Business Ethos Blog

Punishing Apple

Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University


Dr. David Mielke


The federal antitrust case against Apple got underway a couple weeks ago.  The Justice Department contends that Apple plotted with five publishers to artificially inflate the cost of books in 2009-2010.  At the time, prior to the existence of the tablet device market that Steve Jobs created with the iPad, Apple did not sell e-books while Amazon sold 9 out of 10.  The Justice Department claims Jobs forced Amazon and every other e-book distributor to adopt a new e-book pricing model that harmed consumers.  Is this the “Right Thing to do?”  Did Apple violate antitrust laws that restricted competition and harmed consumers?  Let’s look at some issues:

1. Amazon’s Kindle is still the industry leader with Apple trailing in third.

2. The average retail price for trade e-books has since dropped from $7.97 to $7.34.

3. Over the same period readers bought 447% more e-books, and they can choose from dozens of tablets for titles and other media content.

4. Justice looked at the prices for digital versions of new and best selling books, which jumped a few cents.  Justice blames this on Apple’s so-called agency sales model.

5. Like Jobs had done earlier to music with iTunes, he wanted iBookstore to let producers set retail prices within simplified limits—songs for 99 cents, books capped at $12.99 or $14.99 depending on the category.  Apple would take a fixed 30% commission.  Note, he wanted to CAP prices—not require minimum prices and did not deal with retail prices.

6. Historically the book business has operated on wholesale distribution with publishers charging a fixed price and retailers setting the consumer sale price.

7. Amazon was used to buying e-books wholesale and selling them as loss leaders at $9.99, which publishers worried was erasing hard copy sales and freezing digital price expectations.

8. The Justice Department is trying to set a dangerous new theory of antitrust liability, contrary to multiple legal precedents going back to the 1980’s.  Normally, investigations use a “rule of reason” standard to weigh how business practices help or hurt competition.  The government wants the courts to declare Apple’s pricing model is a per se violation, or inherently unlawful.  Justice claims that Apple indirectly coerced Amazon to raise prices.  In other words, the still dominant online retailer is the victim because a rival entered the market.

9. The book publishers hated the $14.99 cap Apple insisted on to maintain standard pricing across its bookstore, but Justice cites these ceilings that constrain the ability to raise prices in a case allegedly about raising prices.

Is this antitrust suit the “Right Thing to do?”  The Justice Department is attempting to dictate how the book industry and online commerce must be structured in a way that benefits an incumbent like Amazon in what is otherwise a fluid, dynamic market.  Lower prices, more sellers, and better products don’t sound like restricting competition or harming consumers.  Is this one more example of government overreach?  It is not the “Right Thing to do.”