Why Apple is still fighting the DoJ

The Wall Street Journal has a look at why Apple is so persistent in fighting the Department of Justice charges after the publishers already settled. It basically comes down to not having its ability to negotiate with other media businesses hampered, not having to get rid of its “most favored nation” clauses in other media sales (it does use them in other areas than just e-books), and not having to put up with government oversight.

"Any time there is a monitor, there is someone sticking their nose in your future business and you aren’t comfortable," said Jeffrey Jacobovitz, co-chair of the antitrust practice at Arnall Golden Gregory LLP. He added that Apple could face more class-action lawsuits.

The publishers, of course, had a lot more reason to settle. The DoJ offered them reasonable settlement terms, they didn’t want to pour good money after bad in defending the suits or risk worse financial consequences from a loss in court, and in Random House and Penguin’s cases they needed to be on good terms with the DoJ so it would approve their merger. Even Macmillan, which had sworn to fight the suit to the bitter end, finally came around and settled after it became clear the stakes were too high to risk a loss.

The oversight might be annoying, but the publishers don’t have their fingers in as many pies as Apple, so the extent of the damages would be limited. But a loss for Apple might open its entire hardware and media empire to government scrutiny.

Apple continues to insist it did nothing wrong. “We’re not going to sign something that says we did something we didn’t do and so we are going to fight it,” Apple CEO Tim Cook said. So in the end, it’s going to be down to Judge Cote to make a decision—and whatever she decides, her decision will be one of the most important events to hit the e-book world this year.

I’ll be looking forward to it.

2 thoughts on “Why Apple is still fighting the DoJ”

  1. Apple is also fighting because the DOJ’s lawsuit is ridiculous. Apple certainly wasn’t a ring leader in a plot to raise prices. Why should it be? It makes money selling iPads and the cheaper ebooks are for them, the more it sells.

    What Apple did have an interest in was dealing what it legitimately regarded as the unfair competition Amazon was creating by selling ebooks below cost. To counter that, it took two approaches.

    1. That MFN clause meant that it could not only always match Amazon’s prices, but make 30% on a price that was losing Amazon money.

    2. Have ebooks from the iBookstore only display on iDevices (and soon Macs).

    The first put pressure on Amazon to switch to agency pricing and MFN. Why? Because it could never afford a price war in which it lost about 30% on every sale while Apple made 30% selling that same book.

    The DOJ lawyers seem to regard that as unfair, but it’s difficult to come up with a legal reason why. There’s certainly no good public policy reason to encourage companies to sell below cost, particularly when the motives seems to be to enlarge Amazon’s already 90% market share and destroy what little competition Amazon then had.

    The second gave Apple pricing protection that Amazon did not have. Apple could, if it wanted, subsidize the cost of ebooks for iPads out of iPad profits. After all, a book bought from the iBookstore could only display on one of Apple’s devices. In contrast, because readers can view Kindle books on their iPads, Amazon not only couldn’t subsidize their ebook sales with device sales, pricing their ebooks well below cost gave readers as much incentive to buy an iPad as to buy a Kindle hardware.

    Taken together, the two removed the incentive Amazon had to sell below cost. That was undoubtedly the primary factor in Amazon abandoning below-cost prices, but monopoly building is certainly not a factor deserving of federal protection.

    That is why the DOJ seems more interested in protecting Amazon from an aggressive Apple than in serving the public interest. With B&N’s ebook initiative stumbling, Apple is by far Amazon’s main competitor. All that federal messing around inside Apple would burden it in a way that isn’t being applied to Amazon.

  2. I agree the DOJ lawsuit was ridiculous. Apple was offering the publishers an irresistible 30% higher distribution cost, how could the big publishers not all unanimously jump at the opportunity of higher distribution costs while eliminating any cost competition between their distributors. After all,isn’t that what all companies are looking for, higher distribution costs? Apple had very difficult negotiations with the publishers trying to determine how high they would allow them to raise the retail prices.

    Why does the meanie DOJ have to enforce the law? They should let poor Apple thumb their nose at the law.

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