Justice Department Presents Opening Arguments Against Apple in E-Book Price Fixing Trial

[Renzatic]

Why not?

For two reasons.

1. They're not taking a loss on every ebook in their selection solely to drive up Kindle sales. Like a few people have stated previously, what they're doing is selling some popular titles below cost as a loss leader, something to get people in the store so they'll buy other stuff that's priced higher than wholesale. Amazon makes a profit off ebooks overall.

2. They're not selling so low that no one else can compete. If Amazon had a setup like "buy a Kindle now, get all ebooks in our store for 50 cents a pop for two years", that would be predatory pricing. It would likely move a ton of Amazon hardware out the door and drive the competition out of the e-book business pretty quickly. No one could match Amazon on price without cutting themselves off at the knees in the process.

What Amazon is doing is selling some highly popular books for a buck or two less than what they bought it for, and making up the difference elsewhere in the store. There's absolutely nothing illegal about that.

 

[jsolares]

Why not?

The DOJ already investigated them and found nothing wrong, so mainly because the DOJ says it wasn't.

With predatory pricing afaik you lose money selling cheap so you can recoup it in excess once you're a monopoly, Amazon hasn't lost a dime, if they raise prices they open up the market for anyone that wants a margin lower than amazon.

 

[LethalWolfe]

Why not?

Why is it? What makes Amazon's approach any different than, say, Best Buy vs Virgin Records back in the day where the Best Buy price was usually 1/3 lower? Or Barnes & Nobles being able to beat the local Mom & Pop bookstore on price?

 

[jsolares]

Not really - if you look at the documents - they were pretty influential at a cap. $12.99 - 14.99. 70% of that range goes from just over 9 to just over 10. So for any publisher getting on board - they weren't really going to be making more - most likely less with the model.

I do have to ask - have you read the full PDF linked earlier with all the evidence, emails, etc?

The publishers have admitted as much from what i've read, they were making less money with the apple model than with amazon.

 

[BaldiMac]

Not really - if you look at the documents - they were pretty influential at a cap. $12.99 - 14.99. 70% of that range goes from just over 9 to just over 10. So for any publisher getting on board - they weren't really going to be making more - most likely less with the model.

Yep. I was just pointing out that they Apple's model was different in that there was no wholesale pricing,

I do have to ask - have you read the full PDF linked earlier with all the evidence, emails, etc?

A lot of it. Not all of it.

For two reasons.

1. They're not taking a loss on every ebook in their selection solely to drive up Kindle sales. Like a few people have stated previously, what they're doing is selling some popular titles below cost as a loss leader, something to get people in the store so they'll buy other stuff that's priced higher than wholesale. Amazon makes a profit off ebooks overall.

2. They're not selling so low that no one else can compete. If Amazon had a setup like "buy a Kindle now, get all ebooks in our store for 50 cents a pop for two years", that would be predatory pricing. It would likely move a ton of Amazon hardware out the door and drive the competition out of the e-book business pretty quickly. No one could match Amazon on price without cutting themselves off at the knees in the process.

What Amazon is doing is selling some highly popular books for a buck or two less than what they bought it for, and making up the difference elsewhere in the store. There's absolutely nothing illegal about that.

The difference between a loss leader and predatory pricing is definitely vague. From the FTC's description, it is about market share and intent to drive out competition.

The DOJ already investigated them and found nothing wrong, so mainly because the DOJ says it wasn't.

Good one.

With predatory pricing afaik you lose money selling cheap so you can recoup it in excess once you're a monopoly, Amazon hasn't lost a dime, if they raise prices they open up the market for anyone that wants a margin lower than amazon.

Amazon is losing money on many best sellers. Before Apple's entry, Amazon had 60%+ of the physical book market and 90% of the eBook market. I think that shows a clear intent to attempt to monopolize the market through below cost pricing.

Why is it? What makes Amazon's approach any different than, say, Best Buy vs Virgin Records back in the day where the Best Buy price was usually 1/3 lower? Or Barnes & Nobles being able to beat the local Mom & Pop bookstore on price?

Best Buy and Barnes & Nobles didn't have the same market power that Amazon has/had. What's okay for a company with 10% of the market isn't necessarily okay when a company has a dominant share.

 

[Renzatic]

Amazon is losing money on many best sellers. Before Apple's entry, Amazon had 60%+ of the physical book market and 90% of the eBook market. I think that shows a clear intent to attempt to monopolize the market through below cost pricing.

