Abstract
Relative ease of entry and rapid innovation are core characteristics of competition on the Internet, but, at the same time, a substantial number of successful Internet-based companies maintain very strong positions on their relative markets. A legitimate question, therefore, is to what extent the workings of “competition on the Internet” might differ from the more traditional market characteristics of the brick-and-mortar world, and whether competition policy as applied in this newer context would require taking account of special considerations. An interesting “case study” in this respect is the market for e-books, which lately has been the object of intensive scrutiny by competition authorities on both sides of the Atlantic. The brief discussion of the competition proceedings confirms that policy intervention in digital markets requires extra caution by authorities and courts, especially when there are network effects at work. More generally, casting Internet competition into the broader “vertical restrictions” picture can give rise to partly new insights for competition policy, such as, for instance, that being a “typical” discounter in the digital era does not preclude providing many of the pre-sale services customers value.
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Notes
- 1.
Cf. Lehr, Measuring the Internet: The Data Challenge, OECD Digital Economy Papers, No. 194, OECD Publishing, 2012, at 11.
- 2.
The trade and marketing of goods and services on the Internet via electronic commerce makes up the so-called digital economy; see OECD, The Digital Economy, Report of two Hearings, Competition Committee, 2013, DAF/COMP(2012)22.
- 3.
As noted by the European Commission in its decision approving Microsoft’s acquisition of Skype, “the use of sites such as Facebook, Google+, LinkedIn and Twitter has more than doubled since January 2009”; see Case No. Comp/M.6281-Microsoft/Skype, 7/10/2011.
- 4.
See Haucap/Heimeshoff, Google, Facebook, Amazon, eBay: Is the Internet Driving Competition or Market Monopolization? DICE Discussion Paper, January 2013, at 2.
- 5.
Summary of the 19 October 2011 Hearing, in OECD, The Digital Economy, supra note 2, at 127.
- 6.
Cf. Evans, Attention Rivalry Among Online Platforms, University of Chicago Institute for Law & Economics Olin Research Paper No. 627 (2013), available at: http://ssrn.com/abstract=2195340 (accessed 19 November 2013).
- 7.
It should be remembered in this context that several countries impose higher tax rates on e-books than on paper books. Luxembourg and France recently decided to apply reduced VAT rates on the sale of e-books (3 % and 5.5 %, respectively), followed by the opening of two infringement proceedings under Art. 258 TFEU (Treaty on the Functioning of the European Union). A European compromise might be in sight, foreseeing a single rate for paper and electronic books alike.
- 8.
The first known examples of writing date from the early 3rd millennium BC, and were on clay tablets. The craft of book binding itself possibly originated in India, binding together palm leaves.
- 9.
Tablets are portable devices providing a bundle of services, in particular, Internet browsing, e-mail, access to content, such as music and books, and to other entertainment offers.
- 10.
The first e-reading devices were released in 1998, but the switch to e-books in the general trade markets started only recently, with the launch of the Sony e-reader in 2006 and of the Amazon Kindle e-reader in 2007.
- 11.
For instance, Amazon’s AZW formatted files can be opened and viewed with Amazon’s Kindle e-book reader. Moreover, Kindle reading apps are available for PCs, tablets, and smartphones.
- 12.
Thus, for instance, Apple’s Fairplay DRM is applied to e-books in the EPUB format and read on iOS devices, but publishers can decide to opt out of DRM.
- 13.
In particular, E-ink and E-paper technologies enable a “look and feel” display of texts similar to the physical print on paper.
- 14.
Outside the US, sales of e-books initially remained much lower. For instance, e-books revenues in France in 2008 still represented only 0.1 % of the total €5 billion revenues from book sales; see Autorité de la Concurrence, Avis no 09-A-56 du 18 décembre 2009 relatif à une demande d’avis du ministre de la culture et de la communication portant sur le livre numérique, at 6.
- 15.
In France, the Kobo e-reader launched in partnership with FNAC, for instance.
- 16.
The iPad and other tablets were first released during 2010.
- 17.
OECD, E-books: Developments and Policy Considerations, OECD Digital Economy Papers, No. 208, OECD Publishing, 2012, at 13 ff.
- 18.
In Japan, for instance, mostly owing to the limited offer of titles in digital bookstores, overall e-books adoption rates are the lowest in the developed world. Despite Sony’s introduction of e-reading devices in Japan already in the early 1990s, the market for e-books has not taken up yet, see “Why Japanese readers don’t like e-books”, CNNMoney, 11 February 2013. Apparently, however, the markets for serialized mobile phone novellas and comic books, to be accessed via mobile applications, are booming, see OECD, E-books: Developments and Policy Considerations, supra note 17, at 18.
- 19.
More precisely, publishers usually set a list price, or suggested retail price, and then sold books for a wholesale price which was often a percentage of the list price.
