11 April 2012

The Sound of One Shoe Dropping

The DOJ has pulled the trigger and filed an antitrust lawsuit regarding e-book pricing against Apple and a number of major New York-based commercial trade publishers. U.S. v. Apple, Inc., et al., No. [20]12cv2826 (S.D.N.Y. 11 Apr 2012) (PDF). It's about bloody time... and the suit means both much less and much more than it's being spun as.

First, consider some of the procedural and prudential limits on this lawsuit that make it a less-than-complete solution to any of the problems that led to it. It does not include Amazon or any other e-book vendor; it does not include other major trade publishers, such as Wiley (all those For Dummies books), nor nontrade publishers; it does not concern any price-fixing arrangement other than the price offered to consumers for electronic trade books, nor any other competition-restricting arrangements directly related to those prices; it does not concern the relationship of e-book pricing to printed book pricing or distribution methods; it does not concern non-trade books, whatever they might be (see below). These are all critical and important exclusions. Some of them are wise; some of them are stupid, but required by precedent; and some of them... are just stupid.

Second, this concerns a per se violation of § 1 of the Sherman Act (codified at 15 U.S.C. § 1), so market definition is much less of an issue than it would otherwise be. It's not relevant to prove liability — but it is necessary to fashion a remedy. Here, I am much less than satisfied with the government's complaint (¶¶ 99–104) and cursory analysis. Admittedly, the statement in the complaint is all that is necessary at this stage of the litigation, but the inconsistent rhetoric in that passage indicates that the drafters of the complaint did not give sufficient consideration to what they were doing... and do not understand trade publishing, as all they did was substitute one set of technical terms for another. Nowhere in the complaint is there any sense of what "trade publishing" means either in a general sense or otherwise. This will be a critical battle later, as the place of e-books in and related to print trade publishing is going to be a major limitation on the action. Consider whether each (or any) of the following are "trade e-books.... for sale to consumers" (¶ 99):

  • A movie tie-in edition of a previously published novel, with or without extra material from the author and/or third parties... or, perhaps, a code entitling the purchaser to a discount on a DVD of the movie
  • A self-published self-help book aimed at those with a narrow range of conditions, circumstances, or objectives that is picked up by one of the commercial publishers and entered into that publisher's catalog... but is virtually never made available (in print form) through any general trade vendor except Apple and/or Amazon, but instead only through specialist vendors
  • A fictional work of "literary merit" in copyright that is incidentally sold in stores, but the vast majority of sales for which are as college-level required books for specific courses, and when sold to consumers of their own free choice is usually special-ordered
  • An early work in a series or other multiwork contract that is being kept "in print" only through a strained interpretation of the underlying contract by the commercial trade publisher so as to prevent the author from effectively moving to a different publisher, and that shows no commercially reasonable level of sales to consumers (or, perhaps, any sales at all to consumers at any price)

Then there's the sale issue, too; and how this lawsuit potentially relates to HarperCollins's attempts to extort vastly higher prices from libraries and limit the number of times a given "copy" can be loaned.

Third, most of the attention (such as it is) that is being paid to this complaint focuses solely upon the conspiracy itself. That's the "policy wonk" end of the lawsuit. The difference between a litigator and a policy wonk is that the litigator doesn't jump from point A to point B without travelling through the parts in the middle. Much of that journey is procedural, and concerns availability of evidence and standards of proof. Those are of concern to policy wonks, but usually are peripheral... and their evalution is usually archly ideological and/or partisan and/or self-interested. The real action in this suit is in the requested remedies.

To remedy these illegal acts, the United States requests that the Court:

a.  Adjudge and decree that Defendants entered into an unlawful contract, combination, or conspiracy in unreasonable restraint of interstate trade and commerce in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1;

b.  Enjoin the Defendants, their officers, agents, servants, employees and attorneys and their successors and all other persons acting or claiming to act in active concert or participation with one or more of them, from continuing, maintaining, or renewing in any manner, directly or indirectly, the conduct alleged herein or from engaging in any other conduct, combination, conspiracy, agreement, understanding, plan, program, or other arrangement having the same effect as the alleged violation or that otherwise violates Section 1 of the Sherman Act, 15 U.S.C. § 1, through fixing the method and manner in which they sell e-books, or otherwise agreeing to set the price or release date for e-books, or collective negotiation of e-book agreements, or otherwise collectively restraining retail price competition for e-books;

