Saturday, June 22, 2013

Apple, Amazon, and Big Content

I've been following the e-books antitrust trial. From the beginning, I've been surprised that the DOJ has been alleging that Apple was the mastermind or ringleader of a conspiracy to raise e-book prices. I think that there is ample evidence that the major publishers worked together to raise e-book prices on bestsellers and used Apple's new iBookstore as leverage against Amazon. But saying that Apple orchestrated the whole thing and strong-armed the publishers seems like a massive stretch.

First, Apple's interest was in breaking Amazon's hold over the e-book market, not raising the prices of e-books. Second, what kind of leverage did Apple possibly hold over the publishers to force them to do anything? It seems much more likely that Apple saw that the publishers wanted to get out from under Amazon's thumb and came up with a mutually beneficial way for them to do it.

The funny thing is that this is exactly what Amazon did to enter the music business. The record companies were upset by Apple's pricing model: 99¢ for every song. The record companies wanted variable pricing. They wanted to be able to charge higher prices for the latest hits and popular songs. Apple refused. And iTunes was so dominant that the record companies couldn't do anything about it.

When Amazon decided to enter the music business, they knew that they needed to do something to compete against iTunes. They wanted the record companies to drop DRM. Now I'm sure that the record companies didn't want to drop DRM. They only agreed to sign on with iTunes in the first place because of Apple's FairPlay DRM technology. But an Amazon music store would give the record companies leverage against Apple, so they agreed. And once the Amazon music store opened with 99¢ tracks that were DRM-free, the record companies withheld the same DRM-free option from Apple until Apple agreed to introduce variable pricing and the price of hit songs rose to $1.29. (The price increase was bundled with higher quality encoding to soothe the consumer, but it was definitely a price increase.)

It seems like the case against the book publishers was pretty solid, which is why they all ended up settling with the DOJ. If the publishers had individually decided to sign on with Apple and then threatened to remove their books from Amazon unless Amazon agreed to change to the agency model, then I think they would have been fine. But by doing it in unison (and meeting secretly as a group to make sure that everyone was onboard), they behaved as a de facto monopoly. This is horizontal collusion.

I've read that, in order to prove vertical collusion against Apple (since Apple is not a publisher), the DOJ had to prove that Apple wasn't simply a member of the conspiracy but the instigator. I'm not sure if that is the case. In my opinion, the DOJ seems to have its blinders on and can't seem to see past the fact that the price of e-books rose because of what Apple did. Even the judge seemed blinded by that fact, although she seems to see more nuance as the trial unfolded. I'm curious to see what the outcome of the trial is.

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