How the NY Times Bought Apple's Spin on the Feds' Antitrust Suit Allowing Amazon to Cut Prices on E-books

The US Justice Department announced this week that it will sue e-book publishers and Apple Computer for conspiring to raise e-book prices above the levels that Amazon, the dominant retailer for e-books, had been charging.

News reporters, responding critically to the government's charges, were quick to point out that Amazon was willing and able to lose money on its e-books in order to boost sales of its profitable Kindle devices. The New York Times, for example, stated as fact, and without any attribution, that:

Amazon, which already controls about 60 percent of the e-book market, can take a loss on every book it sells to gain market share for its Kindle devices. When it has enough competitive advantage, it can dictate its own terms, something publishers say is beginning to happen.

But only five months ago, following the launch of Amazon's Kindle Fire, the New York Times explained, as fact, and without attribution, why Amazon had priced the Kindle at just $200 (while also making commensurate price cuts in the company's other Kindle e-readers) this way:

Amazon sees the Kindle line of devices as critical for its future as a virtual store, and is willing to lose money on the sale of each one for the sake of market share. Once dominance is achieved, it plans to make money on the movies, books and music that users download directly from Amazon.

Now, both of these statements can't be true.  It's not possible for Amazon to both (1) sell e-books at a loss in order to reap big profits on Kindle devices, and (2) sell Kindles at a loss to reap big profits on e-books. It may be doing 1 or it may be doing 2, but it can't be doing both at the same time. (Or, if it is, readers of this post will be handsomely rewarded for selling short Amazon stock IMMEDIATELY!).

I don't mean to pick on the New York Times. The confusion in its coverage of Amazon in both periods was matched by the reporting of many other news organizations. The law of antitrust is complicated, even to lawyers and economists. Journalists, needing to simplify the e-book story for readers, sympathize with book publishers (with whom they, as book authors and wannabe book authors, identify) and with Apple, which is not only a cool company, but a disruptive "David" in an industry essentially created by Amazon, as "Goliath."

Of course, what's good for book publishers, authors and Apple (the biggest company, by capitalization, in the world, don't forget) is not necessarily what's good for consumers. Amazon wanted to cap prices at $9.99 for most new e-books, which was the prevailing price on until consummation of the Apple-publishers "conspiracy" alleged by government lawyers. The agreement between Apple and publishers, designed to eliminate competition between Amazon and Apple, caused e-book prices to rise gradually to $13.99 and then $14.99 for most new releases.

Increasing prices to consumers by as much as 50% is not trivial. And Amazon, the day after the government announced it had settled with three of the publishers, the Hachette Book Group, Simon & Schuster and HarperCollins (though not Apple), began to cut prices aggressively.

Question: But what about the argument, advanced by Apple and book publishers, that Amazon, if left to its devices, will grow from a near-monopoly to a total monopoly, at which point it will be free to raise e-book prices sky-high with impunity?

Answer: Apple isn't going away. Nor Google or other companies are interested in the e-book space. They would quickly re-enter the market, happily undercutting Amazon's hypothetical sky-high rates, and driving prices back to competitive levels. If Amazon behaves like a monopolist, it will lose its monopoly.

Although Apple and the book publishers may have succeeded in their PR strategy, there is no shortage of hypocrisy on the other side of the e-book battle.

The Justice Department lawyers, in their suit, describe a conspiracy starting in 2009, as publishing house CEOs began to meet secretly in private dining rooms of upscale restaurants in New York and Europe, plotting collusive action to solve "the $9.99 problem" and later deleting emails to cover their tracks.

Spare us the Sopranos screenplay. Publishing executives don't know how to have a meeting other than at expensive restaurants. In their rarefied world, this is the most public of all venues, not a place to escape the prying eyes of government investigators.

Moreover, the mechanism chosen by the publishers and Apple to effect their agreement was a "most-favored-nation" clause in retail agreements between the publishers and Apple. In effect, the clause forbade the publishers from offering Amazon prices lower than the prices given to Apple. Remove this clause and the antitrust issue goes away.

A clause in a written contract is hardly the modus operandi of conspirators entering into an illicit agreement to fix-prices. This was a business deal entered into by CEOs who discussed it openly with partners and colleagues, and who thought -- erroneously, it turns out -- that what they were doing, though controversial, was legal.

Behind the e-book dispute, of course, is the bigger concern that unchecked competition between Amazon and Apple (among others) inevitably will push prices too low to reward authors adequately and to provide incentives for the writing of new books.

My own view is that authors, in an e-book world, will do fine, perhaps even better than under traditional arrangements, but that publishing houses will shrink, reduced to their core editorial functions of identifying promising authors, brainstorming over book ideas, and revising/editing  authors' manuscripts. Amazon can do a lot of things well, but it will never write a prize-winning novel, biography, history, or book-length collection of poems or investigative journalism.

I could be wrong about the e-book industry. But if there is a problem to be fixed, it must be addressed by Congress, not an ad hoc and self-appointed cartel of publishers wedded to pre-digital technology and desperately trying to preserve the status quo.

Peter Scheer, Executive Director of the First Amendment Coalition (FAC), is a lawyer and journalist. The views expressed here are his alone, and do not necessarily reflect the views of FAC's Board of Directors.