Today Penguin filed its answer to the Department of Justice antitrust suit against Apple and the US book publishers (MacMillan and Penguin). Prior to this both Macmillan and Apple responded to the suit. The Penguin response is 75 pages long, so I won’t be going over it point by point. But it is particularly enlightening in that it restates the government allegations and responds to each of them. While I was reading the documents, it struck me how much it really addressed the big issues of this litigation. Penguin did a lot more than simply make the obligatory categorical denials to each of the 103 government allegations.
Antitrust law is exceptionally arcane and frequently difficult to understand even by those who specialize in such matters. There are so many exceptions that have been carved out over the years that it is always difficult to determine what the outcomes are likely to be. I know. I have been a plaintiff in 3 suits and a consultant to the Federal Trade Commission in an antitrust investigation, all of them against – would you believe? – the book publishers.
Let’s go over some of the key allegations and the Penguin responses.
United States allegation #2. The government asserts: that e- book sales have been increasing “ever since Amazon released its first Kindle device in November of 2007…..One of Amazon’s most successful marketing strategies was to lower substantially the price of newly released and bestselling e-books to $9.99.”
Penguin response: Penguin admits that e-book sales have been increasing and further “admits that Amazon’s below-cost selling of certain newly released and best-selling e-books for $9.99,… was a successful strategy for locking consumers into its proprietary Kindle platform and raising a significant barrier to entry.”
[My comment. This is a very revealing response by Penguin. Framed as an admission of the government's allegation, it includes some twists on Penguin's part that go to the heart of their defense. The government implies that Amazon is simply pursuing a typical market strategy to offer lower prices and sell more books. Penguin emphasizes that the practice is very selective and that the strategy was initiated to lock consumers into purchasing Kindles and keeping other potential competitors from entering the market. In other words, Penguin is pointing out that the real threat to competition is Amazon, not them.]
US allegation #3. “Publisher defendants feared that lower retail prices for e-books might lead eventually to lower wholesale prices for e-books, lower prices for print books, or other consequences the publishers hoped to avoid….Publisher Defendants teamed up with Defendant Apple which shared the same goal of restraining retail price competition…”
Penguin response: Penguin admits that they had concerns about Amazon’s pricing practices. They point out that Amazon was selling some of these books “well below the prices paid by Amazon to Penguin…for these titles.” They believed that Amazon’s practices were “anti-competitive and detrimental to the long term process of expanding opportunities for developing authors and creating more content.” They also point out the Government’s complaint “is careful to avoid stating, prior to Apple’s entry, Amazon’s share of eBook sales was 80 to 90 percent.” Penguin goes on to argue that Amazon’s practices were “undercutting the margins and incentives of other booksellers, fostering a perception of eBooks as lower cost commodities, and threatening the viability of book publishers and authors, as well as other bookselling outlets vital to the marketing and promotion of books.”
[My comment. Penguin pointedly mentions that the government avoids bringing up an inconvenient fact: that Amazon had 80-90% of e-Book sales prior to Apple's entry. Again, they are emphasizing that the real competitive danger lies with the "monopolist-Amazon" and that the result of the publishers – Apple relationship was to increase competition, not to restrain it.]
US allegation #5. The government alleges that Apple and the publishers “jointly agreed to alter the business model governing the relationship between publishers and retailers. Under the old “wholesale” model, “publishers sold books to retailers, and retailers, as the owners of the books, had the freedom to establish retail prices.” Under the new model, “publishers would take control of retail pricing by appointing retailers as ‘agents’ who would have no power to alter retail prices set by publishers.”
Penguin Response. Penguin denies there was any agreement among the publishers to change the pricing model. They again reiterate their position that “the allegation that there was a ‘robust retail price competition’ before the adoption of the agency model ignores the indisputable fact that the ‘competition’ was nothing more than the below-cost, predatory, market-domination strategy of a monopolist distributor [Amazon].”
[ My comment. This gets to the heart of the government's case that the publishers jointly conspired to establish a system that fixed prices at a higher level than would otherwise be the case. Certainly if the government can establish the factual basis for such a joint agreement, then they will be in a very strong position. Penguin claims here and repeatedly in their answer that there was no joint agreement and that they were simply responding individually to the anti-competitive practices of the "monopolist", Amazon.]
US allegation #8. The government alleges that after executing the new trade model with Apple, “the Publisher Defendants all then quickly acted to …[impose the new model] on their other retailers. As a direct result, those retailers lost their ability to compete on price, including their ability to sell the most popular e-Books for $9.99…”
Penguin Response. Under the new model, “price competition has moved from the retail level to the publisher level. Price and non-price competition both among publisher and among eBook retailers has exponentially increased as a result of the move to the agency model.
[My comment. Penguin's apparent argument that price competition continues to be robust because it is practiced at the publisher level, as distinguished from the retail level seems to be a bit of a strain, even if true. But they do point out that outside of the very limited class of best sellers that Amazon had been selling for $9.99, there is increased price competition. And furthermore the government has not considered the competitive benefits of more players in the market selling more types of electronic readers and even more types of book formats, like enhanced e-Books that did not exist until the iPad.]
Ok. That’s enough for this blog. The complaint goes on with numerous allegations of specific facts that the government hopes will prove their case. Probably the most conspicuous allegations (at least from the point of view of publisher tittle-tattle are #39-45, where the government describes repeated meetings attended by publisher CEO’s at fancy New York restaurants. The government complaint fails to show exactly what was discussed over Chardonnay but insinuates that this was the venue where the agreements were made.
I hope this gives you a little flavor of what the issues are in this case and how the two parties frame those issues.