In separate filings this week, Penguin and Macmillan rejected charges that they colluded with other publishers to artificially inflate the prices of e-books. In responses to both the U.S. Department of Justice as well as a civil suit brought by a group of state attorneys general, the publishers vigorously denied any wrongdoing in connection with the 2010 switch to the agency model and the launch of Apple’s iPad and iBookstore.
“The lack of evidence of conspiracy cited in the Government’s Complaint is telling,” the Macmillan brief states in its response to the DoJ, claiming the government’s action is based on the “little circumstantial evidence it was able to gather”—despite an extensive investigation—and “piles innuendo on top of innuendo, stretches facts, and implies actions that did not occur and which Macmillan denies unequivocally.”
Penguin attorneys say the DoJ is mischaracterizing its “vertical distribution” deal with Apple to sell e-books as anti-competitive, while ignoring the actions of “monopolist” Amazon. “A vertical agreement is presumptively pro-competitive,” Penguin argues. “Broader distribution is pro-competitive. Lower barriers to entry are pro-competitive. Yet the government intentionally ignores these facts…and instead sides with a monopolist.”
Three other publishers (HarperCollins, Simon & Schuster, and Hachette) settled with the DoJ immediately upon the DoJ’s filing of the suit, admitting no wrongdoing. They have also agreed to settle with the states, although the final details of the state deal have yet to be worked out. A third suit, a consumer class action led by Seattle firm Hagens Berman, is ongoing.
Apple also denied the price-fixing charges in a filing this week, and called the government’s case “fundamentally flawed.”
Deny, Deny, Deny
While the Apple and Macmillan filings are more succinct, Penguin’s brief (click here to download the complete filing) makes for fascinating reading. Charge by charge, it more deeply strikes at the government’s case, including: the DoJ’s portrayal of the publishing and the e-book markets; e-mails and communications supposedly implicating publishing executives in some kind of a scheme; and those now infamous private dinners in the wine cellar at Picholine. The DoJ claims that publishers, panicked over Amazon’s $9.99 Kindle prices, conspired with Apple to devise an alternate e-book market, but the publishers now offer a competing narrative—no conspiracy, and Amazon is the monopolist.
In fact, prior to Apple’s entry in to the e-book market, Amazon’s overall share of e-book sales was 80% to 90%, the Penguin brief states, and rather than “intense price competition” driving e-book prices to $9.99, it was Amazon’s “predatory, below-cost pricing” that had created a barrier to entry for would-be competitors, and served to “lock consumers into [Amazon’s] proprietary Kindle platform.”
After the 2010 switch to agency pricing and the launch of Apple’s iBookstore, price competition did not cease, Penguin argues, it simply moved from the retailer to the publisher level. The switch to agency was in reality an expressly pro-competitive move—publishers were knowingly taking less money per unit on agency sales because the agency model promised to open the market to new players, and publishers would then benefit from increased sales volume.
“Price and non-price competition among e-book retailers has increased exponentially since the switch to the agency model,” Penguin’s brief states, adding that every e-book retailer except one—Amazon—readily agreed to move to agency pricing. With its suit, however, the DoJ is now proposing to “restore Amazon’s monopoly power in e-book retailing,” Penguin argues, “weakening and eliminating other e-book retailers.”
Penguin also takes issue with the DoJ’s rudimentary characterization of the publishing and e-book markets. For example, while the DoJ states that e-books lower publishing overhead “considerably,” Penguin counters that the savings are modest. The DoJ characterizes Amazon’s Kindle business as successful and profitable, but as “a product market,” not counting device sales, Penguin denies that Amazon’s $9.99 prices, when they occurred, “involved anything other than a loss.” And Penguin denies that e-books are analogous to print books. There is no “longstanding” wholesale model for e-books, Penguin states—indeed the e-book market is in its “infancy--and there is no reason to expect that digial market practices should follow print practices.
