After I wrote my review of Publishers Weekly senior writer Andrew Richard Albanese’s (recently updated) e-book The Battle of $9.99 about the DoJ vs. Apple e-book trial, Publishers Weekly offered me a chance to interview Mr. Albanese. I came up with a number of questions and passed them along, and he answered them via email. We are looking into the possibility of further interviews in other formats. But for now, here are Mr. Albanese’s responses to my questions about the trial.
In covering the Apple trial, what surprised you the most?
This may sound like a dodge, but the biggest surprise to me was the lack of any surprises. I had actually finished the first draft of this e-book before the trial began, based on the pretrial filings, and I was surprised at just how closely the trial hewed to the facts and conclusions submitted by the parties. And given that Judge Cote had let it be known before the trial began that she thought the government would prove its case, I was expecting the live witnesses to offer some kind of persuasive re-telling of the facts. But that didn’t happen.
In the end, it was that lack of surprises that helped to seal Apple’s fate. Given the mountain of evidence it faced, Apple needed strong, mind-changing performances from the witnesses if it was going to prevail. Instead, the witnesses gave largely halting, equivocal testimony. In fact, in her written opinion, Judge Cote called out many of them for not being credible, and in one footnote said that some of the publishers’ denials on the stand, often in the face of clear evidence to the contrary, actually convinced her of their guilt.
What is the most common misconception you see about events surrounding the trial?
That this scheme with Apple was something publishers had to do to save the book industry. The conventional wisdom that publishers were acting to save publishing from a marauding Amazon made for a compelling narrative, but if you scratch the surface it wasn’t so much Amazon these firms needed saving from as from their own decisions. I mean, these are not tweedy little publishers. These are billion-dollar conglomerates seeking to maintain control over an industry that was and is still being disrupted.
I think it is important to remember that no one held a gun to anyone’s head and made them sell their e-books through Amazon. The publishers had each negotiated and signed their terms of sale, and they all cashed the checks. And they had options if they believed Amazon’s pricing practices were destroying their market position. The thing is, following through and exercising those options individually was going to involve a little more pain than the publishers cared to endure.
As for Apple, it is one of the world’s richest companies and it came to the table with a game-changing device. It hardly needed such a sweeping assist from publishers to get into the e-book game. No one disputes that the iPad was going to be used as an e-reader whether or not there was an iBookstore.
Nevertheless, the perception persists that the publishers and Apple were saving the book business—even the New York Times concluded in an editorial that the Apple deals served to create a “healthier” market for publishers and for consumers. I think that opinion is based on some pretty breathtaking assumptions to say the least. For all its warts, it was Amazon that took a flyer and invested in the creation of a consumer e-book business, which I hold as a pretty major achievement. And all the while Amazon was investing in the Kindle, the major publishers were focused on suing Google. You have to wonder where the e-book market would be today if had been left solely to the major publishers to hash things out.
Unlike the Times, I can’t so easily accept that it is “healthy” for a handful of billion dollar conglomerates to band together, even if they are banding together against a big disruptive company like Amazon. As U.S. attorney Mark Ryan argued at trial: who knows how the market would have eventually solved the $9.99 problem? I think that’s an important point to keep in mind.
In the run-up to their suit, the DoJ apparently investigated Amazon’s pricing practices, calling their e-book division "consistently profitable," but only devoted a couple of sentences to this in their complaint. Amazon has been notoriously tight-lipped about its numbers. How thorough could such an investigation have been?
It’s a good question. We obviously don’t really know how thorough the DoJ investigation was—but we do know there was a lot of information gathered, and we know that Amazon attorneys worked to ensure that much of that information was not publicly disclosed, including information about its pricing and profitability. Apple attorneys opposed Amazon’s bid to have that information sealed or redacted. True, Amazon was not a party to this suit, Apple attorneys noted, but still, they were the driving force behind it.
But throughout the case, Judge Cote refused to allow this to be made an exposition of Amazon’s business, or of general e-book economics. She kept things laser-focused on the alleged collusive behavior. And, in the end, I think the publishers actually dodged a bullet there, too, because, like Amazon, they surely did not want to answer questions under oath about their digital economics. Alas, that’s for another trial.
In her decision allowing the publishers’ settlement to go through, Judge Cote wrote:
Second, the Complaint asserts that Amazon’s e-books business was “consistently profitable.” Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing “below an appropriate measure of . . . costs.” Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222 (1993). There must also be a “dangerous probability” that the alleged predator will“recoup[] its investment in below-cost prices” in the future. Id. at 224. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was “predatory,” none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs. See Ne. Tel.Co. v. Am. Tel. & Tel.Co., 651 F.2d 76, 88 (2d Cir. 1981) (“[P]rices below reasonably anticipated marginal cost will be presumed predatory.”).
