Ebook Antitrust: Is Apple or Amazon.com in the Wrong?
Daniel Knight - 2012.04.11 -
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This reputed
English translation of an ancient Chinese curse seems an appropriate
way to begin this article, as the US Department of Justice has
filed an antitrust suit against Apple and several book publishers,
accusing them of price fixing and collusion.
Antitrust laws are intended to prohibit anticompetitive behavior
(which sometimes creates monopolies) and unfair business practices.
Monopolies
Standard Oil
These laws were used to break up Standard Oil, which
controlled 88% of the refined oil flow in the US in 1890. Standard Oil
of Ohio was incorporated in 1970 and either took over or destroyed most
of its competition in Cleveland over a two month period in 1972 by
undercutting prices, monopolizing the production of barrels used to
transport oil, and even
"Dispatching thugs who used threats and physical
violence to break up the operations of competitors who could not
otherwise be persuaded." (The Dismantling of the Standard
Oil Trust)
Technically a consortium of oil
companies that had the same board of
directors, Standard Oil became so powerful that it could obtain
heavily discounted shipping rates that other oil companies couldn't
touch. Congress pass the Sherman Antitrust
Act in 1890, laws designed to bring an end to business practices
that reduced competition in the marketplace. In 1911, Standard Oil was
broken up into 34
different companies.
Over time, many of these companies merged and merged again, creating
industry giants ExxonMobil, Chevron, Marathon, Sunoco, ConocoPhillips,
and a huge portion of Anglo-American BP.
AT&T
Much more recently, antitrust law was used to break up AT&T, which
had a virtual monopoly on telephone service across the US. AT&T was
regulated by state public utility commissions and the FCC. The monopoly
was dismantled
in 1982, creating seven regional phone companies - Ameritech, Bell
Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US
West - and leaving AT&T as a long-distance company.
Over time, these companies also merged into larger ones, giving us
today's AT&T and Verizon.
Price Fixing vs. Selling at a Loss
Although price fixing is common in some countries and actually the
law in some markets (such a French book sellers), it's a criminal
federal offense under the Sherman Antitrust Act. Apple has been accused
of price fixing in the case of the iTunes Music Store, which originally
sold all tracks at the same 99¢ price. However, there are
competing music services, most notably Amazon.com's.
In the realm of physical merchandise, once a store buys something,
it is generally allowed to set its own price. If it wants to charge
full retail price, sell it at cost, or choose a price point in between,
that's its choice. Amazon.com became an online retailing powerhouse by
offering books, CDs, DVDs, and later all sorts of merchandise at
greatly discounted prices, growing into the biggest reseller in many
product categories.
Electronic distribution changes everything. Apple, Amazon.com,
Barnes & Noble, and others no longer need to buy a printed book and
sell it - their customers can order, pay for, and receive ebooks over
the Internet. There is no inventory cost, which completely changes to
profit equation for book publishers.
Amazon.com likes to sell ebooks for $9.99, even taking a loss on
some titles to achieve that price, which is anticompetitive
behavior.
When Apple created its iBooks Store, it wanted a level play field.
Apple negotiated an agreement with publishers that it would be able to
sell the same titles as Amazon.com, Barnes & Noble, and others at
no higher a price than Apple charges its customers.
That certainly sounds fair to me. Unlike iTunes music, Apple hasn't
tried to set prices for the ebooks it sells. It allows publishers to
set the retail price, which they have always done with printed books.
Apple's contracts with publishers only mean that iBooks buyers won't be
penalized for choosing Apple's store instead of Amazon.com's.
Amazon.com doesn't like this. It had a good thing going with its
$9.99 ebooks, selling some at a loss to grow its market - exactly the
same thing it does with the Kindle Fire tablet. And exactly the same
kind of thing Standard Oil once did to drive competitors from its
markets.
Yet the Department of Justice is ignoring that and going after
Apple, which is only asking that publishers treat them fairly by
guaranteeing it the same retail pricing as any competitor offers.
If Amazon.com wants to buy physical books or Kindle tablets and
resell them at a loss, that's one thing, but there are no inventory
costs or risks involved with selling ebooks. Amazon.com can't argue
that it's trying to unload old, unsold inventory, so choosing to sell
ebooks below its cost can only be a chosen strategy to control the
market. By negotiating with publishers as it did, Apple is creating a
more competitive market by assuring that no ebook seller has to sell at
a loss to compete with Amazon.com.
Kudos to Apple for working to create a level play field for the
ebook industry.
Dan Knight has been using Macs since 1986,
sold Macs for several years, supported them for many more years, and
has been publishing Low End Mac since April 1997. If you find Dan's articles helpful, please consider making a donation to his tip jar.
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