Penguin admitted, however, that it was concerned that Amazon’s “below-cost” pricing strategy would be “detrimental to the long-term health of the book industry,” including “devaluing books,” raising barriers to entry for would-be competitors, and “destroying the value chain that supports authors, agents, booksellers, and publishers.” And, it conceded, based on Amazon's brief removal of Macmillan's "buy buttons" after its agency switch, that any publisher that sought to work with an Amazon competitor likely faced retribution from the e-tailer.
But did publishers’ fear of Amazon drive top executives to conspiracy? And what about those e-mails, calls, and private dinners? In its suit, the DoJ claims publishers “regularly communicated” to advance the conspiracy, “directly discussed...collective action,” against Amazon, and took steps to “conceal their communication.” The publishers and Apple deny those charges in the filings, although Penguin admits it was interested in having other publishers participate in an Apple e-bookstore. But, the brief states, that desire was also pro-competitive—because without broad participation, the “iBookstore would almost certainly fail,” and Penguin “did not want to sell its e-books in a bookstore that would fail.”
Things get especially interesting when it comes to the communications cited as evidence by the DoJ. Specifically, Penguin claims that an e-mail from Penguin chairman John Makinson, in which he talks about being “on a collision course with Amazon,” is taken selectively out of context. In fact, the August 2009 e-mail, sent long before “anyone outside of Apple ever heard of the iPad or the iBookstore,” is actually about Penguin’s participation in Bookish and aNobii—“joint ventures that were, and are legitimate collaborations among Penguin and other publishers.” The filing even shows specific sentences selectively omitted from e-mails that say as much. Indeed, Bookish is such a prominent subject in the Penguin filing, the joint venture appears to be either a remarkably ingenious front, or the government appears to be grasping at straws.
And those private dinners among CEOs? The brief repeatedly characterizes them as “purely social matters,” where “issues and trends were discussed only at a high level of generality.” One of the dinners was to welcome new Random House CEO Markus Dohle to the community. Macmillian’s brief notes that its CEO, John Sargent, did not even attend a number of these meetings, and Macmillan declined to participate in Bookish, making its alleged role in the alleged conspiracy even murkier.
Did the publishing executives collude, however, through Apple, as terms were being discussed for the iBookstore? No, the publishers say—in fact, communication held as evidence of conspiracy by the DoJ, shows the opposite, Penguin argues. In an exchange between Penguin and Apple, Makinson suggests that Penguin would not announce its participation in the iBookstore until a fourth publisher is signed on. If the publishers were colluding, the Penguin brief argues, this would not be a question. As to phone calls between CEOs just prior to the iBookstore announcement, Penguin denied that any of those brief calls sought “common assurances of strategy.”
As for the “most favored nation” clauses in Apple’s contract, Penguin concedes only that the clause might be “characterized” as such—in practice, “the provision did not diminish Apple’s incentive to compete; to the contrary, it allowed Apple to match the lowest e-book prices.” Penguin also noted that its agency contract with Amazon also contains such clauses.
The filings now set up quite a scenario. Certainly, Macmillan, Penguin, and Apple have struck back at the government’s case. How will the government respond? Will it seek to depose executives or other employees at the settling publishers to contradict Penguin and Macmillan? And what of Random House, which is not involved? In one of the more eye-opening parts of the DoJ case, Penguin CEO David Shanks is revealed to have lobbied Barnes & Noble to punish Random House for not joining the agency switch. It’s not evidence of collusion, but it’s not exactly collegial.
Certainly, litigation is always a dicey, complex proposition and having three publishers settling and two fighting represents a particular challenge. In addition to the DoJ case, the state and the consumer class actions all stand to reveal quite a bit about publisher practices, and the economics of digital publishing. Even if the government fails to prove a consipracy, a trial will likely shed light on industry practices that could fuel other disputes, for example, digital royalty rates. As if the digital transition hasn't been complicated enough as it stands, defending one's business practices in court will surely add another level a complexity. But, as the publisher's filings show, that light is also going to shine on Amazon.