What does that mean for all those who continue to insist Amazon practices "predatory pricing" in its $9.99 sales?
Bluntly, it means they are wrong. My own opinion, based on all the evidence I’ve seen, is that Amazon was not engaged in predatory pricing. Now, you can certainly disagree with the way Amazon chose to compete, and I think that’s a valid complaint. But under the law, based on the evidence I’ve seen, I have a hard time believing Amazon’s conduct rose to the level of predatory pricing.
Still, I really don’t know, because I don’t know what Amazon’s economics look like. All I can say is that proving predatory pricing would have involved a con
versation about digital economics that no one in this case really wanted to have. And, as I said before, the publishers all negotiated and signed their terms of sale contracts, and they did have options to push back. If the major publishers were indeed being preyed upon, the fact is they’d all signed off on their predator.
When Apple and the publishers colluded, Amazon was quick to file a complaint. In her decision, Judge Cote suggested the publishers should have filed such a complaint in response to Amazon, instead of illegally colluding. Did the publishers ever file such a complaint themselves? If not, why do you think they didn’t?
They did not file any formal complaint that I am aware of, and no such evidence was introduced at trial. It’s speculation, but as I said before, I have to think they never did so because the facts just weren’t there to support such a filing and, besides, I don’t the think the publishers wanted to open up that can of worms anyway, for many reasons, not the least of which is that, at the end of the day, the publishers were still going to have to do business with Amazon.
As you note, in her decision Judge Cote did admonish the publishers for not filing a complaint to authorities if they believed Amazon was engaged in illegal pricing practices. Yet, her thoughtful written opinion also showed that she understood exactly why none of them ever would have. Individually, each publisher feared Amazon’s retribution. This is why it took Apple to get each of them to move to agency, right? They needed a united front. At the same time, the antitrust laws prohibit the publishers from coming together to discuss such business matters, so a joint complaint about prices would have been difficult if not impossible.
Is there any chance the publishers might push for a more thorough DoJ investigation of Amazon’s price practices at this late date?
For now, I can’t see any reason to. Although Apple and the publishers’ plan did not work perfectly, it did work. The publishers succeeded in moving their e-book businesses to the agency model, even though the settlements allow retailers to discount into 2014. But regardless of the discounting, we are now in an agency era, and in 2014 the sanctions end and the publishers have a measure of control over consumer pricing. However things shake out in the next round of contract talks, those talks will start with consumer e-book pricing largely in the publishers’ hands. And frankly, I think everyone is just looking to get back to business at this point and stop paying lawyers.
During the settlement phase of the trial, Bob Kohn was extremely vociferous, filing brief after brief, asking that the Department of Justice be made to divulge the full results of its investigation into Amazon’s pricing, and appealing Judge Cote’s rejection of his requests to intervene. Did anything ever come of that?
Bob lost his appeal. But I did see him in court and we did talk quite a bit, and as usual I found his take on the case insightful, and compelling. Bob will correct me if I get this wrong, but one of his core beliefs is that Amazon was engaged in predatory pricing and that the publishers’ and Apple’s actions were therefore legally justified. Judge Cote reiterated in her opinion that this trial was not about Amazon’s practices, but Bob believes that is just flat wrong.
I haven’t heard about Kohn filing any more briefs lately. Has he given up?
Well, we’ll have to ask him, but my impression is that Bob is pretty deep into this case, and I think that there could well be another brief from him at some point, perhaps during Apple’s appeal.
I saw a news story lately that Panasonic and Sanyo were fined for price fixing in auto parts, and a number of their executives are facing jail time. Might any of Apple’s executives face jail time for their roles in the publisher price fixing? Could the publishers’ executives have faced jail time if they hadn’t settled?
No, this was a civil case. The Panasonic case was far more ugly and was filed as a felony criminal case. That investigation actually involved the FBI, and charges of bid rigging and other unsavory practices.
But, I think it is good that you raise this case, because, when we hear price-fixing and conspiracy charges we tend to think about unscrupulous, cigar-chomping industrialists blatantly ripping people off. But that’s really not the Apple case. In her opinion, the judge even noted Apple’s innovation and its good intentions, and stressed that none of the aspects of the deal—the agency model, simultaneous negotiations, or MFNs, for example—were illegal. But, in her opinion, how the parties got to that deal ran afoul of the law.
My thanks to Mr. Albanese for his thoughtful and insightful answers. I’ll look forward to speaking with him further!