- 20.
The distribution costs associated with the physical books are clearly higher because, for instance, physical books need to be stored in physical places, shipped, and returned books taken care of.
- 21.
See US District Court, Southern District of New York, 12 Civ. 2826 (DLC), Opinion and Order, 7 July 2013, available at http://www.justice.gov/atr/cases/f299200/299275.pdf (accessed 19 November 2013), at 33.
- 22.
United States v. Apple Inc., et al., Civil Action n. 12-cv-2826 (DLC) (SDNY). The DOJ complaint was filed on 11 April 2012 and transferred to the same court already dealing with previously filed class actions. On the same day, the DOJ filed a consent decree indicating its intention to settle the DOJ action. On top of that, there was also State Action on behalf of consumers, eventually settled by the parties. Under the terms of the settlement, publishers must refund consumers who purchased e-books at conspiracy-inflated prices between 1 April 2010 and 23 May 2012, see Roberts, What the ebook settlement means for publishers, Apple and you, available at http://paidcontent.org/2012/08/31/explainer-what-the-ebook-settlement-means-for-publishers-apple-and-you/ (accessed 19 November 2013).
- 23.
Case COMP/C-2/39.847. In close cooperation with the DOJ, the European Commission opened formal proceedings to investigate practices on the e-books market in December 2011, after having carried out unannounced inspections on the premises of companies active in the e-book publishing sector in several member states in March of the same year.
- 24.
The publishing companies involved in this case are Hachette, HarperCollins Publishers, Simon & Schuster, Macmillan, and Penguin Group. Random House was the only one among the major publishers who declined to join the conspiracy.
- 25.
Apparently, the idea to adopt an agency model instead of a wholesale model originally came from Hachette and later HarperCollins, but met Apple’s initial opposition, see US District Court, Southern District of New York, 12 Civ. 2826 (DLC), Opinion and Order, 7 July 2013, available at http://www.justice.gov/atr/cases/f299200/299275.pdf (accessed 19 November 2013), at 34. Eventually, Apple decided to embrace the same model it already was familiar with, being used to sell Apps through the App Store, id., at 38.
- 26.
According to analyst reports discovered by Apple in June 2009, a price of $12.99 for e-books could have been a more profitable price point than Amazon’s $9.99, id. at 28.
- 27.
Apparently, the MFN clause was first suggested by Apple’s in-house counsel, and was previously used in one of Apple’s wholesale music agreements, id. at 47–48.
- 28.
Apple insisted on the price caps “as protection against excessively high prices that could either alienate [its] customers or subject [it] to ridicule”, id. at 65.
- 29.
Id. at 61.
- 30.
Id. at 54.
- 31.
Steve Jobs, Apple’s CEO at that time, told his biographer Walter Isaacson that the publishers “went to Amazon and said, ‘You’re going to sign an agency contract or we’re not going to give you the books’”, id. at 84, note 47 and at 104.
- 32.
As Steve Jobs noted in an e-mail sent to James Murdoch of News Corp, HarperCollins’ parent company, holding back e-books from e-retailers can be seriously counter-productive for the publishers, however: “(W)ithout a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I’ve seen this happen with my own eyes”, id. at 81.
- 33.
Under the Apple Agreement, seven months was the exact period in which new titles were under the obligations of price caps and MFN treatment.
- 34.
See “Amazon Gives In to Macmillan and Apple, and E-Book Prices Will Go Up”, 31 January 2010, http://allthingsd.com/20100131/amazon-gives-in-to-macmillan-and-apple-and-e-book-prices-will-go-up/ (accessed 19 November 2013).
- 35.
Opinion and Order, supra note 25, at 90.
- 36.
As explained in the Order, “the Publisher Defendants did this in order to make up for some of the revenue lost from their sales of New Release e-books”, id. at 96.
- 37.
Id. at 114.
- 38.
Id. at 132.
- 39.
Id. at 133.
- 40.
Case 1:12-cv-02826-DLC, available at http://www.justice.gov/atr/cases/f300500/300510.pdf (accessed 19 November 2013).
- 41.
The commitments offered by Apple and the publishers to the European Commission are also largely similar, see Summary of Commission Decision of 12 December 2012, Case COMP/39.847—E-BOOKS, [2013] OJ C 73/17.
- 42.
Salary and expenses of the external compliance monitor will be paid by Apple. He or she will work in team with the internal antitrust compliance officer, who is responsible for ensuring that Apple’s senior executives across all of the company’s businesses receive antitrust compliance training, and who will report directly to outside directors.
- 43.
See Greenfeld, Retailers Discount Big-Five Best-Sellers, Keeping Prices at All-Time Low, Digital Book World Daily (4 September 2013), available at http://www.digitalbookworld.com/2013/retailers-discount-big-five-best-sellers-keeping-prices-low/ (accessed 19 November 2013).
