March 9, 2012

Justice Dept. finally does something about predatory pricing in the book biz by announcing it’s suing … Apple and the publishers?

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Steve Jobs introduces the iBookstore

As faithful readers and attendees of my various talks know I have for years now been saying that the publishing industry had a very simple way to stop Amazon.com‘s predatory pricing: They could, thanks to a 2007 Supreme Court decision, collude to set a floor price for books — i.e., basically say no more discounts, meaning everyone has to sell the book for about the same price.

The court decision in question — Leegin Creative Leather Products, Inc. v. PSKS, Inc. — overturned a 96-year-old ruling saying it was illegal for manufacturers to set fixed prices under the Sherman Antitrust Act. The decision — Leegin Creative, for short — reversed that, saying it was okay after all to set a price floor — i.e., a non-discountable price — so long as it was good for the consumer. Here’s a good summation of the case from Wikipedia:

Leegin, a manufacturer of leather apparel, concluded that its interests would be best served by opting out of a price war “race to the bottom,” focusing instead on quality and brand cachet. Accordingly, with specific exceptions, it decided to refuse sale to retailers if they intended to discount its products below their recommended retail price. Five years after this policy was introduced, Leegin discovered that Kay’s Kloset (sic.) was violating the policy by marking down the Leegin products by 20%. When Kay’s refused to comply with Leegin’s policy, Leegin cut them off. PSKS, the parent company of Kay’s, sued. PSKS charged that Leegin violated the antitrust laws when it would “enter into agreements with retailers to charge only those prices fixed by Leegin.”

A New York Times report describes the argument, and the decision that resulted, saying the government …

…  had argued that the blanket prohibition against resale price maintenance agreements was archaic and counterproductive because, they said, some resale price agreements actually promote competition.

For example, they said, such agreements can make it easier for a new producer by assuring retailers that they will be able to recoup their investments in helping to market the product. And they said some distributors could be unfairly harmed by others — like Internet-based retailers — that could offer discounts because they would not be incurring the expenses of providing product demonstrations and other specialized consumer services.

A majority of the court agreed that the flat ban on price agreements discouraged these and other marketing practices that could be helpful to competition.

Price war, race to the bottom, internet-based retailers with an unfair advantage — it was the stuff of the book business writ large, and so when the above story appeared on the front page of the Times, and was covered on the front page of the Wall Street Journal, too, as I’ve recounted here before, I immediately called Wall Street Journal book reporter Jeffrey A. Trachtenberg. I told him I thought this was the opportunity to stop the kind of discounting that first Barnes & Noble and then Amazon had enforced so destructively to book culture. Trachtenberg was surprised, said he hadn’t thought of this as it applied to the book business, and told me he was going to ask the corporate counsels at some Big Six publishers if they agreed with my interpretation. He called back to say they did … and they wanted to know if Melville House would make the first move. That would have been ridiculous, of course. For one thing, it’s hard to collude by yourself. For another, Melville House was a company run off the kitchen table at the time. It seemed unlikely to me that we could lead a movement whereby the giant international conglomerates would follow us. Those corporate attorneys were making what they call a joke.

And no one — and I mean not one single book biz journalist — has mentioned that case again, despite my constant trumpeting that it was our ticket out of this crummy burgh … until now.

Because late Wednesday night, Trachtenberg and his WSJ colleague Thomas Catan broke the news that “The Justice Department has warned Apple Inc. and five of the biggest U.S. publishers that it plans to sue them for allegedly colluding to raise the price of electronic books ….” The five out of the Big Six publishers being sued: Simon & Schuster, Macmillan, Penguin, HarperCollins and Hachette.

Here’s the gist of their report:

The case centers on Apple’s move to change the way that publishers charged for e-books as it prepared to introduce its first iPad in early 2010. Traditionally, publishers sold books to retailers for roughly half of the recommended cover price. Under that “wholesale model,” booksellers were then free to offer those books to customers for less than the cover price if they wished. Most physical books are sold using this model.

To build its early lead in e-books, Amazon Inc. sold many new best sellers at $9.99 to encourage consumers to buy its Kindle electronic readers. But publishers deeply disliked the strategy, fearing consumers would grow accustomed to inexpensive e-books and limit publishers’ ability to sell pricier titles.

Publishers also worried that retailers such as Barnes & Noble Inc. would be unable to compete with Amazon’s steep discounting, leaving just one big buyer able to dictate prices in the industry ….

As Apple prepared to introduce its first iPad, the late Steve Jobs, then its chief executive, suggested moving to an “agency model,” under which the publishers would set the price of the book and Apple would take a 30% cut. Apple also stipulated that publishers couldn’t let rival retailers sell the same book at a lower price.

“We told the publishers, ‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway,'” Mr. Jobs was quoted as saying by his biographer, Walter Isaacson.

The publishers were then able to impose the same model across the industry, Mr. Jobs told Mr. Isaacson. “They went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books,’ ” Mr. Jobs said.

The Justice Department believes that Apple and the publishers acted in concert to raise prices across the industry, and is prepared to sue them for violating federal antitrust laws

Well, that’s one way to look at it. You could just as easily say the publishers were not raising prices so much as trying to prevent them from dropping so precipitously — in other words, exactly the circumstances of Leegin Creative, except far more drastically so.

Except that it’s not at all clear they acted in collusion — in fact, what happened is Macmillan stood up to Amazon, and the other publishers simply followed suit. That’s not exactly collusion. In fact, I’m sure Macmillan would call it something else — the other Big Sixers, after all, left Macmillan hung out to dry with no buy buttons from Amazon for a couple of weeks before deciding to take a similar stand on their own.

And anyway, so what if they did collude? Given the clear dictates of the Leegin case, it would seem the Justice Department has a  weak case indeed. And while Trachtenberg and Catan report some of the threatened publishers are hinting at a settlement, other reports, such as this story from Julie Bosman and Edward Wyatt for the New York Times, say “not all of the publishers are negotiating with the Justice Department,” and that in any event amongst all the publishers ‘There is general agreement … that it is vitally important to retain the current model, which allows publishers to set their own prices for e-books as they face an aggressive challenge from Amazon in the book market.”

And so it does seem that — at last — the big boys are acting on the same reading of Leegin that I had five years ago, and rumors are flying in New York that it will be the basis of their defense. (And by the way, after all these years, and with the notable exception of Barry Lynn‘s great report for Harper’s Magazine that we discussed in January … I’ve finally seen another citation of Leegin Creative in relation to the book business — in a Columbia Journalism Review story about the case against Apple and the publishers that says, yes, it seems the Department of Justice has a weak case in light of Leegin. Watch for many others to echo it now in a catch-up game — but that’s a good thing.)

Hovering over the entire story, meanwhile, is the innate weirdness of the DOJ’s decision: not only to fly in the face of the Leegin decision, but to charge Apple, and not Amazon, with an antitrust violation. After years of flagrant and public predatory pricing and behavior on the part of Amazon, not to mention its refusal to obey tax laws, the fact that it’s Apple being charged — Apple, the company that’s so good at fixing the price of books that it, er, hardly sells any at all — is a travesty of justice.

But that’s your tax dollars at work. Meanwhile, it remains to be seen whether the leaders of this ultra-timid industry will, indeed, finally act in concert and take strength from the Leegin Creative decision to stand up to the charges. As I said once before concerning Leegin: You say you want a revolution? Well, here’s your chance.

 

Dennis Johnson is the founder of MobyLives, and the co-founder and co-publisher of Melville House. Follow him on Twitter at @mobylives

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