What Amazon is doing is price shifting, which is a part of selling something as a loss leader. It's a fairly well accepted fact that any company would want you to shop at their store instead of someone elses, and they'll do things to entice you to buy things there instead of the shop three doors over. Amazon did this by pricing their bestsellers for a few bucks less than the competition, then shifting the cost over to other books. As in...

"We'll sell Twilight for $13.99 instead of $16.99 to undercut Wal-Mart, but price these books $3 higher to offset the cost".

...this way they're bringing people into their store, and still making money overall. Wal-Mart could do the same thing. So could Apple if they wanted to. It's legal, and doesn't hurt anyone's bottom line.

Remember, Amazon has always made a profit off their books. This is an important distinction. They weren't rigging the game so they could make a profit later through a monopoly. They've been playing by the rules the entire time. The fact they now control such a large part of the market isn't due to any underhanded tactics on their part.

 

[BaldiMac]

What Amazon is doing is price shifting, which is a part of selling something as a loss leader. It's a fairly well accepted fact that any company would want you to shop at their store instead of someone elses, and they'll do things to entice you to buy things there instead of the shop three doors over. Amazon did this by pricing their bestsellers for a few bucks less than the competition, then shifting the cost over to other books. As in...

"We'll see Twilight for $13.99 instead of $16.99 to undercut Wal-Mart, but price these books $3 higher to offset the cost".

...this way they're bringing people into their store, and still making money overall. Wal-Mart could do the same thing. So could Apple if they wanted to. It's legal, and doesn't hurt anyone's bottom line.

Remember, Amazon has always made a profit off their books. This is an important distinction. They weren't rigging the game so they could make a profit later through a monopoly. They've been playing by the rules the entire time. The fact they now control such a large part of the market isn't due to any underhanded tactics on their part.

Again, the difference between loss leaders and predatory pricing is intent to drive out competition or monopolize the market. Wal-Mart's share of the music market was never anywhere close to Amazon's share of the book market.

http://www.ftc.gov/bc/antitrust/predatory_pricing.shtm

 

[LethalWolfe]

Amazon is losing money on many best sellers. Before Apple's entry, Amazon had 60%+ of the physical book market and 90% of the eBook market. I think that shows a clear intent to attempt to monopolize the market through below cost pricing.

Does it? Or is it just an example of an early entrant into a new market getting the lions share until the competition comes in? The DOJ recently investigated Amazon for predatory pricing on eBooks and didn't find evidence of wrong doing.

Is Amazon's pricing making it impossible for Apple to compete or is Apple just unable to get the margins and/or leverage that it wants due to Amazon's position in the marketplace? With regards to B&M bookstores... well, B&M stores of all types are suffering due to increased online sales. The ones that can't compete will disappear and that's just the nature of business. Every B&M store that centered around selling books, music or movies has seen the bottom fall out of those markets. I remember when CDs used to dominante the floor space at Best Buys and now the CD section at my nearest Best Buy is tiny but their home theater section is huge now. Unfortunately single purpose stores like Borders or Virgin Records can't shift focus like that and have a significantly harder time surviving.

Best Buy and Barnes & Nobles didn't have the same market power that Amazon has/had. What's okay for a company with 10% of the market isn't necessarily okay when a company has a dominant share.

Agreed that size matters but being big and successful isn't a crime (and neither is having a monopoly).

 

[Renzatic]

Again, the difference between loss leaders and predatory pricing is intent to monopolize the market. Wal-Mart's share of the music market was never anywhere close to Amazon's share of the book market.

Amazon still doesn't have a monopoly of the book market. Just because they have majority share of it doesn't mean they're no longer allowed to do things commonly practiced by just about every retail enterprise on the face of the earth.

Price shifting and loss leaders are legal. Period. It doesn't matter if they have 8% of the market or 80%.

 

[TMay]

Looks like Amazon left a mess in the boathouse

Sure looks like the DOJ is going to be unhappy about that...

http://tech.fortune.cnn.com/2013/06/06/apple-ebook-bezos-boathouse/

 

[PracticalMac]

IMHO:

The bottom line of the government it to prevent monopolies, and break up existing monopolies (example AT&T, penalties on Microsoft).

We have one company, Amazon, with around 80% of the eBook market.
It is known that some companies (Boarders) suffered directly with their extremely aggressive pricing.

