By Michael Shermer
Los Angeles Times
The Justice Department filed suit last week against Apple Inc. and two major book publishers, Macmillan and Penguin Group USA, accusing them of colluding in 2010 to raise the prices of e-books. Three other publishers that were investigated — Hachette, Simon & Schuster and HarperCollins — agreed to a settlement, which Sharis A. Pozen, the acting director of the Justice Department’s antitrust division, said “will begin to undo the harm caused by the companies’ anticompetitive conduct, and will restore price competition so that consumers can pay lower prices for their e-books.”
Not likely. What this lawsuit probably will do instead is return to Amazon the power to monopolize the e-book market through predatory pricing to the detriment of publishers, authors and, ultimately, readers.
I am one of the authors. My books are published by Henry Holt/Times Books, which is owned by Macmillan. Several years ago, when the e-book market began to take off, Amazon introduced the Kindle and began selling electronic copies of my books, along with those of thousands of other authors, for $9.99 each. That’s deeply discounted from the $13.99 price they paid publishers on average.
Why would Amazon willingly lose so much money on sales? To monopolize the e-book/e-reader market by driving out competitors who couldn’t afford to slash prices. We authors were concerned about how this might affect our ability to make a living and how our publishers would stay in business.
The chief executive of Macmillan, John Sargent, in fact, met with the vice president in charge of content for the Kindle, Russ Grandinetti, in early 2010 to deliver an ultimatum and explain why Amazon’s $9.99 discount pricing model would put book publishers out of business. Amazon responded by immediately pulling Macmillan books off its website. With so much content from other publishers, Amazon thought it could afford to ignore Macmillan.
At that time I wondered if the trustbusters from the Justice Department would swoop in to put a stop to Amazon’s predatory pricing practices, but Steve Jobs, the iPad and Apple had already come to the rescue. Other publishers, which knew that Apple would provide an alternative e-book outlet, were planning to join Macmillan in demanding to set prices based on their production and marketing costs — you know, the way everyone else in the business does it. Suddenly, Amazon backed down; it posted on its website that it would “capitulate and accept Macmillan’s terms.”
So it was all good, right? Not in the eyes of the Justice Department. Jobs had realized that Apple was big enough to stand up to Amazon, but because he wasn’t a bookseller or a publisher, he had no content. So he had brought together the major New York publishers to work out a pricing model they could live with and he would agree to for the iPad — and by the way, stop Amazon’s monopolistic approach.
For the Justice Department, Jobs’ solution — especially his rallying of the publishers — was an easy target: collusion in price setting. Tellingly, it is not suing Random House, which also had made deals with Apple and Amazon to set its prices. Why? Because Random House did not meet with the other publishers and Jobs.
In fact, what seems to have raised the ire of the Justice Department more than anything else is the fact that, as noted in its lawsuit, these publishing CEOs met “in private dining rooms of upscale Manhattan restaurants” to “discuss confidential business and competitive matters, including Amazon’s e-book retailing practices.” Even worse, one of the meetings took place in the Chef’s Wine Cellar at the exclusive Picholine restaurant, where, shockingly, “business matters were discussed.” There was no mention of cigars being chomped by mustachioed captains of industry.
Who will really benefit from the Justice Department’s lawsuit? Amazon, of course. As a company spokesman said in a statement about the case, “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books.”
Amazon will gain a government-aided advantage over the competition. As Macmillan’s Sargent said in a statement: “After careful consideration, we came to the conclusion that the terms (of the proposed settlement with Justice) could have allowed Amazon to recover the monopoly position it had been building before our switch to the agency model.” (The “agency model” allows publishers to set their own prices.)
This sentiment was echoed by the president of the Authors Guild, Scott Turow, who said, “The irony of this bites hard: Our government may be on the verge of killing real competition in order to save the appearance of competition.”
The Justice Department should have left things alone. Essentially, two titans — Apple and Amazon — clashed, and competition was working. In the long run, I suspect that the price of e-books would have come down through normal competition. But now we’ll never know. And the costs to the publishers of defending themselves against the Justice Department will ultimately be passed down to readers through the higher price of books, thereby negating the intent of protecting the consumers.
Rather than Justice’s meddling, we consumers have a much more effective tool against companies that charge a price we don’t like: Don’t buy the product.