Preliminary schedule for state and private class action eBook price-fixing trials

PaidContent reports that the parties to the state and private class action eBook price-fixing lawsuits have agreed to a deadline for final preliminary filings of October 2013. That's four months after the date that the Justice Department's lawsuit against Apple. Macmillan and Penguin is set to begin. It also means that the state and private lawsuits wouldn't begin until some time in 2014. The Justice Department and states will share transcripts of depositions and other findings related to their investigations with the class action lawyers. There are talks with a mediator scheduled for this fall to consider a settlement of all the cases, but for now, that looks like more of a formality than a sign that a settlement is in the works.

U.S. eBook price-fixing trial set for June 2013; Apple and publishers still have issues

Reuters reports that Judge Denise Cote has set June 3, 2013 as the the start date for the U.S. eBook price-fixing trial against Apple, Macmillan and Penguin. According to another report from the Associated Press, the Department of Justice has asked the judge for permission to continue gathering evidence for the case until March of 2013, but Apple wants the DOJ to wrap up its discovery by the end of 2012. (Apparently, the publishers are siding with the DOJ on this issue, not Apple.)

A third report from CNET News says that the three publishers that are in the process of settling with the DOJ--Hachette, HarperCollins and Simon & Schuster--are asking to be treated as "non parties" to the lawsuit, so that they won't be required to provide discovery in the case unless a party provides "good cause." The DOJ says that the publishers aren't entitled to "special treatment" because there was no allowance for it in their settlement agreement, the companies are likely to be "sources of highly relevant evidence," and they've turned over documents to European investigators that they haven't turned over to the DOJ.

Justice Department investigates cable and online video companies

According to The Wall Street Journal, the U.S. Justice Department has launched an investigation of the online video market. Justice Department officials have spoken to representatives from Netflix and Hulu, as well as Comcast, Time Warner Cable and other cable operators, about whether the cable companies are acting illegally to limit the access of online video companies to content, limit consumers' access to online video content, and limit the bandwidth that consumers need to access that content.

According to the article, online video services have expressed concern that data caps imposed by cable operators will give those operators an unfair advantage, a fear reinforced when Comcast announced in March that data used by its own Xfinity app running on Xbox 360s wouldn't count toward subscribers' data caps. Netflix's Reed Hastings accused Comcast of trying to skirt FCC rules that prevent Internet Service Providers from giving preferential access to their own content.

The Wall Street Journal's sources say that the Justice Department is examining whether Comcast is violating the legal agreements that it agreed to in order to get permission to acquire NBCUniversal in 2011. It's also looking into whether the TV Everywhere initiative first developed by Comcast and Time Warner is illegally requiring consumers to have a cable subscription in order to access some online programming.

Another area of investigation is the distribution contracts that programming providers sign with cable operators. These contracts usually include "most favored nation" clauses that require programming providers to give the top cable operators the lowest price and best terms and conditions that they give to any of their other customers. The Justice Department is looking into whether there are valid business reasons for these clauses, or whether they're intended to prevent programming suppliers from dealing with over-the-top video providers.

Most favored nation clauses are also part of the Justice Department's case against Apple and five of the Big 6 book publishers. In that case, those clauses were used to insure that all eBook resellers sold eBooks from the publishers under investigation at the same price.

It's important to remember that an investigation doesn't necessarily mean that the Justice Department will prosecute anyone. In some cases, the companies under investigation voluntarily change their practices in order to forestall prosecution.
 

What would you rather have: A monopoly or price-fixing?

Last week, The Wall Street Journal reported that the U.S. Justice Department has warned Apple and five of the "Big 6" trade publishers (Macmillan, Penguin, Hachette, HarperCollins and Simon & Schuster) that it's planning to file suit against them for price-fixing as a result of their implementation of agency pricing for eBooks. Here's a brief overview (and a disclaimer: I'm not a lawyer, and this isn't legal advice):

Until 2009, virtually all publishers in the U.S. sold their books (both print and eBooks) to resellers under the wholesale model. Typically, books would be sold by publishers to resellers at 50% of their suggested list prices--the prices printed on the book covers. Resellers were then free to resell the books at any price they desired. This was the model (along with co-op payments for display locations at the front of bookstores and preferred positions on bookshelves) that Barnes & Noble and Borders used to drive hundreds, if not thousands, of independent booksellers out of business with discounting. In many cases, the "big box" booksellers sold books for less than the price that independent booksellers paid to buy them.

