09 March 2012

Slipping on a Few Antitrust Banana Peels

If you're not already very familiar with both trade-publishing practices and customs, and the basics of antitrust doctrine, you should read yesterday's entry first. I cannot be responsible if your head spins right off your neck if you don't. (I cannot be responsible if your head spins right off your neck if you do, either, but that's a different doctrine entirely.)

Once we're all talking about the same thing, we need to consider one more logical foundation before diving into this particular set of facts in search of antitrust issues: Potential remedies, and their effectiveness against the harm. In an antitrust action, damages are automatically trebled... but are calculated based on the difference between profits/revenues in a hypothetical perfect market (or, at least, the state of the market before the violations proven began) and the actual profits/revenues obtained during the period of violation. Let's say that the "average" price of an e-book was $8 before whatever antitrust violation gets proven began, with a downward trend toward $7.50, and that it's $8.50 now, with an upward trend toward $9 independent of inflation. Damages would therefore be 3 * (8.5–8) or $1.50 per e-book sold as a result of the proven violation — that is, per book sold under the RPMA. Plus attorney's fees. Plus an injunction saying "don't do it any more or we'll get really angry!" Plus, if the violation is tied directly to improper use of nontransactional power to change the market structure (usually, but not only, mergers), divestiture of some of the entities to create competition — like the AT&T divestiture, or the proposed separation of Microsoft into an OS company and an applications company.

The key thing to remember here is that an antitrust remedy can be imposed only against parties found to be participating in the violation. That is why the inquiry isn't limited just to Apple, or just to Amazon, but also includes the publishers... because, after all, there are other e-book vendors out there who could be improperly harmed by being forced to comply with a new "standard."1

Now, turning to the actual antitrust theory, there are three possible theories that could be put forth as part of an antitrust complaint. In order of increasing difficulty of proof:

  • Collusive pricefixing. This need not require a smoking gun, but merely adequate evidence of an agreement to act in concert to restrict free choice in the defined market. The quotations that have been thrown around from the Steve Jobs bio might be part of that evidence; so, too, might the timing of actions immediately after a meeting, and so on. Of course, a smoking gun memo (or high-level defector from a party testifying to what happened at a meeting that was carefully not confirmed by a memo) would also constitute such evidence, and perhaps the best kind — but not the only kind — of such evidence.

    Collusion ain't allowed under antitrust law — it's a per se violation. If there is adequate evidence of collusion regarding price or quantity, or adequate evidence of some other kind of collusion restricting consumer choice in the defined market, then one can skip everything else and go right to the remedy.

  • Overconcentration in the market achieved through anticompetitive means. This is usually something that arises in merger considerations; recently, for example, the rejection of AT&T's attempted purchase of the US operations of T-mobile2 comes to mind. It is not, however, restricted to mergers, as the 1970s breakup of AT&T demonstrates. This gets particularly tricky when the overconcentration results, either directly or indirectly, from an "innovative" management initiative or a changing market. Here, the market definition is particularly critical. For example, one reaches a different result under an overconcentration theory if the market definition considers "all potential e-book buyers" than if one considers "all potential e-book buyers for the iPad and compatible platforms." Apple will want to claim the universe as the market, because then it won't have excessive power... while the publishers may well want the opposite, because they'll claim that any wrongful conduct of theirs was coerced by Apple's dominance (which, by the way, would also limit the applicability of any remedy to the Apple Store, and would not keep the publishers from turning around and imposing the same terms on other vendors precisely because that would be a different markt).

    Overconcentration is judged under the entirely irrational Rule of Reason, which focuses on whether activity "unreasonably" restricts competition. The Rule of Reason is especially Alice-in-Wonderlandish in this context, though, because by its nature it cannot be applied to monopsony conduct.

  • Noncollusive pricefixing in restraint of trade. One recent example of this is airlines' efforts to charge "bag fees" as a way of enhancing revenue without having to clearly raise prices. Isn't it fascinating how, despite the disparate routes and aircraft and everything else, the bag fees have converged at the same amounts? Even without a formal (or even informal) agreement among the airlines, this might constitute an unlawful restraint of trade. The problem is proof: This almost always comes down to duelling experts and extraordinarily expensive and protracted discovery.

    The e-book situation is a good example of noncollusive pricefixing in restraint of trade, but particularly so at the monopsonist publisher end. Isn't it fascinating how rapidly the major publishers converged on "25% of net" as the author's share for e-book licensing... and refuse, except in extreme outlier instances, to compete on price? The real question is whether there is an adequate antitrust relationship between this aspect of e-book pricing and the RPMA. Again, this may well come down to duelling experts; based on what I know, there is a strong linkage, but it's right on the edge of one that makes this part of the same case or controversy.

    Noncollusive pricefixing, like overconcentration, is judged under the Rule of Reason. The complication is that the nature of proof required is much more difficult than the nature of proof required for determining overconcentration.

It's too early to really predict where things are going with this particular matter, but that's never stopped any pundit from pulling out the ol' crystal ball, so it's not going to stop me! In my judgment, this is going to come down to a tactical battle in which the DoJ officials are going to try to avoid choosing among theories for as long as possible. There is a more than faint hope that there is, in fact, substantial smoking gun evidence of collusive pricefixing. The evidence of overconcentration is probably there for the taking, even though it's inconsistent with the merger guidelines, because Apple's history of price leadership is pretty well established through iTunes and the demise of the Zune. The noncollusive pricefixing evidence is much clearer at the author-compensation end than at the consumer end, largely because there are so many red herrings available to both the publishers and to Apple to deny any effective market uniformity. Perhaps the most important of these red herrings is the nonfungibility of books: A Stephen King novel is not fungible with a Thomas Harris novel, or a Scott Turow novel. Thus, price similarities are not definitive for books, because (under longstanding antitrust doctrine) the focus is on complete substitution and perfect competition — which, by definition, cannot happen for nonfungibles.

In the objective, law-school-casebook sense, this particular dispute is not a close call: The RPMA (and associated imposition of uniform terms on authors) violates antitrust law, and requires a remedy that may well include divesting Apple's razor blades from its handles (that is, the "app store" from the hardware sales). That won't deal with the Amazon problem directly, but will indirectly... if the publishers are explicitly and directly bound by a parallel remedy. We're not in Law-School-Casebookistan, though, so this is not going to be a quick, easy, or inexpensive dispute. And you know who gets to pay for it, don't you?

That's all for now, but I'll certainly have more to say as things develop.

  1. Just a short note on standards: It's not necessarily an antitrust violation for competitors to consult to set a standard. For example, it's not a violation for all the competing computing-related companies to consult in setting the standard language definition for HTML5, or for the competing members of the automotive industry to consult via the Society of Automotive Engineers in setting the standards for what constitutes a particular grade of motor oil. The key exception to this exception, though, is that neither price nor quantity are proper subjects of that consultation. One example of the effect of this is those annoying ETrade-baby commercials... because ETrade, a discount broker, could not exist if the DoJ had not smacked the securities industry for establishing standard commissions in the 1970s, which at that time barred the existence of "discounts" and discount brokers.
  2. It seems like the same bad actors keep popping up in the footnotes, don't they? Unfortunately, there has not been a lot of research done on factors leading to antitrust recidivism, but I will note that it seems peculiarly prevalent (anecdotally) in industries/markets founded on intellectual property, particularly long after the expiration of patents or other underlying rights. This probably has a relationship of some kind to the endowment effect, but it's a tenuous relationship at best... because endowment is a personal/individual instance, and top management changes over time. Or it's supposed to, anyway.