How Apple's Agency Model for Publishers Fails to Merit Collusion Charges

[lilo777]

True, but it seems the publishers like Apple's policy.

It's not like Microsoft installing IE but preventing Netscape from being installed where the latter suffered. Amazon is the only one that suffered, but they still have such a huge market it was a minimal effect.

Sounds more like the DOJ was just shifting its weight for show.

Are you for real? Have not we all suffered because of higher book prices?

 

[tbrinkma]

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

You've *badly* misunderstood the meaning of a 'Most Favored Nation' clause. It doesn't require that your price be *lower* than anyone else's. It simply requires that no-one else's price be lower than *yours*. There's a significant difference between those two statements.

If I sell a product to Bob, or Sam (who don't have an MFN clause), and Wally (who does), I can price things as follows:

Bob: $10; Sam: $5; Wally: $5
Or
Bob: $5; Sam: $5; Wally: $5

Because no one has a lower price than Wally, who negotiated an MFN clause.

But if I tried the following pricing schemes, Wally would have me for breach of contract:

Bob: $5; Sam: 7; Wally: 10
Or
Bob: $10; Sam: $5; Wally: $10

because I've given someone a lower price than Wally, who negotiated an MFN clause in his contract.

 

[blow45]

True, but it seems the publishers like Apple's policy.

It's not like Microsoft installing IE but preventing Netscape from being installed where the latter suffered. Amazon is the only one that suffered, but they still have such a huge market it was a minimal effect.

Sounds more like the DOJ was just shifting its weight for show.

They liked it so much what with the extra profits it ensured them, that they colluded with them, and now one by one are already settling with the DOJ because they fear the worst will come in a court of law from their illegal practices.

 

[prhammer]

The Apple Way or the highway

Apple will lead us to believe that I am better off because there is competition. However, the competition comes with a higher price. Normally that is the effective of a monopoly.

Apple prefers a world in which products do not have to compete based on price. That's the way they sell their products. Notice that it doesn't matter if you buy a MacBook from Apple, WalMart or Best Buy - all the same price. The only thing retailers can do is offer some package of extras (always 3rd-party items) at drastically discounted prices as an incentive.

So any talk about consumers is pure and utter nonsense. This is completely about Apple wanting to be able to get into the ebook business and not have to compete with Amazon. They figure if the price is the same then iPad and iPhone people will want the iBooks feature set. But they know that the bells and whistles probably won't be enough to offset a lower price.

Further, since they want to be assured of always getting 30%, they don't want to have to compete on price, because they are not willing to discount on their end to drive sales.

It is certainly a crafty method > but it is not about consumers. It is about Apple wanting it their way.

 

[tbrinkma]

The problem is that "screwing over the consumer" isn't always so cut and dry by checking who costs more. Especially when wholesale pricing allows Amazon to use newer titles and the kindle itself as loss leaders. It not only creates an unrealistic price expectation, but it tends to squeeze out players that can't afford to slash their own wrists in the game of price cut-throat. Amazon can fuel losses in Kindle sales from video games, furniture, TVs, peripherals, food, clothing, etc. B&N can't.

And more importantly, neither can the publishers that Amazon was squeezing while setting up its own 'publishing house' for authors.

I 'scare quote' the term publishing house in the above sentence, because Amazon didn't (and doesn't) provide it's authors any of the normal services that a real publishing house does. A real publishing house provides proof-reading and editing (not the same thing), advances, cover artists, review copies for cover quotes, and many other, less visible services. Amazon says, "Upload your manuscript and set the price, we'll put it in the store."

 

[wwchris]

I would assume that we all think that Apple has the right to sell any book in their store they want. So...

All Apple has done is told the publishers in advance, "If we see your books selling for less on Amazon, we are just going to pull your book from our store. No harm, no foul. If you want them to stay in our store, we suggest you tell Amazon not to sell it for less than the price you request or you will stop selling to them. That is totally up to you, we just don't do business by selling products for less than they cost."

What's the problem?

 

[macthetiger85]

I said "yeah, so what?"

You explained the "yeah" part very well but didn't address the "so what" part.

My point is that many apps work the same on iOS and on Android and yet consumers still choose both platforms. Thus, if books are the same everywhere, consumers will likely choose them on multiple platforms.

