It’s been roughly five years since the expiration of sanctions placed on five major publishers by the U.S. Department of Justice for conspiring to fix e-book prices. And as 2019 draws down, American antitrust regulators—encouraged by U.S. publishers—now have a new target in their sights: the tech industry. But can America’s competition laws effectively address the growing power and dominance of a few firms in the sector? And what lessons can we take from the Apple e-books case?
PW recently caught up with Cleveland-Marshall College of Law Professor Chris Sagers, who in his new book United States v. Apple: Competition in America (Harvard University Press) uses the Apple e-books case to explore the state of competition policy in America.
Looking back, the Apple e-book price-fixing case was not close on the facts. So, what made the case so remarkable to you?
The most remarkable thing to me was that so much of the public opposed the suit, when to many antitrust lawyers the case seemed very strong. But it turns out that’s not uncommon, historically. And the fundamental conclusion of my book is that antitrust cases often find popular opposition, because antitrust is basically an effort to make markets work like they should work, and in their ordinary operation, markets are often machines for producing pain. They cause businesses to fail, investments to be wasted, and jobs to be lost. So it can be very hard for the public to see how an antitrust case in which the government seems to be insisting that all those things should happen is actually for the best.
And the Apple e-books case was an ideal case to explore that, because the ordinary forces of competition in this case—basically, a technological innovation that made e-books cheaper to distribute than print books—appeared to jeopardize so many other values and businesses we can all agree are important and good. But if we're going to have competition policy at all, we have to make peace with those kinds of risks.
Why is it important to have public support for antitrust law and competition policies?
Public support matters because if the public and the judiciary don’t believe in a policy that keeps markets vigorous, even though they’re sometimes unpleasant to watch, then antitrust won’t be consistent and sustainable enough to do us any good. The enforcement agencies are not immune to political considerations, and they won't bring cases if they are unpopular, for example. And the judiciary matter most of all, because they ultimately decide what is illegal and what is not. But on the brighter side, in the book I show that the consequences of enforcing competition policy are usually not as bad as are feared, and that the alternative, not enforcing competition policy, would in fact make things worse.
Case in point, publishers and their supporters argued they were merely defending themselves—and more broadly, defending the very future of books—from a marauding Amazon and their $9.99 e-book prices, which they believed would devalue the book. Was that a legitimate fear, in your opinion?
I don't know what might would have happened if the $9.99 e-book price persisted, but I don’t think the publishers would just have failed. They would have adapted. Now, that adaptation might have been fairly painful. But what the publishers were really seeking to preserve was their revenue from new release hardcovers, on which they depend pretty heavily. That was the real threat of Amazon’s $9.99 e-book pricing. Although books in general obey the law of supply and demand, commercial bestsellers are differentiated and they don't have especially close substitutes. So to the extent that Amazon's $9.99 prices threatened anything, it threatened an oligopoly that really benefited the big publishers and a very small group of celebrity authors.
OK, but as you write in the book, Amazon is clearly problematic. Can you talk a little more about how, in hindsight, you saw Amazon’s play in the e-book realm? In his closing arguments, DoJ attorney Mark Ryan made a point that I thought was key—“who knows how the market would have eventually dealt with Amazon’s $9.99 price point?” he argued. Was that the right question? Or, was the supposed benefit to consumers of Amazon’s low prices used to obscure its true purpose in enacting them?
That’s an excellent question. And yes, I do think Amazon is a problem. But I don't think its e-book prices are what matters. Like I said, those prices were a frontal assault not on books, but on a publishing oligopoly that was earning substantial excess income on a particular set of bestselling, highly differentiated books. But this is what is supposed to happen in markets—when one firm figures out how to get some supra-competitive profit, someone else will figure out how to compete it away.
Instead, I think Amazon is a problem because it has gotten very big, very fast, and by doing more than just selling cheaper or better products. For example, it has done a large number of strategic acquisitions to neutralize competitive threats. It has engaged in a lot of very strong-armed negotiations and contract practices. But in the book, I argue that we should use our antitrust laws to stop that kind of stuff, too. My bottom line on the role that Amazon played in the e-books case has always been that if Amazon is a problem, then let's sue them. The solution was not to let the big publishers collude, and sue nobody.