Apple steps up with a plan that evens the competition, allows for timely release of both media (print and online) across a wider selection of platforms, reducing the strangle hold by Amazon.

Agree the downside is slightly higher prices for the consumer, but the upside is more advantages.

Should the DoJ watch it?
Yes.

I think it was too early to sue. They should have seen price trends for longer.

 

[LethalWolfe]

IMHO:

The bottom line of the government it to prevent monopolies, and break up existing monopolies (example AT&T, penalties on Microsoft).

We have one company, Amazon, with around 80% of the eBook market.
It is known that some companies (Boarders) suffered directly with their extremely aggressive pricing.

Apple steps up with a plan that evens the competition, allows for timely release of both media (print and online) across a wider selection of platforms, reducing the strangle hold by Amazon.

Agree the downside is slightly higher prices for the consumer, but the upside is more advantages.

Monopolies are not inherently illegal, lower prices are not inherently illegal, price fixing and collusion are illegal, and anti-trust laws in America are based around protecting consumers, not protecting companies from each other. If a company with monopoly power isn't abusing it's power such as gouging customers or to unfairly preventing competition then it's not going to run afoul of the US government. To this point, the DoJ recently investigated, and cleared, Amazon of predatory pricing accustations.

Stores (big and small) that specialize in music, video games, movies or books have been rapidly closing up shop the past decade as people have rather quickly started going 'digital' and/or shopping online physical goods vs in stores. The marketplace has shifted and businesses that won't/can't shift with it are going to suffer.

 

[PracticalMac]

price fixing

Considering an individual publisher usually has rights to a title and set their own price, how is the relation with other titles (different authors) and physical vs ebooks?

It is not like, say, gasoline or milk.

Thanks

 

[LethalWolfe]

Considering an individual publisher usually has rights to a title and set their own price, how is the relation with other titles (different authors) and physical vs ebooks?

This is the crux of the current DoJ case it is not? That Apple and the major publishing companies conspired to increase prices. Apple's angle is that it would give them leverage against Amazon and the publishers' angle is that they'd make more money due to the increase in ebook prices.

 

[PracticalMac]

This is the crux of the current DoJ case it is not? That Apple and the major publishing companies conspired to increase prices. Apple's angle is that it would give them leverage against Amazon and the publishers' angle is that they'd make more money due to the increase in ebook prices.

What will stop the retailers from doing so?

They are sole source for popular books, so raise them.

Another publisher cant do same, because they do not have rights to book.

 

[LethalWolfe]

What will stop the retailers from doing so?

They are sole source for popular books, so raise them.

Another publisher cant do same, because they do not have rights to book.

In this case publishers got together and agreed to basically cease competing with each other in order to raise prices across the board. This would force retailers to raise their prices which means consumers would pay more. This is price fixing and it's against the law in the U.S.

I'm confused about what you are confused about.

 

[PracticalMac]

In this case publishers got together and agreed to basically cease competing with each other in order to raise prices across the board. This would force retailers to raise their prices which means consumers would pay more. This is price fixing and it's against the law in the U.S.

I'm confused about what you are confused about.

Ok, this analogy:

Apple makes computers/mobile devices, its own proprietary design no one else can copy due to patent protections. It sells at a high price and customers buy.

The competition makes its own design, largely incompatible, and sells it at a very low price. A few have premium designs, but for most part sell for low price, and low profit.

Either Apples high price or competitors low price, both are free to set their own price because each have unique designs that cant be copied (without agreement).

Publishers same thing, they have proprietary copyright material other publishers cannot copy (without agreement).
If the published the same material (like gasoline), I can see it, but its not.
What are they competing each other over?

 

[LethalWolfe]

What are they competing each other over?

Customers. Which means money. And in the case of price fixing they decide to not compete with each other so they can all make money w/o taking as many risks.

 

[EbookReader]

before: plenty of retail price competition

after: no more retail price competition (prices are now fixed / same everywhere)


someone wrote this at another site:

Apple got a late start with ebooks. Since they don't like selling things on the cheap, they colluded with the publishers to force everyone else to sell at the same high prices; thereby leveling the playing field to something Apple could live with.

Ultimate loser? the consumer!

