Our second segment of this three- part series adds some background to the publishing landscape, and through the antitrust saga involving Apple and the largest publishing companies, explores how the evolution of ebooks has impacted not only consumer habits, but the publishing industry as a whole.  Check out Part One of this series here.

The publishing industry has a long, tumultuous history with the antitrust laws.  But with the advent of e-books, the relationship was taken to a whole new level.  Amazon first produced its Kindle platform in 2007, making it the first widely available e-book platform.  The mass availability of the Kindle revolutionized both access to information and the world of publishing.  Because of the low cost of producing and distributing an e-book, many more authors now had the opportunity to publish their books and millions of readers gained cheaper and more convenient access to those publications.

After seeing its Kindle success, Amazon launched its own publishing business in 2009.  Unlike the traditional publishing houses, Amazon does little editing or vetting of the books it publishes for quality and accuracy.  Instead, it uses its publishing arm as a means for authors to “self-publish” and quickly present their material to wide audience.  Amazon contends that this business model allows more authors, and thus more ideas, to reach the broader public at a lower cost.  Indeed, one can imagine that without a mechanism to “self-publish,” many independent authors would be left without a voice.

Because of its success with the Kindle, and given its margin, Amazon began to sell e-books at extremely low prices.  This in turn boosted sales of the Kindle, and hence, Amazon’s profitability (even taking into account the hit it was taking on the sale of the e-books themselves).  Publishers of the e-books were extremely unhappy with Amazon’s low pricing of their books, mainly because it caused the reading public to become accustomed to low prices.  Nevertheless, there was little they could do to stop Amazon.  Complaints to the Department of Justice about Amazon’s alleged predatory pricing—pricing below cost—fell on deaf ears.

At about the same time, Apple wanted to enter the e-book business and did so with its introduction of the iPad in 2010.  At that time, Amazon held a greater than 90% market share of the e-book business.  While the parties disagree as to the motivation, Apple negotiated pricing deals with five of the largest book publishers—Hachette Book Group, Simon & Schuster, HarperCollins, Penguin, and MacMillan—that effectively maintained control of the downstream, retail pricing of the e-books in the publishers’ hands – whereas before control over retail hand been in the hands of the distributor (i.e., Amazon) – and precluded these publishers from allowing Amazon to sell their books below a certain price.  Apple and the publishers claim these deals helped to break Amazon’s stranglehold of the e-book market, while Amazon claimed that Apple and the publishers simply were engaging in an anticompetitive conspiracy aimed to raise consumers’ prices, attempting to gain through illegal means what they could not gain through the normal competitive process.  Accordingly, Amazon urged the Department of Justice to investigate Apple for antitrust violations, which it did, ultimately leading to the DOJ filing suit against Apple and all five publishers.

The publishers all reached settlements with the DOJ and state attorneys general, paying out more than $160 million to the states.  Some of the publishers also stipulated that other book retailers, such as Amazon, could control the price of the settling publishers’ books, so long as the retailers made a profit on the business they did with each publisher.

Apple proceeded to trial alone before Judge Denise Cote in the U.S. District Court for the Southern District of New York.  It lost, with Judge Cote finding that Apple and the major publishers had colluded to impose higher prices in violation of U.S. antitrust laws.  The judge specifically recognized, however, that the lawsuit was not a referendum on Amazon’s behavior but on Apple’s.  Even if Apple’s anticompetitive actions had been motivated by Amazon’s market dominance, it had no right to violate the antitrust laws.:  “This trial has not been the occasion to decide whether Amazon’s choice to sell NYT Bestsellers or other New Releases as loss leaders was an unfair trade practice or in any other way a violation of the law.”  Essentially, the judge was telling Apple that our mothers were correct—two wrongs do not make a right.  The Second Circuit Court of Appeals later affirmed the U.S. District Court’s decision, with Judge Raymond J. Lohier, Jr. similarly noting in his concurring opinion that “more corporate bullying is not an appropriate antidote to corporate bullying.”

Our final installment in this series will discuss the specific claims being hurled at Amazon and ponder their antitrust relevance.  Stay tuned.