The Journal Misses on Ebooks and Antitrust

It’s usually wise to read an “experts say” story a little more skeptically than you normally would.

That’s the case with a Wall Street Journal story earlier this week on the Department of Justice antitrust lawsuit against five major book publishers and Apple, who were trying to break Amazon’s 90 percent monopoly on the ebook retail market. The headline says “Critics of E-Books Lawsuit Miss the Mark, Experts Say.”

Critics have accused the department’s Antitrust Division of picking on struggling book publishers while aiding Internet retailing giant Inc…

So did the Antitrust Division get the law backward? Antitrust scholars say no and that some of the criticism is based on basic misperceptions of the law.

If you can get two antitrust scholars to say something, then it becomes “antitrust scholars say,” implying that they all think that. Are you sure about that, WSJ? Here’s CNET eleven days earlier:

The Department of Justice “has a far better case against the publishers than Apple,” says Dominick Armentano, professor emeritus of economics at the University of Hartford and author of Antitrust and Monopoly who’s now affiliated with the Independent Institute in Oakland, Calif. “If the CEOs of the various publishers got together in hotel rooms to discuss prices, they are sunk” and might as well settle, he says.

Richard Epstein, the prolific legal scholar and professor of law at New York University, goes further. Epstein argues in an essay published yesterday that there are “difficulties” with the Justice Department’s case against publishers as well: “It will take some time to hear the whole story, but the betting here is that this lawsuit is a mistake.”

And here’s The Seattle Times three weeks ago:

That those companies are under investigation for price fixing doesn’t diminish claims of an Amazon monopoly, said antitrust expert Michael Carrier, of the Rutgers School of Law in Camden, N.J.

The beef with the DOJ’s suit is not necessarily that Apple and the book publishers didn’t violate the law—or at least skirt awfully close to it—by agreeing on a new model with specific price points. It’s that the DOJ suit misses the forest for the trees. As does the Journal:

U.S. antitrust law doesn’t seek to protect little companies against big ones, or even struggling ones against successful ones. Companies can grow as large as they want, as long as they do it through lower prices, better service or niftier innovations. Companies can even become monopolies, as long as they don’t get there illegally or try to extend their power by unlawfully stifling competition.

Well, yes. The whole point of the pro-publisher view is that Amazon was abusing its monopoly position to stifle competition. It sold the publishers’ ebooks at a loss, making it difficult or impossible for competitors to enter the market and perpetuating its 90 percent market share. Somewhat ironically, Amazon only started making money on ebooks after the publishers forced it to adopt the new model (which gave it the exact same terms as Apple, by the way), which has reduced its market share by a third.

Note how how the Journal deals with Amazon’s predatory pricing:

Amazon popularized e-books by introducing the Kindle in 2007 and then heavily discounting the e-books at its own expense. Publishers hated Amazon’s $9.99 price for new best sellers because it made it harder for publishers to sell hardcover books at higher prices.

But as disruptive as Amazon’s pricing may be to publishers, it isn’t illegal, experts say.

The paper implies that Amazon lowered its profit margins, but it doesn’t tell readers that Amazon lost money on the books. That might make folks who haven’t been closely following the story ask why they’d do such a thing.

Glossing over the predatory pricing angle allows it to say something as obviously nonsensical as this:

But the law is concerned with protecting competition, not competitors, experts say.

How do you go about protecting competition without protecting competitors—even if only indirectly?

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 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.

But even if publishers did set prices together, it doesn’t mean DOJ has its priorities straight. They were reacting to an anticompetitive threat. One that the government won’t take on itself.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,