c.  Prohibit the collusive setting of price tiers that can de facto fix prices;

d.  Declare null and void the Apple Agency Agreements and any agreement between a Publisher Defendant and an e-book retailer that restricts, limits, or impedes the e-book retailer's ability to set, alter, or reduce the retail price of any e-book or to offer price or other promotions to encourage consumers to purchase any e-book, or contains a retail price MFN;

e.  Reform the agreements between Apple and Publisher Defendants to strike the retail price MFN clauses as void and unenforceable; and

f.  Award to Plaintiff its costs of this action and such other and further relief as may be appropriate and as the Court may deem just and proper.

Complaint ¶ 104 (emphasis added). Now you can see why the publishers themselves were sued, and not just Apple for inducing the behavior. The policy wonks are going to claim that because Amazon is not being sued, the suit doesn't concern Amazon. They're wrong, as the bolded text in subparagaph d indicates. Earlier in the complaint, we learn this (ok, you learn this; I've been bitching about it from day one):

The proposed e-book distribution agreement mainly incorporated the principles Apple set out in its e-mail messages of January 4 through January 6 [2010], with two notable changes. First, Apple demanded that the Publisher Defendants provide Apple their complete e-book catalogs and that they not delay the electronic release of any title behind its print release. Second, and more important, Apple replaced the express requirement that each publisher adopt the agency model with each of its retailers with an unusual most favored nation ("MFN") pricing provision. That provision was not structured like a standard MFN in favor of a retailer, ensuring Apple that it would receive the best available wholesale price. Nor did the MFN ensure Apple that the Publisher Defendants would not set a higher retail price on the iBookstore than they set on other websites where they controlled retail prices. Instead, the MFN here required each publisher to guarantee that it would lower the retail price of each e-book in Apple's iBookstore to match the lowest price offered by any other retailer, even if the Publisher Defendant did not control that other retailer's ultimate consumer price. That is, instead of an MFN designed to protect Apple's ability to compete, this MFN was designed to protect Apple from having to compete on price at all, while still maintaining Apple's 30 percent margin.

Complaint ¶ 65. That's where Amazon's practices get drawn in... because Amazon has been demanding the same MFN of publishers for quite some time.

Fourth, this lawsuit does nothing for the monopsony problem — the collusive setting of e-book royalty rates being the unusually large tip of the iceberg. A complete solution to the problem of e-book pricing also requires attention to how e-books are produced and costed out on both internal cost-sales (aka p&l) sheets and in the formal accounting that is not reported to the SEC by over half of these vendors, since they're not US public companies. In this respect, I'm disappointed, if not surprised at all; there just isn't an awful lot of precedent on the monopsony problem as it concerns antitrust, and the DOJ has historically been loathe to extend its reach on economic activities without at least some precedent achieved by private litigants. It shouldn't be, but it is; it is substantially less likely to lead to active government intervention in a market if the government takes proactive steps to ensure that market is a fair one in the first place. And if the market is not a fair one, all of those pollyannish neoconservative/libertarian theories that the market will solve all problems are just pretending that a kangaroo court with no attorneys allowed for defendants accused of stealing sheep from the lord represents true justice.

Frankly, this lawsuit is the inevitable result of the relaxation of merger attention during the Reagan administration. It is, to put it another way, another data point demonstrating the incorrectness of the Chicago and Austrian schools of economics as they relate to market power, antitrust, and economics. Because those schools of economics entirely discount personal empire-building (for some value of both "personal" and "empire-building") as motivations for the actions of economic actors, they simply cannot — and do not — engage with the real economic world. The misuse of extreme interpretations of Chicago/Austrian economics in recasting antitrust policy (not to mention in reshaping the judiciary) in the 1980s has come home to roost for a very simple reason: If commercial trade publishing were not overconcentrated, it (probably) would require an explicit, knowing, "evil intent" conspiracy and agreement among publishers to set prices in this manner, as Mr Sargent's screed seems to simultaneously deny existed and would require as the only kind of "conspiracy" prohibited by the Sherman Act. (Of course, both of those premises are wrong, both in fact and in law... and certainly they must be rejected on the face of the complaint.)