As a reporter covering the case, I was always struck by the fact that Apple, the world’s richest, most innovative corporation, went through all this trouble because in the e-book market they didn’t want to compete on price. Can you talk a little about the environment we’re in where a company like Apple, with every advantage in the world, would conclude that it couldn’t or shouldn’t have to compete on price?
I don’t think Apple believed that it couldn't or shouldn't compete on price. It was a case of raw opportunism. The evidence showed that Apple didn't actually care about e-books. It was going to launch the iPad with or without an iBookstore. But there was an easy profit to be had. As the iPad launch drew near, Apple executives realized that the publishers were so desperate to get the retail price of e-books up that they would happily cut Apple in on their profits, because the publishers’ only real concern was that the $9.99 price would hurt hardcover new-release sales. In a way, Apple's opportunism was a mirror image of Amazon's—both companies knew that the publishers were sitting on a pile of supra-competitive profit from their bestsellers. The difference is that Amazon took it in a way that benefited the reading public—at least in the short term—and Apple wanted to take it for its shareholders.
Earlier this year, the Association of American Publishers submitted comments to the FTC urging that Amazon be investigated. “The marketplace of ideas will be irreparably diminished if the government permits it to be served only—or even predominantly—by a very small number of dominant platforms," the comments conclude. What do you make of the the publishers claims?
I couldn't agree more that a firm like Amazon deserves close antitrust scrutiny. And I'm very glad we are focusing attention on these digital platforms, and that a group of state Attorneys General are now engaged in some sort of investigatory action. On the other hand, the AAP draping their goals in the language of high intellectual values is very frustrating to me. Despite the rhetoric in the AAP's lobbying document, the motive and the goal of its members is not to preserve "the marketplace of ideas." It is dollars and cents, and making sure that its members capture as much of the revenue from the book market as they can, even if that sometimes comes at the expense of authors and the reading public.
So, you see the threat Amazon potentially poses to the book business as a straight up marketplace issue, then? No need to make it a “marketplace of ideas” issue?
Amazon is unquestionably a beast in book retail—it has upwards of 90% of e-book sales and more than 40% of physical books. But I don't think Amazon wants to restrain the free flow of ideas. And I don't think the problem of a monopoly or monopsony power in the book market is a problem of censorship. For example, one particular AAP member—Penguin Random House—has a market share in trade book wholesale that is about the same as Amazon's share of retail paper book sales. Is that a threat to the marketplace of ideas, too? I doubt we will ever hear the AAP say that.
In the U.S., the tech industry is now drawing antitrust scrutiny. Clearly, there are many issues surrounding the tech industry that need to be addressed. But I have to ask, are we putting too much pressure on antitrust to rein the practices of these big, disruptive companies?
That’s a good question, and no one can be sure. But my whole book is devoted to the argument that technological change is not particularly special or new. So, before we revise or reject antitrust because we think it won't work in the new digital economy, I'd like us to try to actually enforce the antitrust laws we have. We haven't enforced our antitrust laws for real in decades. I believe that if we had a real merger policy, and solid monopolization enforcement for a good decade or so, we'd be blown away by how flexible and appropriate it is to handle our purportedly new circumstances.
In the book you make a compelling case that we should fix the laws where they are broken, and enforce the laws where they work, and overall, do a better job of showing how antitrust laws and competition policies benefit us. That’s a big job—I won’t ask you to take it all on here. But where would you start?
With better data and information. Antitrust was killed by federal judges in the 1970s and 80s. These judges justified what I think was a pretty activist intervention by citing books and articles in conservative economics that cast theoretical doubt on antitrust injury. They demanded better proof that private conduct was actually harmful to the public before allowing the government to step in. Well, within the last decade or so, economists are finding more and more empirical proof of harm from corporate concentration and anticompetitive conduct. So that's where the government could really step up—by aggressively studying and presenting all this data. These federal judges are not somehow bad, and most of them aren’t predisposed against enforcing our antitrust laws. They’ve just come to believe that the courts needed to weigh the costs and benefits of enforcement in a certain way. Now, we need to persuade they've gotten that wrong.