History tells us that when incumbent businesses are faced by threats to their business models, they can resort to drastic, potentially illegal responses. In recent times, we are seeing that threat is often Amazon.
The DOJ today filed suit against Apple and leading publishers. According to the allegations, the CEOs of book publishers broke bread, talked, and emailed in figuring out how to deal with Amazon’s heavy discounting of e-books — the “wretched” $9.99 price point. Apple provided a hub to execute the collusive plan — first, through a change in pricing method, moving from wholesaling books to entering into agency relationships with retailers, where the publishers, not the retailers, set the price, and, second, through a MFN clause which provided that books could not be sold at other retailers at prices lower than on Apple.
The complaint is worth a read. If the allegations are true, it’s a pattern that repeats itself when incumbents are faced by a challenge to their business or business model. Twenty years ago, Toys R Us responded to the challenge posted by toy discounting by the warehouse clubs by pressuring their toy suppliers, and, according to the FTC, orchestrating an agreement between the toy suppliers, to restricting the warehouse clubs access to popular toys. Like in the allegations today, nothing particularly wrong with the individual agreements between supplier and retailer, but something legal becomes illegal when the individual agreements govern a conspiracy between the suppliers.
Another place where manufacturers are facing pricing pressure from Amazon are with electronics — TVs, cameras, laptops, phones, etc, where Best Buy and traditional retailers are undercut on price, and have been complaining that customers look at bricks and mortars and go buy online. Given the publishing action, I am surprised that the April 1 introduction of unilateral pricing policies, where retailers cannot discount, by Sony, LG, Panasonic, Samsung, and others has not gotten more attention. I would expect that these will get the same sort of attention received by the publishers to see what conversations and actions and between whom surrounded the simultaneous introduction of these policies.