Holidays

Home may be where they have to take you in, but holidays with family can stretch everyone’s tolerance to the breaking point. Fondly-remembered quirks in July become aggravating, nails-across-chalkboard character faults at the end of December. Fortunately, there’s another twelve months until another enforced captivity with the irrepressible savages we call family.

Merry Christmas. Yes, you, too, you annoying so-and-so.

A Good Week for Apple

Apple found itself in two different courtrooms this week. One had a happy outcome for the company, and the other… well, we’ll have to wait and see, but the signs look good.

The Early 2000s Called...

The first case dated back a full decade, and involved claims that Apple excluded songs not purchased through iTunes from iPods, and prohibited songs purchased through iTunes from non-Apple music players. As John Gruber (no, not that Jon Gruber, the MIT professor of “speak-o” fame and a big believer in the stupidity of the American voter, but the tech writer) noted, the case was absurd on its face:

[The case] had nothing to do with rival stores’ music files, and everything to do with rival music stores’ DRM [digital rights management].

Gruber goes on to note that Apple used DRM at the insistence of music publishers, and that one could always put music without DRM (i.e., unencrypted MP3s) onto iPods. Furthermore, in an amusing twist, the class-action lawsuit had two named plaintiffs. Apple showed that neither plaintiff actually purchased an iPod during the window claimed by the class. Oops. The judge allowed a last-minute substitution to another plaintiff, but it’s a little embarrassing to not vet your named plaintiff properly.

After the trial, the jury deliberated for a mere three hours before finding Apple not guilty.

Antitrust Overreach

On Monday, Apple and the U.S. Department of Justice presented oral arguments before the D.C. Circuit appeals court in the ebook price-fixing case. On Monday morning, George L. Priest, a law professor at Yale Law School and an antitrust expert, wrote an op-ed in the Wall Street Journal explaining why Apple should win its appeal. (The piece is behind the Journal’s paywall, sadly.) Priest wrote, in part:

Yet what Apple had coordinated was hardly a typical price-fixing conspiracy. The publishers had chosen Apple’s terms—including a cap on prices—even though the terms reduced the returns they would receive from e-book sales. The court entirely ignored what really mattered: the platform competition between Amazon and Apple. 

The court sharply restricted from the trial any evidence about Amazon, including its retaliatory practices against publishers who challenged its pricing. In 2010 Amazon deleted the buy option for Macmillan’s e-books and print books. More recently Amazon delayed shipment of Hachette’s books. The court also did not consider the publishers’ desire to increase e-book prices to protect their core print book business. 

In short, the court’s evidentiary rulings concealed the economic motivations driving the industry. All that mattered to Judge Cote was that the publishers’ new agency agreements meant that Amazon had to offer their e-books at non-subsidized, higher prices. 

This is not sensible antitrust policy. Apple attempted to enhance competition, not restrain it—and the court’s decision protects Amazon’s 90% market share in e-book competition.

During oral arguments, two of the three judges appeared sympathetic with Apple’s point of view, one even noting that the trial judge agreed that Apple’s conduct was legal as a general matter, and, therefore, the question of whether the company’s conduct in this instance harmed competition should have been judged under the fairly difficult-to-prove rule-of-reason standard, rather than a more truncated analysis. From a piece in the New Yorker:

On Monday, comments from the appellate judges in New York—especially Judge Dennis Jacobs—suggested that they might be more receptive than Cote to Apple’s line of reasoning. According to Agence France-Presse, Jacobs said, “What we’re talking about is a new entrant who is breaking the hold of a market by a monopolist who is maintaining its hold by what is arguably predatory pricing.”

It remains to be seen whether the reading of the panel’s views is correct, and whether they vacate the decision entirely or remand it back to the district court with instructions to use a different legal standard, but that was a pretty good start for Apple.

(In)civility

People talk about how the anonymity of the Internet permits and possibly encourages some to be uncivil, and that’s true enough. But a related phenomenon is that the Internet encourages social interaction among the like-minded, and the resulting group-think sometimes promotes the kind of discourse that would never happen in a more heterogeneous group.

To wit: author John Scalzi (@scalzi) on Twitter: "As far as I can tell, the Breitbart site is by, and for, people who have drunk lead paint smoothies every single day of their lives."

