To Trust or To Anti-Trust?

Good Witch of the North

Good Witch of the North

“Are you a good witch or a bad witch?” asked Dorothy of the Good Witch of the North when she arrived. You see, there are two kinds and you can’t always tell. When the Sherman Anti-trust Act of 1894 was written, it was under the assumption that all monopolies are evil and therefore act in ways that always hurt consumers. They failed to consider the possibility that a company could be a good monopolist or a bad monopolist. We now have our answer.

After crushing traditional booksellers and establishing a dominant position in the market for books, Amazon.com released the Kindle e-reader, which has helped them to grab about 90% of the market for e-books. This is about as close to a monopoly as one can get. Only instead of taking advantage of this position to raise prices, they have actually lowered the cost of books for consumers to about $9.99 each.

Who doesn’t like lower prices? Book publishers, of course. They have been unhappy about Amazon’s use of a wholesale e-book pricing model, which has given Amazon the power to set its own prices, even if they are at or below cost. While the publishers still get a royalty for each sale, this practice has encouraged consumers to buy e-books instead of higher-priced physical books, which has lowered publisher profits. This was intentional on the part of Amazon, which has been willing to lose money to gain control of the e-book market. So, five of the largest book publishers allegedly tried to collude with Apple to switch to an “agency” model whereby publishers would have been able to set their own, presumably higher, prices. The US Federal Trade Commission brought an anti-trust suit against Apple and the book publishers, but ironically, the decision favored Amazon.com, the reigning monopolist.

Apple Monopoly?

Apple Monopoly?

Apple contends that they did not care what prices the publishers set for content and just wanted to make sure no other retailer, such as Amazon.com, received a better wholesale price. It doesn’t even make sense that Apple would have tried to gain market share by raising prices. How do you encourage consumers to switch to e-books and gain market share over a competitor by selling the same product at the same or an even higher price? Apple apparently just wanted to make sure that no other retailer could get a better wholesale price.

The publishers may have wanted their e-books sold at higher retail prices, but there was no way to guarantee that this would happen. One publisher even admitted that they were afraid Apple would just match Amazon’s low prices, leaving them no better off. Nevertheless, the FTC decided that the negotiations constituted collusion that was not in the best interests of consumers. In other words, monopolist Amazon.com was declared to be a good witch, but does that necessarily make Apple a bad witch? The real effect of this case may be to hurt competition, which will ultimately hurt consumers.

Ironically, Apple did the same thing for downloadable music that Amazon.com did for e-books, which was to lower prices for consumers. Steve Jobs fought hard to change the business model that the music labels had held onto for so long in order to create the iTunes store where people could buy music for only $0.99 per song. He did so over the objections of music labels that wanted to keep the prices for albums high or set different prices for more popular songs. The lower prices on iTunes finally got many consumers to switch to digital music and to slow the trend to illegally share music online. But the music labels have been trying to break Apple’s near monopoly on digital music sales so that they could negotiate better deals with retailers. They turned to Amazon.com to try and break Apple’s monopoly, but instead of raising prices, Amazon has been allowed to lower them even further. I guess that makes both Apple and Amazon.com good witches.

Google: Don't Be Evil

Google: Don’t Be Evil

What about Google? One of their most famous company values is “Don’t be evil.” Google’s Android phone operating system is the only real competitor to Apple’s IOS, but they give it away for free, along with tons of other web-based services, which are mostly funded by advertising. Google has stimulated competition in most of the markets it entered and has benefitted consumers greatly. People use their services because they are damn good! Google even refused to bow to Chinese pressure to censor web searches at great cost to their market share in China. Google must be a good witch too.

Google Anti-Competition Case

Google Anti-Competition Case

But that hasn’t stopped the FTC or the European Union Competition Commission from investigating Google for allegedly abusing its 90 percent share of the online Internet search and advertising market. The FTC already settled its case, with little to show for it. The EU still isn’t happy and wants Google to suggest ways to overcome their concerns.

 

Inspector Clouseau

Inspector Clouseau

Perhaps Google should just offer to create something called Google Light, a dumbed down search feature just for Europe. For instance, every once in a while, it would answer a French query with “Pardon me, but I can’t understand your ridiculous French accent! Please visit our unrestricted American site for better search results.”

What is going on in the American technology industry? Aren’t there any bad witches anymore? I guess Microsoft was the last one, at least according to the FTC. Remember the long, drawn out anti-trust suit brought against them for bundling and giving away the Internet Explorer browser for free, which helped to destroy Netscape’s business? In retrospect, it doesn’t sound so evil. Maybe Microsoft was also a good witch after all.

Sure, the millions spent on attorneys and time spent in court fighting the anti-trust case was probably a major hassle for monopolist Microsoft. But the case was more like an annoying insect that would not leave them alone than a major threat to their business. What has really hurt Microsoft has been the pressure put on them by the three new good witches. Sales of the Windows operating system are being crushed under the weight of IOS, Android, and the Kindle.

Antitrust laws exist for the benefit of consumers, not as a tool to try and bring down market leaders or competitors. The following quote from the Supreme Court decision in the case Spectrum Sports, Inc. v. McQuillan states this clearly.

“The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”

FTC's Weapon

FTC’s Weapon

Maybe it is time for the Federal Trade Commission, the Attorney General, and European Commission to step out of the way and let the good witches battle it out by themselves. No matter which giant monopoly wins or loses, consumers still seem to win. Government action seems to be more anti-consumer and an irrelevant, expensive, and distracting annoyance than anything else.

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