 

[EbookReader]

http://tech.fortune.cnn.com/2013/06/12/apple-ebook-jobs-smoking-gun/

So it was a surprise -- at least to the reporters in the courtroom -- when the DOJ's McCuaig introduced Plaintiff's Exhibit 55, an e-mail from Steve Jobs to Eddy Cue, his point man in the e-book negotiations, responding to a request from the publishers that the price caps in the contract be raised.

"I can live with this," Jobs wrote on Jan. 14, 2010, less than two weeks before the iPad was unveiled, "as long as they move Amazon to the agent model too for new releases for the first year. If not, I'm not sure we can be competitive..."

Does that, McCuaig asked Apple's Moerer, reflect "indifference"?
"No," Moerer reluctantly admitted.

There would be no antitrust lawsuit if Apple use agency model for ebook while Amazon can continue to use wholesale. In a free market, Amazon can fight 1 of the Major Publisher to stay wholesale. But when 5 of the 6 Major Publishers all demand a switch to agency, Amazon had no choice. Anti trust law prohibit competitors (the major publishers) from working together when it come to prices.

 

[EbookReader]

http://www.washingtonpost.com/busin...7a3b10-d453-11e2-8cbe-1bcbee06f8f8_story.html

In response, Cue admitted that he simultaneously negotiated deals with five major publishers — Penguin, Simon & Schuster, HarperCollins, Hatchette and Macmillan. He even shared with publishers the progress of negotiations with rivals in general terms.

http://tech.fortune.cnn.com/2013/06/14/apple-ebooks-eddy-cue/

Of course the prices of some e-books went up after five of the six biggest book publishers put their titles on the iBookstore, he told Larry Buterman, one of the DOJ's co-counsels. "I gave them the opportunity to raise their prices."

Yes he met with all the publishers, offered them essentially the same terms and kept them apprised of how many of their competitors had thrown in with Apple. In the tens of thousands of media deals he's negotiated over the years, that's how he'd always operated.

And he made no apology for telling the publishers in late December 2009 that for Apple to enter the e-book market all retailers -- including Amazon -- would have to switch from the "wholesale" model (where Amazon set the prices), to the so-called "agency" model (where the publishers set them). That was his plan for about two weeks until he realized in early January that it wouldn't work.

Apple's first plan was to ask publishers to sign a contract that required them to change their deal with Amazon. The government claims that Apple soon realized that would be illegal. And that Apple's second plan -- to replace that requirement with a price-matching provision -- was just another way to achieve the same effect.

The MFN clause did have the same effect.....All ebook sellers were required to change their contract from wholesale to agency. Could this be done without collusion? (1 major publisher vs. 5 major publishers all colluding?)

1 major publisher = 12% market share
5 major publishers = 60% market share

In a free market, you can handle 1 major supplier with 12% market share, but if 5 major suppliers with 60% combined market share all gang up on you, you probably concede defeat.

















someone wrote this on another forum

That means no loss leaders, no sales, no dealer willing to settle for a smaller margin to beat the competition. That means that if you wanted to buy the book "My Life as an Apple Fan" (made up title), and you have several ereader platforms, you could not do price shopping to get the best deal. Period.

If agency pricing with MFN clause are allowed, the content providers get to set the price, the digital retailers get their 30% commission, the consumers get

1) no sales
2) no discount
3) no loss leader
4) no price shopping since the "prices will be the same" everywhere
5) retailers can't take a smaller margin in order to beat competition

 

[EbookReader]

http://phys.org/news/2013-06-mysterious-steve-jobs-emails-apple.html

After signing with Apple, the five publishers demanded to shift Amazon to the agency model. Apple maintains that it had nothing to do with Amazon's negotiations with the publishers.

Some publishers have told the court that they decided to shift Amazon to agency because of the Apple MFN provision.

Free market: can fight 1 publisher

Collusion: can't fight all 5 publishers



Here's how collusion took place:

http://www.scribd.com/doc/145486131/U-S-v-Apple-Et-Al-Opening-Slides



"You are absolutely correct: we've always known that unless other publishers follow us, there's no chance of success in getting Amazon to change its pricing practices."



Penguin CEO David Shanks: "My orders from London. You must have the fourth major or we can't be in the announcement."

Apple Eddy Cue: "Hopefully this is not an issue but if it is I will call you at 4pm. It would be a huge mistake to miss this if we have 3."

No change here, he is waiting for the others to sign. We have executables ready to sign but he wants an assurance that he is 1 of 4 before signing.

