Column: On newspapers and ebooks, the Justice Department’s antitrust theory is obsolete

Almost every antitrust case turns on the definition of the market at issue, whether by product or geographically: Is a monopoly threatened in the market for all passenger vehicles or only two-seater sports cars? Are we talking about detergent sales nationwide or only in Wyoming?

The Department of Justice's lawsuit that effectively killed a bid by Tribune Publishing Co., owner of The Times, for the Orange County Register involved just such a distinction: The agency's antitrust lawyers said Tribune's takeover of the Register threatened to create a monopoly over English-language print newspapers in Orange County; Tribune's response was that newspapers are no longer a relevant market by themselves, given competition for news consumers from TV, radio and the Internet.

As Gabriel Kahn of USC's Annenberg School for Communication and Journalism told my colleague Andrew Khouri, trying to create a monopoly in print newspapers is "the equivalent of cornering the market in horse-drawn buggies." 

He's got a point. (On Monday, a bankruptcy judge approved the sale of Freedom Communications, the owner of the Register and the Riverside Press-Enterprise, to Digital First Media. That decision came after U.S. District Judge Andre Birotte issued an injunction against Tribune's bid on Friday, effectively killing the bid.)

This isn't the first time the Department of Justice has been accused of misreading the influence of new technologies in publishing. In 2012, the DOJ sued Apple and six book publishers for colluding to fix ebook prices. Many in the publishing industry thought the agency had picked exactly the wrong targets: The publishers had desperately sought a way to break the near monopoly in ebooks held by Amazon, which had attained 90% of the market by systematically selling ebooks below cost — in fact, at least one publisher had pleaded with the DOJ to file suit against Amazon. Apple's offer to let the publishers set their own prices (within limits) on its iBookstore was a lifeline, they argued. They lost.

The danger in these cases is that the DOJ's focus on promoting lower prices for newspaper readers and advertising or for ebooks could undermine the business models of publishers already eroded by technology. That could mean less news and fewer books. As media analyst Ken Doctor put it recently, "newspaper readers are today likely only to see their news coverage further diminished as likely collateral damage of DOJ’s attempt to represent the citizenry."

The DOJ's actions in publishing may reflect the Obama administration's determination to "invigorate" antitrust enforcement. Whether it has lived up to that pledge is the topic of intense debate among antitrust experts. The administration did block a proposed merger between wireless providers T-Mobile and AT&T in 2011 but not a spate of proposed combinations among health insurers, which are expected to go through with some government-ordered modifications. But few industries have sustained such wrenching changes as publishing, where efforts to survive involve arrangements that look like antitrust violations in the old world but may be necessary in the new. Can antitrust enforcement keep up?

Before I go further, a few disclosures. I'm an employee of Tribune Publishing, the defendant in the DOJ's lawsuit and now the losing bidder in the quest for Freedom, but no company official has dictated my approach or conclusions about the case. Tribune Publishing's corporate strategy obviously assumed that the company would be healthier with the acquisition of the Register and the Press-Enterprise than without them, especially since the company already owns the San Diego Union-Tribune and hoped to create a more powerful presence in the overall Southern California news market. But the success of the strategy would depend on execution, and whether it would work in practice is conjectural. The employees of the Register almost certainly have more at stake directly in the outcome of the bidding than I do.

I'm also a published author, with three books on the list of Simon & Schuster and two at HarperCollins, which were both sued by the DOJ in the eBooks case. Both settled out of court.

So let's examine how the government's antitrust lawyers see the publishing landscape.

The DOJ's lawsuit asserted that combining the Times and the Orange County Register would give Tribune Publishing 98% of English-language daily newspaper circulation in Orange County; combining The Times, the San Diego Union-Tribune and the Riverside Press-Enterprise could give the company 81% of circulation in Riverside County. Tribune, it argued, would have a stranglehold over circulation and advertising rates, since readers and advertisers would supposedly have nowhere else to turn. 