Now, I don’t read Breitbart religiously, but people do link to it and I’ve seen some good stuff there. Out of curiosity, wondering what might have set off Mr. Scalzi, I looked at the site just now, and here are the top stories:

• “Oprah Defends Sony Exec Over Racist Comments - But Slammed [L.A. Clippers owner] Sterling"
• “Police: 3 Dead, Including Gunman, in Sydney Siege"
• “Aussie Comedian: See? Gun Control Works"
• “Immigration Activists Bash Boehner at L.A. Amnesty Conference"

(I’m not sure if I should have included Greg Outfield’s “Gutcheck: Why Sony Should Scare You,” so let’s make it five pieces.)

I didn’t bother to read any of the stories. The headlines pretty much speak for themselves. Breitbart is a conservative site, so it’s no surprise the pieces have a conservative slant.

By comparison, let’s look at the first four stories at Daily Kos:

• “David Koch: ‘I’m a social liberal’"
• “Lima climate talks: Optimism going in, skepticism coming out"
• “Vivek Murthy confirmed as Surgeon General"
• “Fox & Friends uses Australia hostage-taking to justify American torture program"

Seems like a pretty liberal slant. The piece on Koch, for example, notes that he says he’s conservative on economic matters and a social liberal, whereupon the author editorializes

Before you actually seek to take him up on the "social liberal" part, note that he continued by saying "as long as it doesn't interfere with the machinations of Plutus, god of wealth and king of all domains."

Hmm, I’m pretty sure Koch did not actually say those words in quotation marks.

I’m still not sure what Mr. Scalzi was upset about, but I will bet he wouldn’t make the remark he did on Twitter in a general audience - say, to book buyers in Cleveland. On Twitter, however, he felt that this was a perfectly acceptable remark.

Apple, Ebooks, and Antitrust

Interesting article on the Forbes web site the other day about the impending oral arguments at the Circuit Court, which is hearing Apple’s appeal of its price-fixing conviction.

I’m not involved with the case in any way, but I have personal interest in Apple and ebooks and professional interest in competition policy, so I’ve been following the case with some interest. What I never understood was how a conspiracy by publishers translated into price-fixing by Apple. What’s funny about the Forbes piece is that the article, while correctly saying that Apple probably has an uphill battle at the appeals court, points out via a series of parenthetical comments many of the problems with the case.

Apple was breaking into a market then dominated by Amazon, which had an 80% to 90% market share - monopoly power in almost anyone’s book.

While it’s true that market power isn’t a necessary condition for finding a price-fixing violation, it’s pretty odd to think that the entrant into a market dominated by a firm with substantial market power would be interested in elevating prices. What’s unusual here is that Apple, in trying to create its ebooks business, is a middleman and needs to attract attention from both buyers and sellers of books. Buyers of books want lower prices, all else equal, while sellers prefer higher prices - and Apple’s inducement to the major publishers was that they could better control pricing through Apple’s agency model rather than Amazon’s wholesaler model. But Apple is pretty much indifferent to higher book prices. Yes, Apple takes a 30% cut and therefore benefits from higher prices, but not by much compared with its margins on selling additional hardware.

(Notwithstanding the price rise in key categories of books, prices fell overall, its expert testified.)

Seems like a problem for a price-fixing case generally.

Judge Cote later found that when [Apple’s Eddie] Cue showed up at those first meetings [with the CEO of the major publishers], he immediately plunged his company into a price-fixing cabal. ‘Apple's entry into the conspiracy had to start somewhere,' she wrote, 'and the evidence is that it started at those initial meetings in New York City.'

That sounds good, but then we have:

"To prove collusion, the government showed (above) that the publisher CEOs phoned each other while negotiating their contracts with Apple. It couldnít prove, however, that Apple knew of these calls."

Hmm, that’s a problem.

Regarding the agency model:

(Judge Cote acknowledged that negotiating from a standard contract was ordinarily lawful.)

and

(Cote acknowledged that the agency model was lawful.)

In order to ensure that Apple wouldn’t be at a price disadvantage relative to Amazon,

...Cue decided to propose tiers of price caps, tied to the suggested hardback list prices. (Judge Cote acknowledged that price tiers and caps were lawful.)

Finally, regarding the most-favored nations clause that Apple negotiated,

It gave Apple the right to match the price at which any new-release ebook was being sold by another retailer. (Cote acknowledged that MFNs are ordinarily legal.)

And this is, in antitrust expert Herbert Hovenkamp’s works, “an uphill battle” for Apple? He’s probably right, but this case should never have gone against Apple in the first place.