Amazon used the same model to launch its entry into the eBooks business. Amazon's strategy was to sell all its eBooks for $9.99 or less, even if that meant selling them below the wholesale price. Amazon quickly controlled as much as 90% of the U.S. eBook market.

In 2009, as part of its entry into the eBook business, Apple proposed a different model to the Big 6 publishers (all of the companies under investigation plus Random House), which became known as agency pricing. Under agency pricing, booksellers don't actually purchase the books that they sell to customers--instead, they act as "agents" for the publishers and take a commission on each sale, which Apple set at 30%. Since the booksellers don't own (take title of) the books, the publishers can set the prices, and the booksellers are obligated to sell the books at that price. Five of the Big 6 publishers implemented agency pricing for their eBooks (Random House waited a year before it implemented agency pricing, which is why it's not under investigation.)

The five participating publishers went to their resellers at approximately the same time, and told them that, regardless of when their existing distribution contracts were to expire, their contracts would be immediately amended to require agency pricing of eBooks. Any reseller who refused would have their supply of eBooks cut off. The first skirmish was between Amazon and Macmillan--Macmillan implemented agency pricing and Amazon briefly stopped sales of all Macmillan titles, but soon relented. That opened the floodgates, and Amazon agreed to agency terms from the four other publishers (although it has refused to accept agency terms from any additional publishers except for Random House).

So far as consumers are concerned, the net result of agency pricing is that prices of eBooks from the Big 6 publishers have gone up substantially, from $9.99 to as much as $16.99. eBooks from the Big 6 were once less expensive than paperbacks; now, in many cases, they're more expensive. In some cases, eBooks are even more expensive than the discounted price of hardcovers.

Both the U.S. Justice Department and the European Union are investigating Apple and the five publishers for price-fixing. The external evidence is that all five publishers implemented the same pricing policies at the same time, and all five threatened to cut off supply to any reseller who refused to agree to the new terms. In Walter Isaacson's biography of Steve Jobs, Jobs is quoted as saying:

"We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.' 

Jobs continued, "They went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books."

That certainly gives the appearance of an organized effort to raise prices, orchestrated by Apple and executed by the five publishers. Publishers and their defenders argue that agency pricing is necessary to prevent Amazon from getting a monopoly in the eBook market, which, while only 20% or so of the "Big 6" publishers' sales, is likely to become 50% or more in a few years. A monopoly would give Amazon control over pricing. Advocates of the government's position say that the actions of Apple and the five publishers have substantially increased consumer prices for eBooks, and that it's hypocritical for companies like Barnes & Noble to support agency pricing when they used wholesale pricing to wipe out their independent competitors.

One of the most important things to understand about U.S. antitrust enforcement is that it's illegal to be a monopolist, but it's not illegal to have the potential of becoming a monopolist. At the time that Amazon had a 90% eBook market share, the eBook market was new ("nascent") and both small in units sold and dollar volume.  The Justice Department almost never goes after a monopoly in a nascent market. Today, Amazon has between 60% and 65% of the U.S. eBook market--a big share to be sure, but not a monopoly. If agency pricing went away tomorrow and Amazon went back to its old pricing strategy, it's very unlikely that the millions of people who own Nooks and eBooks from Barnes & Noble, Apple and other resellers would throw away their eReaders, tablets and eBook collections and start buying from Amazon. So, Amazon didn't have a monopoly, doesn't have a monopoly now and isn't likely to have one in the future.

On the other hand, price-fixing is illegal, and it doesn't even require a formal agreement among the parties to prove that price-fixing exists. There's no question that agency pricing has raised priced for consumers, at least for titles from the "Big 6". (Statistics rolled out by some defenders of agency pricing that show that eBook prices have dropped also include titles from self-publishing authors, some of whom sell their eBooks for as little as $0.99.)

Publishers argue that Amazon is a very difficult company to do business with, and all the evidence I've seen supports them. However, tough bargainers are a fact of life: Wal-Mart has made the lives of vendors miserable for years while pursuing an "Always the Lowest Price" strategy, but vendors have learned to live with it. Taking illegal action to prevent a company from becoming a monopoly is still illegal.

Does Comcast-NBC Universal matter?