Tribune's lawyers say that's where DOJ is wrong. Advertisers and readers already have been abandoning daily newspapers rapidly for other sources of news and advertising, including cable TV and websites; indeed, the strategy of former Freedom owner Aaron Kushner of doubling down on print at the Register at the expense of its digital audience was a factor leading to its bankruptcy filing last November. Newspapers once dominated the news and information smorgasbord of American consumers, but today that picture is "antiquated," Tribune Publishing's lawyers say. Any attempt to raise ad or circulation rates would probably drive readers and advertisers to the proliferating alternatives. 

Newspapers, they argue, need to take drastic steps to insulate themselves from the decline in revenue from their print product as long as online ad sales fail to take up the slack, as is shown in the chart below:

The Justice Department has been slow to acknowledge that. In 2011, Christine Varney of the DOJ's antitrust division told a newspaper industry conference that the agency felt that even though "newspapers have been losing subscription and advertising revenues to other media," that didn't mean that the other media were direct competitors. But she was citing analyses from the 1990s, and the ground had shifted under the DOJ's feet.

It's true, as the Justice Department says, that many of the alternative news sources cited by Tribune Publishing as non-newspaper competition are just republishing material originated by The Times or the Register, but that's a sign of how newspapers have lost control of their revenue streams and underscores their need to develop a stronger business model. Varney acknowledged that "whether ... a relevant market should include sales of advertisements (or content) by both newspapers and other media ... should be analyzed on a case-by-case basis," but the DOJ's lawsuit against Tribune Publishing didn't leave any time to do the analysis.

Similar issues arose in the ebooks case. Amazon's 90% share of the ebook market terrified the publishers, especially since the online merchant showed it wouldn't be shy about pushing book publishers around. In 2010 Amazon removed the "buy" button from the online display of books from Macmillan, which was insisting on controlling the pricing of its ebooks. For months in 2014, a similar dispute provoked Amazon to make it hard for customers to order books from Hachette, the owner of Little, Brown and other imprints. 

Amazon purchased books wholesale from the publishers and set its own retail price, typically a loss-leader $9.99. Publishers felt that price diminished the value of their hardcover sales and preferred to set their own ebook prices. There also were fears in the industry that Amazon's pricing could put booksellers out of business, including even giant Barnes & Noble, which would be even worse for publishers. But individual publishers had almost no leverage with Amazon.

Enter Apple, which wished to create its own online bookstore for iPhone and iPad users. Apple's deal with six major publishers allowed them to set their own ebook prices on the iBookstore, with Apple taking 30% of sales. But Apple didn't want to be undercut by Amazon either, so it insisted on a "most favored nation" deal which allowed it to sell ebooks at the lowest price available from any other merchant online. That gave the publishers an incentive to present a united front to Amazon; most eventually achieved the right to set their own prices.

The publishers saw their effort as a blow against Amazon's predatory pricing; to the Justice Department, resembled price fixing. Noting that the deal had helped cut Amazon's share of the ebooks market to 60% from 90%, U.S. Appeals Judge Dennis Jacobs found that "Apple’s conduct ... was unambiguously and overwhelmingly procompetitive." But his finding was the lone dissent in a 2-1 ruling upholding trial court's verdict in favor of the Justice Dept. Apple's to the Supreme Court was turned down this month. It will have to pay $450 million in credits to customers who bought books on iBookstore at supposedly inflated prices.

Taken together, these cases show how technology is making a hash of markets that were reasonably stable for decades. Defining a market in antitrust cases was not always straightforward. But it can hardly have been as complicated as it is today, when an Orange County "newspaper" can serve readers anywhere in the world and a Google search can bring up local news items from dozens of sources. Lower prices today may look good for the consumer in the short term, but if they're just the precursors of a world with less news or fewer book-buying choices, there's trouble on the horizon.

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

Return to Michael Hiltzik's blog.