Friday, July 12, 2013

Apple, Amazon, eBooks, and Antitrust

I am not a close follower of antitrust law. I studied the law as it then existed more than twenty years ago, at which time the state of the law and its enforcement was in significant flux. Prior antitrust litigation had cast a shadow over the enforcement mechanisms, with the break-up of International Shoe being widely seen as a cautionary tale for how too strong a remedy for antitrust violations (e.g., the break-up of a company) can undermine an industry - a caution that didn't save AT&T from being broken up, but likely did play a role in the decision to preserve Microsoft as a single entity. Since that time, I've watched from the distant sidelines as the courts have relaxed restrictions on what a company may do without running afoul of antitrust law, including in relation to minimum advertised price (MAP) and minimum retail price (MRP) policies.

What strikes me about the argument of the attorney generals and Justice Department, in essence that they pursued Apple in order to protect consumers from higher prices, is that the courts have demonstrated less concern about consumer prices than consumer advocates. Polices such as MAP and MRP can help protect a manufacturer and its retailers (particularly brick and mortar retailers facing online competition) from downward price pressure, but with the inevitable result that prices will go up for consumers.

An early reaction from Jonathan Gans, I think, reasonably summarizes the outcome. I admit, I have not read the 120 page opinion, and I would welcome comment from anybody who has. I'm not sure that I agree with him that "Apple didn't need to do this", at least in the sense of having a viable bookstore. Amazon's approach was, in the eyes of the attorneys general, a boon to consumers, with Amazon selling many titles below cost in order to expand and entrench its market share. The entire controversy with Apple was kicked off by the fact that Apple was not interested in following that path - yet unless they followed Amazon's model, or inspired publishers to convince Amazon to change its pricing model, Apple's eBook store would not have been viable.

Once upon a time, Apple might have been able to accuse Amazon of anti-competitive product dumping, but that theory has been all-but-abandoned, and Amazon was careful enough not to issue subsidies across-the-board such that there was little chance of it's being revived. So we ended up in an odd situation where any potential competitor to Amazon would have to provide subsidies to buyers, likely resulting in its inability to turn a profit on an eBook store, doing something akin to what Apple did, or staying out of the market. Also, through its agency model, Apple cleared the way for additional eBook stores to come online - because they could enter the market without having to worry that they would not be able to turn a profit due to Amazon's subsidized prices. The attorneys general seem to believe that consumers would have been better served by having Apple stay out of the market than by having it enter on terms under which it could turn a profit and which did not in fact give it a competitive advantage. Even accepting the court's conclusion that they proved an antitrust violation I don't think they made that case.

Like any appellant, Apple is going to have a difficult time appealing based upon the argument that the judge misunderstood the facts. The judge's rulings were extensive and, in simple terms, on appeal any ambiguity is construed in favor of the nonmoving party. I expect them to try, and I expect that they are going to identify some findings by the court that arguably contradict the lower court record. But I expect their focus on appeal to be a bit different - that they will be less focused on what the law is, and more focused on what the law should be. That is, just like the deep-pocketed manufacturers who decided to litigate issues of MAP and MRP with what amounted to a law reform argument, Apple is well situated to present... let's call it the "Mr. Bumble defense"1... to present antitrust law. You don't have to sympathize with Mr. Bumble, or believe he is undeserving of his fate, to see that there's some substance to his reaction.

In short, Apple is likely to take its appeal to the highest court that is willing to hear the case and, while happy to win on the facts, can be expected to also argue that to the extent that the law as applied should be distinguished from the facts of their case, and to the extent that it cannot that it should be reversed.
1. In Oliver Twist, after being told that the law presumed his wife to be acting under his direction Mr. Bumble, the workhouse manager, sputters, "If the law supposes that... the law is a ass—a idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience—by experience."

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