- 44.
See Rochet/Tirole, Platform Competition in Two-Sided Markets, (2003) 1 Journal of the European Economic Association 990.
- 45.
It is already part of the accepted competition policy wisdom that the analysis of competitive dynamics involving multi-sided firms differs at least to some extent from that of single-sided firms, see Evans/Schmalensee, The Antitrust Analysis of Multi-Sided Platform Businesses, University of Chicago Institute for Law & Economics Olin Research Paper No. 623 (2013), available at: http://ssrn.com/abstract=2185373 (accessed 19 November 2013).
- 46.
Another example of a pure platform is eBay, which does not buy goods from one category of users to sell them to the other category with a profit.
- 47.
See also Manne, Amazon vs. Macmillan: It’s all about Control (“if not enough buyers own Kindles, there is little value (and some cost) to publishers in participating in the e-book market through Amazon”), 7 February 2010, available at http://truthonthemarket.com/2010/02/07/amazon-vs-macmillan-its-all-about-control/ (accessed 19 November 2013).
- 48.
The retail market for backlists is also likely to see the expansion of “new” players, such as Google Play, following the private settlement with the US publishers and other bilateral partnerships mentioned above.
- 49.
Resale price maintenance for print and e-books, however, remains the norm for several European countries.
- 50.
Cf. Picker, Book Prices are Going Up (Down) (or Both), 17 September 2012, http://www.mediainstitute.org/IPI/2012/091712.php (accessed 19 November 2013).
- 51.
Accordingly, Judge Denise Cote, when discussing the content of Apple’s obligations following the finding of a conspiracy, stressed that she wanted the injunction to be tailored so that it would prevent collusion on price in the future and yet encourage innovation in a rapidly changing e-book business, see New York Times (9 August 2013), Judge Considers Limits on Apple’s Future E-Book Deals, available at http://www.nytimes.com/2013/08/10/technology/judge-considers-limits-on-apples-future-e-book-deals.html (accessed 19 November 2013).
- 52.
See the EU Guidelines on Vertical Restraints, [2010] OJ C 130/1, para. 107 (a).
- 53.
Leegin Creative Products, Inc. v. PSKS, Inc. 551 U.S. 877 (2007).
- 54.
Ibid. at 919 (“I can find no change in circumstances in the past several decades that helps the majority’s position”). See also Note: Leegin’s Unexplored “Change in Circumstance”: The Internet and Resale Price Maintenance, (2007–2008) 121 Harv. L. Rev. 1600.
- 55.
Dr. Miles Medical Co. v. John D. Park & Sons Co. 220 U.S. 373 (1911).
- 56.
See Lao, Resale Price Maintenance: The Internet Phenomenon and “Free Rider” Issues, (2010) 55 The Antitrust Bulletin 473, at 473 ff.
- 57.
Cf. Hsiao/Yen/Li, Exploring consumer value of multi - channel shopping: a perspective of means - end theory, (2012) 22 Internet Research 318, at 318 ff; Gundlach/Cannon/Manning, Free riding and resale price maintenance: Insights from marketing research and practice, (2010) 55 The Antitrust Bulletin 381, 393 ff.
- 58.
More generally, the wealth of information like customer reviews and professional product reviews etc. are bound to decrease the importance of the “prestigious” retailer as quality endorser.
- 59.
Contacts with real online people are very restricted, though, mostly limited to when the customer has a very precise and not otherwise covered service issue.
- 60.
Other categories would for instance comprise education, reference, professional, and children’s books.
- 61.
OECD, E-books: Developments and Policy Considerations, supra note 17, at 5.
- 62.
Cf. “The future of shopping – Malleable malls”, The Economist, 16 February 2013.
- 63.
See also OECD, Vertical Restraints for On-line Sales, 2013, DAF/COMP(2013)13, at 5.
- 64.
See, for instance, Office of Fair Trading, OFT welcomes Amazon’s decision to end price parity policy, Press Release, 29 August 2013; Arbeitskreis Kartellrecht – Bundeskartellamt, Vertikale Beschränkungen in der Internetökonomie, Hintergrundpapier, 10 October 2013, at 20 ff.
- 65.
Evans, Economics of Vertical Restraints for Multi-Sided Platforms, University of Chicago Institute for Law & Economics Olin Research Paper No. 626 (2013), available at: http://ssrn.com/abstract=2195778 (accessed 19 November 2013).
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Vezzoso, S. (2015). Internet Competition and E-Books: Challenging the Competition Policy Acquis?. In: Surblytė, G. (eds) Competition on the Internet. MPI Studies on Intellectual Property and Competition Law, vol 23. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-55096-6_3
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