You sill haven't explained what's wrong with that assumption. You've just told me that making apps is harder than making books. Ok, so what?

Apologies - I guess what I'm saying is Apple can care less about what developers do on android - but with ebooks, since the content is exactly the same, they want to make the difference in service since content cannot be differentiated. For what it's worth, this is me speculating on what a billion dollar company is thinking. Take it as such.

 

[tbrinkma]

I would assume that we all think that Apple has the right to sell any book in their store they want. So...

All Apple has done is told the publishers in advance, "If we see your books selling for less on Amazon, we are just going to pull your book from our store. No harm, no foul. If you want them to stay in our store, we suggest you tell Amazon not to sell it for less than the price you request or you will stop selling to them."

What's the problem?

It's not even that, it's Apple saying, "If we see your books selling for less anywhere else, the contract says we can sell for that price as well. Don't worry, you'll still get your 70% cut of the lower price." This more accurately reflects the meaning of a 'most favored nation' clause. Note the utter lack of implied threat to Amazon or any other retailer.

 

[paradox00]

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list).

This in itself is reasonable. Apple has no control over the prices, because they have no control over prices, this is the only way to guarantee that their prices will remain competitive. It's not really that different from the "you can't sell to our competitors for less" clause that is common.

That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

Only once Amazon agreed to the agency model. I wouldn't be surprised to see the same clause in their contract either.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

Not really. Apple was in no position to dictate anyone's prices. It was the publishers who had the ability to pull titles in an effort to force Amazon into this model and it is the publishers who set the prices. If they worked together, the threats of collusion may be legitimate.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

Apple didn't sell ebooks before this, so that analogy fails on multiple levels. When iBooks launched, if push came to shove, and they could only choose one store, where would they choose to sell their books? I'm guessing Amazon.

 

[bsolar]

And if I am not mistaken, the deal was put together by the publishers, not with Apple.

The deal was put together by the publishers with the help of Apple, at least in the DoJ's opinion. They have Steve Jobs' emails backing up their claims which you can find easily.

In any case all who just focus on the Agency model either don't get it or wilfully try to misrepresent the DoJ's position. The Agency model per se is fine, as it's fine lowest-price deals. What is *not* fine in the DoJ's opinion is the Agency model being abused together with the lowest-price deals by 6 different publishers and Apple colluding to raise overall prices in the ebooks market and keep strict control over them.

 

[IJ Reilly]

Well I don't think they are attacking the Agency Model per se but the way they went about putting the whole deal together. This article brings nothing new to the table IMO.

Precisely. This article talks around the issue. The agency model is not the problem. It also makes the highly dubious argument that Amazon has a "near monopoly" on e-book sales. This is an assertion that needs proof through the demonstration of evidence, which they do not provide. And even if they did, this alone would not be cause for any action, since "monopolies" rarely exist, and aren't illegal even when they do exist. This the first fallacy they promote. The second is that Amazon has abused their market position to "drive competitors out of the market." If anyone had any evidence to support this assertion, then Amazon would be the subject of antitrust complaints themselves. Are they?

One has to wonder if the Wall Street Journal has ever endorsed an antitrust complaint. I recall them giving similar backing to Microsoft when they were hauled up, even though it was clear that they were violators of the law. So I think this article is simply more doctrinaire opposition to antitrust laws by the Journal.

 

[macthetiger85]

No you are talking about a company with a near complete market control due to the device they sell for one to use the books (which itself functions as a virtual store), the ipad, trying to force out competition and competitor's business models by colluding with the publishers to fix the prices at the level they want to so apple can guarantee itself a 30% cut.

There's also something even more sinister here and anticompetitive (and this hasn't been mentioned by anyone yet, as far as I know). If apple managed to wreck amazon's business model and dictate their price, amazon would then not be able to sell their kindle devices which are in direct competition with the ipad. In that sense apple kill two birds with one stone. As they would become the dominant ebooks seller by virtue of their device/store's market dominance and penetration, and also kill competition not only from another bookseller, but from another device to their device. I am quite sure that was apple's thinking as well. If amazon cannot compete with us on book prices, and we guarantee a lowest price for us, as well as the 30% cut, they won't afford to sell their reading devices competitively to people either, so we won't have to face competition at a device level either from them.

