Why Is the Government Helping Amazon Build an E-Book Monopoly?

The e-commerce ecosystem is facing massive change, and for once it's not from movies or music. Instead, it's being brought by e-books.

The Apple vs. DOJ e-book price-fixing trial starts today in the center of the publishing industry, New York City. The trial is as bizarre as it is nuanced, and the publishing industry, along with how we price media online, hangs in the balance.

The Justice Department will try to prove over the course of this week that Apple violated antitrust law by masterminding a conspiracy with five of the “big six” book publishers to fix e-book prices, taking direct aim at Amazon.

If the government wins—and the prevailing assumption is that it will—Apple’s reputation will be bruised, but there will be little tangible impact beyond that. After all the five publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) all already settled out of court back in February in a $164 million deal that allowed retailers to discount e-books yet again and gave consumers a credit for what they were "overcharged" when prices went up.

Really, Apple decided to go to trial on principle: "We're not going to sign a settlement that says we did something we didn't do. So we're going to fight," Tim Cook recently said.

So why do we even care? Because this week’s trial is a window into the future of the embattled publishing industry—not to mention the other content industries being disrupted by digital media. As former FTC policy director David Balto told Reuters, "this case will effectively set the rules for Internet commerce."

First a bit of background. The alleged price-fixing took place in 2010, when Apple introduced its iPad and iBookstore as an alternative e-book outlet. By then Amazon had brilliantly cornered the e-book market by being first on the scene and then having a really smart business plan. Amazon sold e-books at a loss, for $9.99, to promote its Kindle and lure people into its ecosystem.

As the only real distributor for e-books at the time—it had 90 percent of the market—the publishers were forced to play along, and eventually the tech company became their top competitor. The big six thought they’d been had, and Steve Jobs was the one to help them regain some control.

Apple proposed switching the pricing model to the agency model, which let the publisher, rather than the retailer, set the price of an e-book. The price would go up to $12.99 or $14.99, and Apple would get a 30 percent cut. One by one the publishers agreed. The deal also included the “most favored nation” clause, which meant no other retailer could sell e-books for a lower price. That forced Amazon’s hand, by requiring it to match Apple's higher prices.

Now, the DOJ hates price fixing, which one law professor called "the first-degree murder of antitrust violations." But it’s particularly concerned about that most favored nation clause. The clause has been around for centuries and is common with content deals, but like so many things, is being rethought amidst the digital revolution, and of late an argument has been ramping up as to weather it stifles rather than protects competition.

The fear is that gives far too much power to the biggest player in an industry, making it hard for other, smaller companies to emerge. According to the DOJ complaint, "Instead of an MFN designed to protect Apple's ability to compete, this MFN was designed to protect Apple from having to compete in price at all." Apple disagrees, of course. The company said in its filing that going after the clause would set "a dangerous precedent and risk deterring new entry into concentrated markets and punishing innovation."

The other major implication of an Apple loss this week is that Amazon will again have a monopoly on the e-book industry. The big publishers actually made less money with the agency model, but still preferred it because it helped open the market—or so they say. "When Macmillan changed to the agency model we did so knowing we would make less money on our e-book business," the CEO of Macmillan wrote. "We made the change to support an open and competitive market for the future, and it worked."

Competition is good, monopolies are bad. It's not exactly rocket science. So why is the government basically helping Amazon create one? (Today, Amazon controls about 65 percent of the e-book market instead of 90 percent; Apple has about 10 percent.) Many experts think the DOJ really missed the mark here, worrying an Amazon monopoly will do more to hurt the publishing industry than paying a few extra bucks for e-books would have. “The irony of this bites hard,” Author’s Guild president Scott Turow wrote. “Our government may be on the verge of killing real competition in order to save the appearance of competition.”

The argument goes like this: If publishers aren’t setting prices, Amazon is going to sell e-books so damn cheap no one in their right mind will buy physical books. Publishing companies can’t stay in business on e-books alone, so they go under. If they go under, so does the ability to give new authors advances, expert editing, author tours, and all the other perks of traditional publishing.

Hence the big six’s initial freak-out when e-books’s popularity started to skyrocket after the Kindle launched—from 1 percent of publisher revenue in 2008 to 17 percent in 2011. (In reality, the landscape of the industry is much different today than it was when this suit was filed; e-book growth is slowing down significantly.)

There are signs of this fretful future coming to be: e-books are selling often for much less than $9.99, authors are starting to self-publish without the backing of a publishing company—giving their books away for cheap or even free—and the big six is now the big five, since Random House and Penguin merged late last year. Borders went out of business and Barnes and Noble is closing more shops than any nearly any other brick-and-mortar retailer.

As Senator Chuck Schumer put it, “While consumers may have a short-term interest in today’s new release e-book prices, they have a more pressing long-term interest in the survival of the publishing industry.” The trouble is, that’s not really true. If the fate of the music and entertainment businesses taught us anything, it’s that consumers have an interest in getting their media cheap, or free, and we’ll vote with our pocketbooks for whoever makes that possible. It’s capitalism, man. You can hardly incriminate Apple for wanting a piece of that pie.