10 June 2012

The Hub Spoke

by Matt Rubinstein at 3:06 pm

TuffsApple has released a spirited defence to the Department of Justice’s complaint in the e-books price-fixing case (Fortune’s summary: “bite me”). Its recurring motif echoes that of many commentators: that the Department of Justice has played into Amazon’s hands and perversely chosen to perpetuate a monopoly.

Apple’s entry brought competition where none existed. Amazon still has a dominant share in eBook and physical distribution, with significant power it often leverages over the producers and consumers of books to the detriment of both. But prior to Apple’s entry, Amazon effectively stood alone and unchallenged. No longer. Amazon is now forced to compete with Apple, Barnes & Noble, and others. 

In short:

The Government sides with monopoly, rather than competition, in bringing this case.

As far as I know, everything in the Apple defence is true: Amazon used to be the only significant retailer of e-books; the iPad and the iBookstore have driven tremendous innovation and competition on features; publishers disliked Amazon’s discount model and were happy to switch to Apple’s agency arrangements; conversations reported in Steve Jobs’s biography are hearsay and hardly compelling evidence. Even its whimsical description of aikido seems fair enough, except perhaps for the spelling: 

“Akido” is not a team sport like football with a quarterback directing the plays; it is a defensive martial art practiced one-on-one by individuals, requiring use of little strength or power, based on redirecting an attacker’s own force. 

It’s entertaining reading, but most of it is public relations rather than legal defence. The DoJ is alleging that Apple and the publishers have conspired to fix prices, which is a per se violation of section 1 of the Sherman Antitrust Act (15 USC §1) and isn’t affected by whether the conduct might have had a detrimental or even beneficial effect on competition in any market. Apple’s filing denies that the per se rule applies but doesn’t waste any ink explaining why not—that’s Apple’s right, of course, but the defence does go into quite a bit of detail extolling Apple’s achievements and describing various athletic disciplines and other matters that don’t make any difference if Apple and the publishers have fixed prices in contravention of the per se rule. 

But have they? Since Apple isn’t in competition with the publishers, its involvement in any price-fixing arrangement can only be as the hub in a “hub-and-spoke” conspiracy, also called an “A–B–C” conspiracy, where competitors coordinate their prices by passing information through a common supplier or distributor. It’s a somewhat confused area of antitrust enforcement, falling uneasily between horizontal arrangements among competitors (which are generally per se illegal) and vertical arrangements between suppliers and their customers (which are generally fine unless a substantial anticompetitive effect can be proved). 

If Apple had any involvement in a horizontal rather than vertical arrangement, it must have had something to do with keeping some of the publishers up-to-date about which of the other publishers had agreed to the Apple plan. As the DoJ puts it:

As it negotiated with the Publisher Defendants in December 2009 and January 2010, Apple kept each Publisher Defendant informed of the status of its negotiations with the other Publisher Defendants. Apple also assured the Publisher Defendants that its proposals were the same to each and that no deal Apple agreed to with one publisher would be materially different from any deal it agreed to with another publisher. Apple thus knowingly served as a critical conspiracy participant by allowing the Publisher Defendants to signal to one another both (a) which agency terms would comprise an acceptable means of achieving their ultimate goal of raising and stabilizing retail e-book prices, and (b) that they could lock themselves into this particular means of collectively achieving that goal by all signing their Apple Agency Agreement.

Or as Apple sees it:

Apple admits that on occasion in the weeks prior to the announcement of the iPad it provided individual publishers a general sense of progress toward the conclusion of negotiations with a sufficient number of publishers in total to warrant Apple’s entry, but Apple denies that it provided any one publisher with individual or specific information about any other publisher.

Even this is less than ideal: strictly Apple should have just told each publisher what it proposed for that publisher, and not said anything about what was going on with the others; as soon as you share any information about competitors’ intentions there’s a chance for coordination. If Apple did anything to assure publishers that it was safe to sign up because all the other publishers were doing the same thing, that could be a problem.

But it’s probably not a huge problem. If the DoJ’s other allegations are accurate then the publishers didn’t need Apple to help them share competitive information: they were already sending each other e-mails, meeting in the infamous “private dining rooms of upscale Manhattan restaurants” and so on. If Apple hadn’t kept them informed of their progress towards unanimity, it sounds like they would have managed by themselves. If there’s a conspiracy then Apple’s contribution to it seems like an incidental one, and far from the central and even dominant position that hubs usually occupy in these cases.

But is there even a conspiracy? Penguin and Macmillan have now responded to the filing (the other publishers have settled) so we’ll see what they’ve had to say next time.