there primarily to protect consumers, but they do that in part by protecting competitors and suppliers from chokeholds in markets. Doing so ultimately protects consumers in the long run—on prices and on selection.
That’s not to say the government is supposed to step in “to protect inefficient firms from having to exit the market,” a red herring the WSJ quotes. You can’t be efficient enough to compete with a company willing to lose money in a market, particularly if you aren’t willing or able to subsidize those losses with profits from other parts of your business.
What the publishers were trying to do here, in the absence of any interest from antitrust authorities, was to prevent Amazon from gaining monopsony power over their market. A monoposonistic retailer can dictate or inordinately influence prices and terms to the companies who actually produce the products (think Walmart and its suppliers). The funny thing with the ebooks situation is that Apple is a monopsonist in several major markets, too.
No company tries to lock up 90 percent of a market to keep losing money in perpetuity. Eventually, it will either raise prices or force suppliers to take less money. The latter is where Amazon was or is surely going.
In fact, it already has, in both ebooks and print books. Remember, Amazon, controls some 75 percent of online print sales too. Here’s some example of how it tries to use its power over publishers from part two of The Seattle Times tough series on the dark side of its hometown giant:
The bad news came to McFarland & Co. in an email from Amazon.com. The world’s largest Internet retailer wanted better wholesale terms for the small publisher’s books. Starting Jan. 1, 2012 — then only 19 days away — Amazon would buy the publisher’s books at 45 percent off the cover price, roughly double its current price break…
Amazon, which buys (Berkshire Publishing Group’s) books at 40 percent off the cover price, emailed her in December to demand an even bigger discount. She refused, and Amazon stopped placing orders, affecting 10 percent of her business…
This February, Amazon again asserted its influence when it pulled nearly 5,000 titles by distributor Independent Publishers Group from its Kindle e-book store. Amazon wanted better terms, and IPG said “no.”
It’s okay with the DOJ when Amazon behaves like this, but it’s not okay for the companies to fight back. That’s the problem here.
Which brings me to another flaw with the case against the publishers. Typically when a cartel gets together to raise prices in an industry, it’s so, you know, members of the cartel can make more money.
But publishers say they knew when they agreed to it that they’d make less money under the Apple model than they did under the Amazon model.
The Journal doesn’t mention that, either.
I’m pretty sure I’ve never liked something on the WSJ edit page while criticizing the paper’s news side on the same subject. But Gordon Crovitz, the Journal’s former publisher, wrote a good op-ed the same day this news story ran. He raises a valid point: that Apple’s model with book publishers is similar to the one it gives other industries in its app store:
Whether it’s news, games, apps or books, Apple’s position is the same. The market determines the price, and Apple gets 30%. The Justice Department fails to acknowledge anywhere in its 36-page complaint against Apple and book publishers that this is the standard approach. (Indeed, the government complaint inaccurately refers to “30% margins” for Apple. Operating margins are very different from sales commissions.) The government says this “agency model” is inherently wrong (“per se” wrong, in legalese) and “would not have occurred without the conspiracy among the defendants.”
There’s a difference though, and it’s that Apple presumably doesn’t tell Rovio it can’t sell Angry Birds for more than 99 cents. The Justice Department’s case will hinge on whether the companies locked in on the $12.99 and $14.99 prices together. We’ll see, and Crovitz, for one, argues that there’s more price diversity under the agency model, not less.