March 12, 2012
Authors Guild head (and attorney) Scott Turow warns DOJ about the effects of law suit
by Paul Oliver
The Department of Justice’s confounding lawsuit against five of the Big Six publishing companies and Apple, Inc. for price-collusion has been widely regarded as a “out of the frying pan and into the fire” sort of move. The tragic lawsuit seemingly damages competition in benefit of the expansion of the leading market influence (Amazon) and thus undermines the supposed goal of the laws it seeks to uphold.
The list of the suit’s many detractors was joined on Friday by Author’s Guild President Scott Turow when the bestselling author and lawyer offered a clear-eyed and damning open letter concerning the suit. Turow’s letter opens with a grim warning that strikes at the heart of the matter:
Yesterday’s report that the Justice Department may be near filing an antitrust lawsuit against five large trade book publishers and Apple is grim news for everyone who cherishes a rich literary culture.
The Justice Department has been investigating whether those publishers colluded in adopting a new model, pioneered by Apple for its sale of iTunes and apps, for selling e-books. Under that model, Apple simply acts as the publisher’s sales agent, with no authority to discount prices.
We have no way of knowing whether publishers colluded in adopting the agency model for e-book pricing. We do know that collusion wasn’t necessary: given the chance, any rational publisher would have leapt at Apple’s offer and clung to it like a life raft. Amazon was using e-book discounting to destroy bookselling, making it uneconomic for physical bookstores to keep their doors open.
This is not a feel-good lecture about the essential role of indies in literary culture. Nor is it an intricate legal argument meant to defend Apple and the Big 5 from the DOJ. In fact Turow’s admission of having “no way of knowing whether publishers colluded” is the most telling component of the letter. It’s not about guilt or innocence but instead about the spirit of the law. As Turow puts it at the close of his letter:
Let’s hope the reports are wrong, or that the Justice Department reconsiders. The irony bites hard: our government may be on the verge of killing real competition in order to save the appearance of competition.
This would be tragic for all of us who value books, and the culture they support.
There is a didactic component to the letter as well, where Turow reminds publishers and authors of the decisions they have made to help create the precipice they now stand before:
Just before Amazon introduced the Kindle, it convinced major publishers to break old practices and release books in digital form at the same time they released them as hardcovers. Then Amazon dropped its bombshell: as it announced the launch of the Kindle, publishers learned that Amazon would be selling countless frontlist e-books at a loss. This was a game-changer, and not in a good way. Amazon’s predatory pricing would shield it from e-book competitors that lacked Amazon’s deep pockets.
Critically, it also undermined the hardcover market that brick-and-mortar stores depend on. It was as if Netflix announced that it would stream new movies the same weekend they opened in theaters. Publishers, though reportedly furious, largely acquiesced. Amazon, after all, already controlled some 75% of the online physical book market.
Turow also goes beyond the typically metaphysical argument concerning bookstores and literary culture, and lays out the blueprint of a post-brick-&-mortar world with emphasis on the effect such a marketplace will have on new writers, and it isn’t pretty:
For those of us who have been fortunate enough to become familiar to large numbers of readers, the disappearance of bookstores is deeply troubling, but it will have little effect on our sales or incomes. Like rock bands from the pre-Napster era, established authors can still draw a crowd, if not to a stadium, at least to a virtual shopping cart. For new authors, however, a difficult profession is poised to become much more difficult. The high royalties of direct publishing, for most, are more than offset by drastically smaller markets. And publishers won’t risk capital where there’s no reasonable prospect for reward. They will necessarily focus their capital on what works in an online environment: familiar works by familiar authors.
The lawsuit is as baffling as it was the day it was announced and when confronted with the history of the issue as Turow (and MobyLives) have laid out, it smacks of malfeasance more than it does ignorance. There is only one corporate entity that stands to gain by this lawsuit and that is always a suspicious thing, especially when they’re currently the closest thing to a monopoly in the market. Again, Turow writes:
Two years after the agency model came to bookselling, Amazon is losing its chokehold on the e-book market: its share has fallen from about 90% to roughly 60%. Customers are benefiting from the surprisingly innovative e-readers Barnes & Noble’s investments have delivered, including a tablet device that beat Amazon to the market by fully twelve months. Brick-and-mortar bookstores are starting to compete through their partnership with , so loyal customers can buy e-books from them at the same price as they would from Amazon. Direct-selling authors have also benefited, as Amazon more than doubled its royalty rates in the face of competition.
