In
2007, Amazon launched Kindle and announced '$9.99' as the price at
which readers could read their favourite books, whether a recent
launch or evergreen classics. It was a temptation readers could not
resist and Amazon soon emerged as the dominant player in the e-books
market with a 90% market share. Other players such as Barnes &
Nobles's Nook had to sell below average cost to remain competive and
stay in the market. Amazon's emergence as the dominant player meant
it could dictate terms to the publishers. In the language of
competition law, it provided Amazon with a dominant position in the
e-books market.
Initially
the e-books market used the traditional model that pre-existed with
the printed books wherein, the publisher sets the wholesale price and
then the retailer decides the selling price. The Kindle used this
traditional model to set the famous $9.99 price point. Under
this model, The publisher has the choice to decide how much profit or
loss it wants to make on a given title and once it sells the book to
the retailer, the latter sets the final price.
I-pad's
introduction in early 2010 set to change all this. As was later shown
by the Antitrust authorities, the best selling biography of Late
Steve Jobs contained alluding reference to the change it sought. The
icon successfully managed to bring together the five major publishers
in the industry and suggested that the model be transformed to the
'agency' one from the then existing traditional model.
Agency
model, simply put, means that the publisher sets the retail price
and the retailer thereby losses his freedom to set the final price as
he now gets only a fixed percentage of the price(thirty percent for
the retailer in the present case). The offer was tempting for the
publishers as it could re-shift the axis of power back to them from
Amazon, as the latter had become stronger due to its 90% plus capture
in the e-book market. As for Apple, that first roped in these
publishers into shifting the industry gear to Agency model, the
excitement was the opportunity to capture the fast growing e-book
market and create a market for i-Pad. For the publishers and Apple
the cartel was a win-win situation. The results are there to be seen.
From its launch in 2009 till 2012, Apple quickly gained a market
share of 10% of the US market(one of the most important e-book market
in the world) and this is expected to reach 25% in next two to three
years. It is noteworthy to mention that at present the market has
three main competitiors in the US e-book: Amazon's Kindle, Barnes
and Noble's Nook and Apple's iPad.
Apple's
and the top five publishers cartel to raise the e-book prices and
shift to the Agency model invited competition law concerns on both
sides of the Atlantic. Kindly note at the outset
that in the US Antitrust and in the EU & India, it is referred
to as Competition Law and thus, the terms are used interchangeably.
In
the US, the Antitrust authorities alleged that Apple and the six
larget publishers of the US violated Section 1 of the Sherman Act,
thereby restraining competition in the sale of e-books as they agreed
to shift gears to the Agency model, whereby the publisher would set
the price and thus, end the $9.99 dominance created by Amazon. Why
was this a point of concern for the Antitrust authorities? As the
objective of competition law is to protect consumers and not
competition, thus any action that violates the interest of consumers
is a concern for Antitrust/ Competition authorities. As the Agency
model sought to increase prices, it meant that consumers would be
forced to pay a higher price, thereby harming the interests of the
Consumer and reducing the Consumer surplus; thus making it an
anti-trust concern. Moreover, the publisher also sought to slow down
the migration from print to e-version and by raising the prices of
e-books, they sought to achieve this objective. The action visibly
has direct impacts on both the static competition (by increasing
prices) as also dynamic competition(by slowing the migration to
e-books).
In
the EU, Apple along with Hachette,
HarperCollins, Holtzbrinck
and Simon
& Schuster had settled last December(2012)
with the Commission, at the outbreak of the controversy. Penguin,
from the Pearson group of UK soon followed suit with a proposed list
of settlement in April 2013. As per the proposal, Penguin proposed to
end the contract for Agency agreement and not enter into any such
Most Favoured Nation clause for the next five years. Further, if
Penguin enters into any new agency agreement, the retailers will be
free to set the retail price for the next two years, provided that
the total amount of discount provided by the retailer is not greater
then the total amount of commission that the retailer obtains from
the publisher. The Commision has invited public consultations on its
website as on 19th April 2013 and as per the procedure,
interested parties are invited to submit their comments on the
proposed settlement within one month.
In
the US, the five defendants publishing companies viz Hachette,
HarperCollins, Macmillan, Penguin and Simon and Schuster had earlier
settled the charges and only Apple decided to go ahead with a legal
trial in the US. It is important to note that Random House was not
mentioned as a defendant in the law suit, since, considering the
evidence available it was found that Random was coerced to
participate in the cartel. Earlier when it had refused to
participate, Apple prevented Random House's e-book application from
appearing on Apple's App Store. It was only when the House contracted
with Apple on Jan 18, 2011, that it was allowed to present its
e-applications on i-store. Hence, Random's role in the controversy
was a forced one as opposed to a voluntary act.
Like
its move in EU, in the US too, HarperCollins, Simon & Schuster
and Hachette settled with the government at the beginning of the
investigation. Penguin, Macmillian and Apple chose to fight charges;
however, evenutally Penguin fell out considering its proposed merger
with Random House. Macmillian followed suit and settled in
February'13. As per the settlement, the publishers undertook not to
impose any restrictions on promotions and discounts by e-book
retailers. The settled defendants also promised not to enter into any
such new agreements until December 2014. Further, any new proposed
e-book ventures must be notified to the Government in advance and
further, any similar most-favoured-nation clause that was entered
earlier along with Apple is prohibited for the next five years.Apple,
on the other hand adopted and sticks to its strategy to go for a
full-blown trial. It is interesting to see how Apple's strategy in US
differs from that in the EU, notwithstanding the fact that the
subject matter of the controversy remains same. This could perhaps be
attribtuted to the different legal and economic principles followed
across the Atlantic. As part of the government filing before the
commencement of the procedings on 3rd June 2013 in the
district court of New York, the US Department of Justice, has
submitted an email from Mr Jobs to Mr Murdoch at Harper Collins, that
incited the later to be a part of the proposed cartel. The e-mail
makes an interesting reading. For instance Mr Job argues, “Throw in
with Apple and see if we can all make a go of this to create a real
mainstream e-books market at $12.99 and $14.99.” This email is
significant in augmenting Apple's role as from one of the
participants in the cartel to one of a “ringmaster”. Subsequent
circumstantial evidence substantiate the Apple's alleged role. Just
two days following the (in)famous email, the News Corporation owned
Harper Collins signed the agreement to adopt the new pricing model.
Apple, in the meanwhile maintains its claim of promoting innovation
and competition in the market.
As
the curtains fall and trial begins in NY DC in June, it would be
interesting to follow the developments and see if the two sides of
the Atlantic choose to converge or diverge in their opinion on Apple.
If its another GE-Honeywell divergence or Oracle/PeopleSoft unwitting
convergence, only the court can tell. And this time the ball is in
the US Courts.
PS:
Both GE/Honeywell and Oracle/PeopleSoft were Merger cases; but the
present is a cartel case and thus, within the meaning of Article 101
TFEU and Section 1 Sherman Act.