Once previous two are signed, I will head to their offices to get this one signed

 

[EbookReader]

http://news.cnet.com/8301-13579_3-57587840-37/it-was-apples-way-or-the-highway-e-book-execs-say/

After the meeting, Reidy sent Moonves an e-mail that said he was right and that "unless other publishers follow us, there's no chance in getting Amazon to change its pricing practices." She added in the e-mail that Simon & Schuster would have to "gather more troops," which the Justice Department said showed Simon & Schuster wanted to work with other publishers.

.
.

Both publisher CEOs also testified that Apple kept them updated about negotiations with other publishers. Apple didn't spell out the terms of the other deals, they said, but based on conversations with the company, they knew it was pursuing similar agreements with all publishing houses. It also told them how many deals it had signed, and they were able to figure out who the other parties were.

"At the first meeting, [Apple executive Eddy] Cue said Apple was trying to do the same deal with everybody," Shanks said Tuesday.

And the Justice Department cited an e-mail from Reidy to Apple's Cue that said she would "look forward to an update on your progress in herding us cats." She admitted that Cue had told her how many other companies had reached deals with Apple.

As for Amazon using predatory pricing to drive competitors out of the market:

"When Amazon launched its Kindle device, it offered newly released and bestselling e-books to consumers for $9.99. At that time, Publisher Defendants routinely wholesaled those e-books for about that same price, which typically was less than the wholesale price of the hardcover versions of the same titles, reflecting publisher cost savings associated with the electronic format. From the time of its launch, Amazon's e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles."

it's a classic LOSS LEADER strategy that retailers have been using for decades. Apple, as a retailer, can use the same strategy. Selling some newly released and bestselling ebooks at loss/huge discount to get customers in the door. Once there, the customers will buy other profitable ebooks. Overall result: profits from selling ebook.

After the 5 publishers settlement with the USA government, Apple is now utilizing the LOSS LEADER / Wholesale strategy in selling ebook. If Apple did this from the very beginning, there would be no antitrust lawsuit. But Apple wanted the 30% margin even if it has to break the law to get there.

http://www.washingtonpost.com/busin...254036-d9ce-11e2-a9f2-42ee3912ae0e_story.html

In his closing arguments, Ryan urged the judge to focus on evidence that he argued demonstrated a conspiracy. “The issue in this case is collusion,” he said. “We have no quarrels with the agency model. We have no quarrels in general with MFNs.”

Could this be brought about without collusion?

For example, 1 publisher coming to Amazon and say: "Switch to agency" instead of all 5 publishers coming to Amazon at the same time and say Switch to agency.

1 publisher does it: Legal
5 publishers do it with a secret agreement among them that they are not alone: Collusion

"You are absolutely correct: we've always known that unless other publishers follow us, there's no chance of success in getting Amazon to change its pricing practices."

Penguin CEO David Shanks: "My orders from London. You must have the fourth major or we can't be in the announcement."

Apple Eddy Cue: "Hopefully this is not an issue but if it is I will call you at 4pm. It would be a huge mistake to miss this if we have 3."

It's no wonder that all 5 Publishers have all settled in both the EU and USA.

 

[Mystic386]

I can't believe what Apple apologists can come up with. "Apple go to set a minimum price that is fair that supports everyone." Really? In capitalism market is supposed to decide what the fair price is not Apple. You have some very Apple-centric model of capitalism in mind.

Lets agree to differ. I don't support large companies dumping stock and gutting a market to retain their position. Consumers don't win long term instead communities get destroyed.

 

[EbookReader]

Lets agree to differ. I don't support large companies dumping stock and gutting a market to retain their position. Consumers don't win long term instead communities get destroyed.

It's called a loss leader strategy that has been employed for decades in retail:

From DOJ slides:


"When Amazon launched its Kindle device, it offered newly released and bestselling e-books to consumers for $9.99. At that time, Publisher Defendants routinely wholesaled those e-books for about that same price, which typically was less than the wholesale price of the hardcover versions of the same titles, reflecting publisher cost savings associated with the electronic format. From the time of its launch, Amazon's e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles."

How can Amazon be profitable selling ebooks when they are "dumping"?

Maybe Amazon is profitable selling ebooks because their strategy is sound? Loss leader for some books, profits for the rest.

Apple could have done the same. In fact, Apple is in a better position than Amazon to utilize the loss leader strategy. There would be no anti trust lawsuit otherwise.