Now they'll be rushing an ipad mini to the market because the fire has already made a serious impact in the smaller form factor. Apparently the ipad mini is going to come with a nail clipper to chop the ends of fingers off to be usable according to the late Steve.

I don't think Apple had sold a single iPad when these deals were made since iBooks was available from day one with books. So there was no complete market control whatsoever. Are actually blaming Apple now because they made a product that did well?

Apple - what a terrible company - keep making great products! :roll eyes:

By the way, I don't know anyone that thinks the iPad and Kindle compete. In fact avid book readers prefer the Kindle over the iPad. It's the screen that puts them in two completely separate categories. And for those that bought an iPad, a good percentage use the Kindle app on the iPad not the iBooks app. Amazon should be thanking Apple. Without Apple, Amazon would be losing money on every book it sold on the Kindle store since it never sold a Kindle to these people.

 

[BaldiMac]

It's not even that, it's Apple saying, "If we see your books selling for less anywhere else, the contract says we can sell for that price as well. Don't worry, you'll still get your 70% cut of the lower price." This more accurately reflects the meaning of a 'most favored nation' clause. Note the utter lack of implied threat to Amazon or any other retailer.

And, of course, Amazon has a similar clause - at least in their self publishing agreement.

 

[IJ Reilly]

Government did not accuse Apple of monopoly. They accused Apple and book publishers in price fixing. Price fixing can be done without monopoly.

Nobody was accused of having a monopoly. The antitrust laws really don't address monopolies, which aren't illegal in any event. They do address cartels. They are illegal.

 

[macUser2007]

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

Good post and it summarizes the reason Apple is in hot water over this. I hope they get scalded.

BTW, ebook prices have shot up dramatically for consumers since Apple struck this deal, so only a true fanboy would be able to claim this is good for consumers without blushing.

 

[iBug2]

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

Except, Apple's marketshare in ebooks is abysmally small right now. Apple isn't even remotely close to becoming any kind of monopoly on that market. Hence this is of no bother to anyone. If the publisher doesn't want to sell their book on iTunes, they shouldn't. They can simply sell it on amazon and we can all buy it from amazon and read it on our Kindle apps running on iPads and iPhones. At least that's what I keep doing. iBooks catalogue is so small, I can't find any books I want to buy there anyway. Amazon has basically everything.

This really isn't like selling Angry birds for 1$ on iTunes and 2$ on Android. When you buy an ebook from someone else, you can read it on your iDevices as well, whereas you cannot play an Android game on iOS. So I don't see why any publisher at all would be forced to sell any book on iBooks store if it doesn't suit them.

 

[BaldiMac]

Good post and it summarizes the reason Apple is in hot water over this. I hope they get scalded.

BTW, ebook prices have shot up dramatically for consumers since Apple struck this deal, so only a true fanboy would be able to claim this is good for consumers without blushing.

The preemptive "anyone that disagrees with me is completely irrational". It's really the best way to win an argument.

The price of books isn't the only thing that consumers care about.

 

[jimboutilier]

Wow. I'm beginning to be disappointed in MacRumors slanted coverage of such things. No facts whatsoever are offered and this seems to be a random rant against Amazon more than anything else.

The key part of the agreement completely avoided by this so called article is that publishers had to agree to not sell thier product to anyone else at any lower pricing. If that's not price fixing I'm not sure what is. And it clearly hurt consumers because to forced prices up significantly in all outlets as a result.

Apple offers nothing over vendors that already existed yet we all pay more.

 

[TMar]

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

Add to the closed ecosystem of their iOS products and it's even more so. Let's say a publisher didn't want to go through ibooks. Well they should have every right to make a app to distribute the book, Apple would block it and change (if it isn't already worded that way) the developers agreement to prohibit books as apps.

Frankly I don't see how Apple went as long as they did without an antitrust case for as long as they stuck behind the "no apps the duplicate core functionality" blocking or just leaving in limbo browsers and email apps.

 

[IJ Reilly]

Apple's terms for dealing with the publishers included that they were required to give Apple the lowest price (retail, not "list). That means that, combined with their agency-only policy, they were effectively pricing everything on Amazon's website, or anyone else's website, if they wanted to play ball with Apple's new store.

That gives publishers two options: Raise prices to other parties (amazon, B&N, etc), or stop selling their products with apple.