Now that both the U.S. Federal Communications Commission and Justice Department have approved Comcast's acquisition of 51% of NBC Universal, observers of the deal have broken into two camps:

1. The deal will benefit consumers (this camp is very small)
2. The deal will concentrate power and harm consumers (most observers fall into this camp)

The FCC and Justice Department have imposed some conditions on Comcast--for example, it can keep its ownership share of Hulu but can't exercise any management control, it has to make NBC Universal's cable channels and movie content available on an equal basis to all "bona fide" competitors (the courts may have to define what a "bona fide" competitor is), and it has to unbundle its high-speed Internet service so that consumers can purchase it without buying Comcast's cable or telephone service. These conditions go nowhere as far as some of the opponents of the deal wanted, but let's take them as a given.

Now that the deal is done, I find myself in a third camp--the "It doesn't matter" camp. At the end of the day, I think that this deal is going to harm Comcast more than anyone else. Here's why:

• Comcast is getting control of the NBC television network after years of mismanagement that have driven it into fourth place out of four major commercial broadcast networks in the U.S. The broadcast networks' share of the television audience has been shrinking for years, so even if Comcast manages to dramatically improve NBC's programming, it's still an asset with a declining value over time.
• If Comcast tries to move NBC's premier sports programming (primarily the Olympics and NFL football) to cable, NBC's affiliates will go to the U.S. Congress and FCC to force Comcast to prevent the move.
• Universal Pictures has been floundering without direction for years. Comcast will be the studio's sixth owner in 20 years (MCA, Panasonic, Seagram's, Vivendi and General Electric). The studio has been in the "second tier" of the Big 6 U.S. movie studios since its game of ownership "hot potato" started in 1990. It's unlikely that Comcast is going to bring anything to Universal that will change the situation.
• Comcast is acquiring a strong set of cable channels, but it can't deny them to its IPTV or satellite competitors.
• Comcast can't shut down Hulu or turn it into a "TV Everywhere" service.
• Comcast faces the same problem that the last four owners of Universal didn't deal with: What should it do with its theme parks? Panasonic, Seagram's, Vivendi and GE didn't want to be in the theme park business, but they didn't do anything about it. Now, Comcast has to decide whether to invest in the parks or sell them off.

In short, with the exception of the cable networks, which Comcast will effectively no longer have to pay to carry, the company has acquired control of a bunch of problems with questionable solutions. NBC Universal's problems are going to further divert the focus of Comcast's management, which is dealing with a loss of subscribers to IPTV and satellite service providers, and the rise of over-the-top Internet video as a viable competitor to its cable services. (To date, Comcast's primary reaction has been closing its eyes and hoping that the problems go away, but that response won't work for much longer.)

I'd be willing to lay odds that within five years, Comcast will either divest itself of everything but NBC Universal's cable channels, or failing that, will divest the entire company to another acquirer who's foolhardy enough to think that it can turn things around.

US Government considering antitrust action against Apple?

The New York Post reported this morning that the US Justice Department and Federal Trade Commission are deciding which agency should launch an antitrust investigation against Apple. The cause would be the now-infamous Section 3.3.1 of Apple's iPhone Developer Program License Agreement, which banned the use of any cross-platform development tools or programming languages other than those specified by Apple.

The charge against Apple would most likely be that the changes in its license are an illegal restraint of trade. Given that Apple isn't either the dominant supplier of smartphones (that's RIM) or the largest supplier of mobile phones (Apple isn't even in the top five), whichever agency goes after Apple will have to show that the company monopolizes something, and monopolizing its own platform probably won't fly in court.

My suspicion is that the argument will be that Apple has become so important to software developers that its actions have a disproportionate effect on the software industry, even if it doesn't have a conventional monopoly in any market. The goal of any investigation will most likely be to get Apple to open up its development ecosystem and allow alternate languages and cross-development platforms to be used. This investigation could also open the door on how Apple actually evaluates applications, which would be a "peek behind the curtain" that Apple would prefer we not see.

The timing of this leak, during the Gizmodo investigation and weeks before Apple's Worldwide Developers Conference, where the new iPhone is likely to be announced, may be intended by the Government to put pressure on the conpany to reel in its activities or face some potentially embarrassing announcements and disclosures. At the very least, it's likely to stop or slow down Steve Jobs' public missives.