The DOJ Steps In (Or is it: The DOJ Steps In "It"?)

As we all know, in April the Department of Justice accused Apple and five of the largest publishers with conspiring to raise ebook prices. I chose not to voice my opinion at that point because my immediate reaction was, "Yikes! How much did Jeff Bezos of Amazon promise to contribute to the Obama re-election campaign?"

It seemed wiser to wait a bit, get more input and put together a more reasoned response.

Having now had time to research, ponder and consider many opinions, my first thought now is: “Not only must Bezos have promised them money, but if so, he's getting a bargain!” (Which, of course, leads directly to my second thought: “Damn you, Citizens United!” But that's a whole different blog post.)

A little background: The DOJ has accused Apple and the five publishers—Hachette, HarperCollins, Simon & Schuster, Macmillan (a division of Von Holtzbrinck), and Penguin (a division of Pearson)—of conspiring to raise ebook prices. The suit claims that the publishers were so unhappy with Amazon's $9.99 price for ebooks that company management forced themselves to have dinner together at fancy Manhattan restaurants. The DOJ claims that, while choking down that high-priced food, the publishers conspired with Apple to defeat Amazon’s efforts to deliver ebooks at the $9.99 price. Conspiring with the publishers (per the suit) Apple offered them a switch to the agency pricing model, on the condition that the publishers apply this model to Amazon and other retailers. This model would raise prices to $12.99 or $14.99 and, by extension, impose that model on Amazon.

The result of this conspiracy, according to the suit, is that consumers paid millions of dollars more than they should have for the most popular titles.

Hachette, HarperCollins and Simon & Schuster settled almost immediately. This was done either without comment of any kind, or a denial of any wrongdoing and a defense of the agency model. One can only guess that corporate thinking was that, in terms of both dollars and publicity, it was cheaper to settle. Penguin and Macmillan, along with Apple are proceeding. And seem, in fact, to be anxious to take this battle to court. (And they just got their court date: June 3, 2013)

It should also be noted that 16 states filed suit against Apple, Macmillan, Penguin and Simon & Schuster. HarperCollins and Hachette have agreed to pay more than $51 million in restitution according to the Wall Street Journal.

That same Journal article, however, says that “Publishers have argued privately that the agency model helped save the book industry from suffering the same fate as the music recording industry did at the hands of Apple and preserved competition by allowing several booksellers to thrive.”

Before the new pricing, Amazon was thought to have approximately 90%. That share has now slipped to roughly 60%. However, I suspect that other factors must have contributed.

So, is this a valid suit?

Some, like Jeff Roberts of paidContent.org have argued that the DOJ’s case is “half-baked.” Roberts argues that the DOJ's case is based on the idea that Apple created “the entire conspiracy to make sure Amazon didn’t undercut its e-book profits.” He thinks this unlikely, pointing out that Apple had $108 billion in sales last year, while the entire ebook market at the time was less than $1 billion.

Barnes and Noble, who obviously has some skin in this game, released a statement about this, saying that “the settlement will result in higher overall prices on e-books and hardcover books, ultimately harming the American public.” They point out that the agency model exists in other industries and that it has, in fact, brought more competition to ebook sales. Obviously, B&N and every other retailer would be hurt by Amazon… sorry I mean the DOJ… winning this suit.

And the American Book Association has written a letter to the DOJ calling Amazon a “classic free-rider,” gaining that free ride “off the sales and promotional efforts of bricks-and-mortar stores,” and that the three publishers who have settled should not have to drop agency pricing. They also say that independent bookstores will be hurt badly, because they were only able to sell ebooks with the implementation of the agency model.

What do I, your humble blogger, think? After weighing it all, I think this is a bad lawsuit. It will do far more harm than good. Publishers and retailers that are not named “Amazon” should not be prevented from setting prices for their products. Amazon can afford to undercut everyone and stay in business. A business model that forces publishers to allow Amazon to set the price for their product at $9.99 is not a sustainable business model for publishers or for competition in the marketplace.

For whatever reasons, the Obama administration appears to want to make Amazon as close to a monopoly as possible. I thought that American capitalism was not in favor of monopolies, particularly when there is no compelling argument in favor of them. Nobody benefits from this, least of all consumers. Eliminating competition does not tend to lower prices, does it? What happens when monopoly-Amazon decides that it’s time to actually make money on ebooks and raises the price to $15.99?

President Obama: Just say “no” to all that Seattle-based super PAC money.