In this light the DOJ’s actions are more than ill-informed—they’re downright suspicious.
Paul Oliver is the marketing manager of Melville House. Previously he was co-owner of Wolfgang Books in Philadelphia.
The dinner that launched a DOJ lawsuit 
DOJ’s “smoking gun” turns out to be leaky super soaker 
Profile Books publisher: majority of self-published books are “unutterable rubbish” 
Self-published ebooks account for 20% of UK’s genre market 
6 Comments
The purpose of antitrust law is to benefit consumers, and, as a result, antitrust law focuses primarily on the impact on consumers of any particular arrangement such as this. In this case, prices for consumers for a non-technical product (where there is much less of an argument for retail price maintenance) went up dramatically as a result of the actions of Apple and the publishers.
If consumers benefit, antitrust law does not generally care about who wins and loses amongst producers/manufacturers, creators, retailers and distributors. That’s one of the reasons why predatory pricing cases are hard to establish. One could argue that antitrust law should concern itself with other societal concerns and benefits, but historically it does not. Therefore, the DOJ action, rather than being unexpected, unusual, baffling or suspicious or constituting malfeasance, was foreseeable and, frankly, routine. With family working in the industry, I am quite sympathetic to publishers and the traditional players in book distribution, but I do not believe that it is helpful to mischaracterize, even inadvertently, the spirit of antitrust law.
Antitrust law also takes a dim view of predatory pricing, which is defined as dumping products below cost in an effort to drive competitors out of a market. This is exactly what Amazon was doing with e-books prior to the agency plan. There is no dispute that this was the case. They were buying ebooks at $13-15 and selling them for $9.99. What happens to your “business as usual” argument now?
The DOJ is punishing the publishing industry for stopping unlawful behavior by one rogue customer. To me, that continues to be unexpected, baffling, etc.
Under antitrust law, it is difficult for plaintiffs to prevail on predatory pricing claims and victories are rare. Without getting into the legal complexities, just buying books for $X and selling them for $X minus $Y is insufficient to establish predatory pricing. And that’s not even getting into the whole, one person’s predatory pricing claim is the other side’s claim that suppliers are price fixing – colluding to prevent price competition. Not to mention that no one really believes that Amazon, after reducing ebook prices, was then going to double them to recoup losses. If anything, the worry is that ebook prices will continue to drop – that this is the start of a steady decline in ebook pricing that will have disastrous consequences for the established players in the publishing industry as well as for smaller independent publishers.
Whether you and I agree on the law or not, the reality is that the last thing the publishing industry should want is to go before a jury arguing that by dropping ebook prices to consumers – consumers like members of the jury – amazon, one of the top ten most admired companies in the US and a company that has been saving consumers like the jury members time and money for years, was breaking the law, and that publishers, you know, the same guys who have been charging you for years $20 to $30 for a hardback, are the good guys. You might think that an unfair characterization, but don’t kid yourself, that’s the way it will be presented to the jury and, the odds are, how it will look to the jury.
Like I said, I am sympathetic to the publishing industry, but the law will not be its salvation and may be its donnybrook. And wishing it were otherwise and burying one’s head in the sand, rather than facing the facts as to why the DOJ is proceeding and the odds the DOJ might prevail won’t do the publishing industry any good.
Sorry, but precedent — particularly the Leegin Creative case, discussed in detail in our Friday report — pretty directly contradicts this. To boot, the Robinson Patman act discusses the use of “loss leaders” — the Amazon tactic — as potentially predatory. The only reason a group of publishers has not gone to the DOJ or FTC requesting protection from Amazon is fear of retaliation — which they’ve done publicly,r repeatedly — another predatory practice. Finally, I have to disagree with the concept that antitrust laws are all about reducing prices to rock bottom. Antitrust laws are not meant to put industries out of business. Nor are they about lowest possible consumer prices. They’re about fair business practices. For this and numerous other reaons, prosecuting publishers and/or Apple, rather than Amazon, is ludicrous. To characterize it as anything else is simply unrealistic, and irresponsible. — Dennis Johnson
Leegin is about retail price maintenance (vertical restraint of trade), essentially manufacturer/retailer forced agreement on prices with a view to enhancing non-price competition, but I do not believe it blesses collusion amongst suppliers/manufacturers (horizontal restraint of trade). In other words, an electronics company could require all the retailers it deals with to charge $X for its 3D blue-ray player, and the Supreme Court might say that’s ok (Leegin does not bless all retail price maintenance, it just found that such arrangements are no longer automatically a problem but must still be analyzed under a “rule of reason”), as it incentivizes the retailers to provide a service to customers like explaining the 3D player and the benefits of 3D, etc. But, that electronics company could not get together with all the other electronics companies and agree that they will all require their retailers to charge the same price for 3D blue-ray players without it potentially being a problem under antitrust laws. Turow and Apple are arguing in part, it appears, that there was no collusion, and that would have to be decided at trial (and would be argued in any settlement discussions).