It is a very clever way of leveraging the sort of power a monopoly would wield without actually having a monopoly.

This would be like Wal-Mart telling Apple that they will stop selling iPods unless Apple changes the MSRP (and enforces the new one) to match or exceed Wal-Mart's iPod price.

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

That's a pretty good explanation, but the terminology should be "market power" instead of "monopoly," since this is what the antitrust laws recognize. Abuses of market power are said to be "monopolistic" but not necessarily "monopolies." If a company has the power to abuse its position in the market, and does so, then they will run afoul of the antitrust laws. I find using the correct terms of art help in comprehending what is going on here.

 

[blow45]

Except, Apple's marketshare in ebooks is abysmally small right now. Apple isn't even remotely close to becoming any kind of monopoly on that market. Hence this is of no bother to anyone. If the publisher doesn't want to sell their book on iTunes, they shouldn't. They can simply sell it on amazon and we can all buy it from amazon and read it on our Kindle apps running on iPads and iPhones.

As well as it should be. Since when should apple get 70% market shares in every market they enter? The point about monopolies the op made, referred more to the clout apple have due to the success of their idevices. The problem here is not that they are a monopoly it's that they allegedly colluded with publishers for price fixing because they wanted the app store (quite a different beast as others have pointed out) guaranteed 30% profit for books too, and because they were not prepared to sell higher than amazon that had loss leaders, nor where they prepared to buy wholesale and set a flexible % on a per book basis, because apparently that would mean they would have to function as proper book sellers and manage their store, and not hit a button on fixed 30% profits kick back and enjoy the profits with minimal store management. Publishers saw this as a good opportunity to raise and fix book prices universally and hence the collusion lawsuit.

The publishers damn well want fixed prices and higher ebook prices and that's what they attempted to do, and we all have to thank apple btw for the recent surge in ebook prices.

 

[theBB]

Of course, Apple would just stop selling iPods at Wal-Mart, but imagine a situation where Wal-Mart is selling so many iPods that Apple has to comply, or face such a loss of business that they couldn't effectively recover. That's the threat of a retail monopoly, and with their record selling various iThings, Apple has created a mental monopoly of sorts. Companies are afraid to cross them. Afraid to tell them "no."

Yet, WalMart in this instance was Amazon, which did not offer the publishers two different models, either. It was its pricing model or nothing. Apple did not sell one eBook until then, so it could not really dictate any model or price unless the publishers were looking for an ally to break the "monopoly" of Amazon. There was no coersion by Apple in this field.

Anyways, even DOJ does not argue coercion by Apple, but collusion. I am not a lawyer, so I cannot say whether agreeing on a sales model among competitors is the same as price collusion. DOJ's indictment seems to make that argument in effect, but the case may easily collapse once it gets to court. In any case, I am not sure a US court can ever order that a particular sales model as the only acceptable version in a field where no such legislation exists.

 

[IJ Reilly]

Wow. I'm beginning to be disappointed in MacRumors slanted coverage of such things. No facts whatsoever are offered and this seems to be a random rant against Amazon more than anything else.

I'm also disappointed with the strong editorial slanting. This is the third time MR had decided to only reference conservative/libertarian views on this matter. It isn't difficult to find responsible, knowledgable viewpoints that show the other side of the question, but if you read here you'd have to believe that they don't exist.

 

[BaldiMac]

Wow. I'm beginning to be disappointed in MacRumors slanted coverage of such things. No facts whatsoever are offered and this seems to be a random rant against Amazon more than anything else.

The key part of the agreement completely avoided by this so called article is that publishers had to agree to not sell thier product to anyone else at any lower pricing. If that's not price fixing I'm not sure what is. And it clearly hurt consumers because to forced prices up significantly in all outlets as a result.

Apple offers nothing over vendors that already existed yet we all pay more.

It's not (illegal) price fixing. Horizontal price fixing is an agreement between sellers or an agreement between buyers. It is illegal. An agreement between a buyer and a seller such as the one between Apple and a publisher is known as vertical price fixing. It is not illegal. However, vertical price fixing can be abused to facilitate horizontal price fixing. That is the charge.

 

[Padraig]

This is opinion posted with a title that suggests it is fact. I expect better from MR.

+1

At this stage Eric should know better than that. The title should be changed, unless this place wants to have the editorial reputation of Aint it cool news.