March 13, 2012

Is a settlement at hand in both the EU and US case against Apple and the Big Five?

by

EU competition commissionerJoaquin Almunia

The European Union’s competition commissioner, who last year opened an investigation into Apple‘s dealings with HarperCollins, Hachette, Simon & Schuster, Penguin and Macmillan that was similar to the one launched in the US by the Department of Justice, may be close to some kind of settlement, according to a Bloomberg Businessweek report by Aoife White.

At a news conference, “Joaquin Almunia, the antitrust chief, told reporters today that a settlement was only possible if the publishers were ‘ready to remove’ the cause of EU objections regarding sales restrictions,” says the report, although it also notes that “No talks on a settlement are currently taking place.”

Another report, by Brid-Aine Parnell for The Register, called it and “offering” of a “truce,” but also noted: “Almunia said that EU regulators were coordinating with US counterparts on probing the pricing deals between Apple and publishers, which shifted the book market from a wholesale to an agency pricing model. If the companies can’t settle with the commission and avoid admitting any wrongdoing, they face a fine of up to ten per cent of their global sales.”

As for the terms of the truce, meanwhile, as a report by Philip Elmer-DeWitt at CNNMoney asks, “how to do it? Going back to the way things were — when Amazon was putting bookstores out of business by buying e-books as a “wholesaler” and selling them below cost — didn’t seem tenable.”

At the Washington Post, Steven Pearlstein introduces the idea that “a little anti-competitive behavior actually be pro-competitive” and notes that breaking up the “e-book monopoly” of Amazon “would raise prices rather than lower them.” That solution, he says, “has to do with how Amazon went about building its e-book monopoly in the first place — namely, by setting a price that was lower than what Amazon was paying publishers for the book. What looked to consumers like a great bargain at $9.99 a book looked to others in the industry suspiciously like predatory pricing, or selling below cost today in order to gain a monopoly and raise prices in the future.”

But Pearlstein says sources tell him that a settlement may be at hand:

The talks largely focus on two provisions of the publishers’ contract with Apple: one that prohibits the publishers from entering into “wholesale” arrangements with Amazon or any other major distributor, and a second that guarantees that no other distributor will be allowed to sell books for less than Apple. It was those provisions, ostensibly imposed by Apple but greatly welcomed by the publishers, which allegedly gave the publishers the incentive and the confidence to challenge their biggest customer, threatening a cut-off of books if Amazon did not accept the new arrangement.

Meanwhile, he notes that …

… the danger of regulators and judges focusing solely on short-term price effects is that it can mean turning a blind eye to business practices that temporarily lower prices even as they drive competitors out of business, lock in customers or limit entry into the market by new firms with better products.

Or to put it another way, it’s great to be able to buy e-books for $9.99, but maybe not if the alternative is accepting an Amazon monopoly that drives Barnes & Noble and your local bookstore out of business.

The only really safe mechanism for setting price is open competition, says Andy Gavil, an antitrust expert at Howard University, and anything that prevents that ought to be viewed with suspicion. Sounds like good advice to me.

 

 

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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