If book publishers had a strong case and they were comfortable they had a reasonable chance of prevailing on the merits they could sue on antitrust and related unfair competition grounds and seek damages not just for the original harm, but also for harmful retaliatory practices (and indeed could seek equitable remedies against retaliatory actions). But it can be hard, expensive and time consuming to make and prevail on an antitrust case, particularly one of this nature.
It is true that antitrust laws are not about reducing prices to rock bottom – no one is arguing that; nor are antitrust laws about putting industries out of business. But the antitrust laws are not about keeping companies or industries in business either for that sake alone. Antitrust laws are intended to benefit the public/consumers. Even in predatory pricing and similar cases, the purpose of restricting such practices is to protect the public/consumer from the subsequent monopoly/recoupment pricing to make up for the earlier predatory prices.
Like I said, I am sympathetic to publishers/non-Amazon-non-Apple booksellers. But perceptions/appearances count (formally and informally) in PR battles and in legal disputes, and I am merely reminding that from a 3rd party standpoint, here’s what it can look like: Amazon lowers prices for consumers; various publishers and Apple have some type of dealings/conversations and arrive at a new arrangement which is then also imposed on Amazon and thereafter prices go up. Having to argue that the higher prices are good, puts the publishers in a tough spot.
Paragraph 1: I say again, there is no collusion here. What happened happened in public, famously and under close media scrutiny: Macmillan went agency, Amazon retaliated by pulling their buy buttons, and Macmillan went it alone for a while, until the other publishers, one at a time and not simultaneously, decided to follow suit. That’s not acting in collusion. Thus, the details of the Leegin decision seem keenly applicable.
Paragraph 2: You’re not disagreeing with me nor saying anything different — as I say, Amazon is known to retaliate and who can go for long without their largest account? It’s an odd justice system where you have to ask a policeman to step in to protect you from a public crime before they’ll intervene.
Paragraph 3: You certainly implied that it was about the lowest prices possible and said further that “antitrust law does not generally care about who wins and loses amongst
producers/manufacturers, creators, retailers and distributors.”
But that’s simply not true. You can’t have consumer protection with antitrust laws enforcing fair trade practices that protect those who play fair, and which is why Robinson Patman, for example, so emphasizes predatory — or,
unfairly low — prices being the undoing of competition. And our antitrust laws see fair competition as being what’s most protective for the consumer.
Further, this isn’t the widget business we’re talking about here. It’s a business that includes the very making of culture, of art and politics and dissent, all wrapped up in free speech. Protecting that is part of consumer protection. Thus, if “antitrust law focuses primarily on the impact on consumers of any particular arrangement such as this,” it remains shocking to those of us in the industry that the government targeted everyone BUT Amazon on this.
Further, I have to point out: We’re talking about a very young thing when we talk about ebook sales. There was no set price for ebooks until Amazon declared it should be $9.99, a drastic drop from all other formats. So how could publishers be accused of “dramatically” raising prices? In fact they had lowered prices from print prices before Amazon declared a flat price for all books. Why is Amazon allowed to determine that (outrageous) measure, and why does the DOJ agree to it?
Which leads to the observation that this suit would do rather the opposite of consumer protection, and instead protect the one genuine monopoly in the business.
Paragraph 4: a) Amazon did not lower prices for the sake of consumers, it clearly suffered years of losses to gain market control, in a textbook manner (and as described in Robinson Patman); b) as I stated earlier the publishers and Apple clearly did not “have
some type of dealings/conversations and arrive at a new arrangement” — Amazon’s public thuggishness told everyone what they had to do with no need to consult and the entire thing was played out on a public stage, not a backroom; c) the argument is not that publishers reaised prices but that Amazon reduced them so drastically they sold at a loss — in violation of the letter of the law. The argument is that loss leader prices are unrealistic to the survival of all the “manufacturers” — authors and publishers — of an industry vital to our culture. It’s a no-brainer in a fair courtroom, where it’s not about popularity but rather fairness and the true opposition to monopolies.
– DJ