April 26, 2012

The strange bedfellows of the growing DOJ opposition


Beware other industries: What hath the DOJ wrought?

Just because it hasn’t been a headline story the last few days, don’t think the outrage over the Department of Justice lawsuit attacking the publishing industry has abated any. In fact, it seems to have become even more widespread, with discussion spreading well beyond the publishing community but nonetheless maintaining a surprisingly unity of perception:  To all but the most rabid (and short-sighted) Amazon fanatics, the government has missed the forest for the trees.

Even on the editorial pages of Rupert Murdoch‘s Wall Street Journal, which usually evinces an almost psycho-sexual admiration for the monsters born of free-market capitalism, the perception has been that the government protected a monopoly, to the detriment of the culture. As a smart op-ed column by the paper’s former editor L. Gordon Crovitz put it earlier this week,

The complaint discloses dinners the book publishers ate in posh New York restaurants to support the claim that they conspired to fix prices. The more accurate way to describe the goal of the dinners is that publishers conspired to repair an anticompetitive business model. They thought it made no sense for Amazon’s Kindle to have a 90% market share and a single loss-leader price of $9.95 for consumers. They were right. Over the past couple of years, thanks to the agency model, the Kindle’s market share has fallen to 60% thanks to competition from iPads and Barnes & Noble Nooks, and there is more variation in consumer prices, typically ranging from $5.95 to $14.95.

Pricing flexibility for publishers is necessary to allow innovation. Why shouldn’t some e-books cost 99 cents and others that come with video and hardcover editions be $49.95? Why not give people the option to pay 10% more to access an e-book on all e-readers? Consumers should decide, not Amazon or the Antitrust Division.

A report for CNN Money by Julianne Pepitone similarly cuts right to the chase: She observes that the the DOJ lawsuit “may sound like great news for Kindle readers, some worry that Amazon will become a de facto monopoly that could eventually have enough power to raise prices as it sees fit or play hardball with publishers who are left with no other options.”

As one analyst tells her, “The DOJ’s suit focuses entirely on helping the consumer in the short-term, but we need to look at authors and retailers. If you fundamentally limit their choices, they may not ever get books published. And that translates to a losing situation for consumers, too.” Noting that Amazon can now slash its prices again, selling ebooks at a loss, he observes that “If this were steel from a foreign country being sold for less than it’s worth, we’d call it predatory pricing and slap a tariff on it.”

In an article at Portfolio.com, meanwhile, Michael del Castillo discusses how the DOJ lawsuit poses a threat to other businesses. He details the launch of a new business by Amazon, AmazonSupply, that uses the same cut-throat pricing tactic used by its bookselling arm, and that del Castillo says “hould cause some red flags to go up in light of a lawsuit recently filed by the Department of Justice against five Amazon competitors—and in light of the response from some of those competitors regarding real competition versus the appearance of competition.”

Starting with a quote from Authors Guild head Scott Turow regarding the DOJ lawsuit, del Castillo explains why AmazonSupply threatens a wide variety of business:

By allowing Amazon to resume selling most titles at a loss, the Department of Justice will basically prevent traditional bookstores from trying to enter the e-book market, at the same time it drives trade out of those stores and into the proprietary world of the Kindle. The settlement provides a gigantic obstacle to Amazon’s competitors in the e-book business by allowing Amazon to function without making a profit, something that leaves that market forbidding to anyone else who might think of entering, and a bad business for those already there.

Macmillan, Penguin, and Apple seem poised to fight this one out. And based on today’s launch of AmazonSupply, they may be fighting for more than their right survive, but for supply stores of all types as well.

In a statement released today to announce the launch of AmazonSupply, vice president Prentis Wilson said, “We’re excited to offer a wide range of items, from basic supplies like drill bits and automatic hand dryers to hard-to-find parts like laboratory centrifuges and miniature polyimide tubing, enabling business and industrial customers to streamline their buying processes. Low prices combined with fast, free shipping and a vast selection make shopping on AmazonSupply a great experience for customers.”

Low prices, indeed. But if Turow’s concerns over Amazon’s role in the publishing world have any bearing on the company’s general business practices, today’s announcement of the launch of AmazonSupply should be of interest to anyone in the supply business.

The day after the Department of Justice filed its suit against the book publishers, Amazon said it would drop its prices from $14.99 to $9.99 or less.

The unity of so many different business and political interests is striking, so much so as to be vaguely encouraging that maybe this thing will turn out all right. After all, how often do such disparate players act agree on anything? The only other similar instance I can think of is the explosion of outrage over the Amazon Price Check App scandal.

Meanwhile, equally encouraging is that the deepening conversation is finding some serious flaws and factual errors in the government’s presentation of its case.

In his WSJ commentary, for example, L. Gordon Crovitz notes that “Exhibit A” for the publishers in their case against the DOJ should be that “The 30% revenue-share model is Apple’s standard practice, not, as alleged by the government, the product of a conspiracy.”

Whether it’s news, games, apps or books, Apple’s position is the same. The market determines the price, and Apple gets 30%. The Justice Department fails to acknowledge anywhere in its 36-page complaint against Apple and book publishers that this is the standard approach. (Indeed, the government complaint inaccurately refers to “30% margins” for Apple. Operating margins are very different from sales commissions.) The government says this “agency model” is inherently wrong (“per se” wrong, in legalese) and “would not have occurred without the conspiracy among the defendants.”

The problem for the government is that there’s nothing wrong with the agency model, which has been upheld by federal courts and is common across many industries.

As if there wasn’t enough already that was obviously wrong with the government’s case. And of course that obviousness is what makes the case so depressing — how could they not see this was so insane? 

The thing is, it’s becoming equally hard not to take heart from the numbers and the variety of people lining up on the right side of the fight. After all, even for a government, popular consensus is a hard thing to beat.


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