Did Steve Jobs Live and Work for You?
ALEXANDER R. COHEN
In his 2005 Stanford commencement speech, Steve Jobs offered a vision of work focused on love and personal satisfaction:
Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle.
This message is one of the most inspiring things about Steve Jobs. It’s a challenge: Pursue your happiness by doing work you love. If you find the right work, you can do great things. But are you entitled to organize your career around the pursuit of your own happiness? The government’s response to one of Steve Jobs’s last triumphs suggests it doesn’t think so.
In July 2013, Denise Cote published an exciting tale of business adventure. It was the story of how Steve Jobs was able to stand up at the iPad launch and challenge Amazon’s control of the ebook market. And it was the story of Apple executive Eddy Cue’s three-month campaign to rescue the publishing industry and give his “seriously ill” boss one of his last successes (p. 30). But Denise Cote is not a journalist or a historian. She’s a federal judge, and her purpose was to show that Jobs, Cue, and Apple had violated antitrust law (United States v Apple Inc. et al.).
Apple’s still fighting, and Judge Cote’s ruling may eventually be overturned. But Cote’s story and her conclusion that what Apple did was illegal illustrate the essence of antitrust law: the principle that businessmen are not entitled to dedicate their work to the pursuit of their own happiness—that when their own goals conflict with what would best serve the consumer, they must sacrifice those goals.
$9.99 and Bust
Before Apple entered the ebooks business, the major publishers were scared. Amazon, which had introduced an ebook reader called the Kindle, sold almost ninety percent of all ebooks (p. 14). It sold many of the most popular ones for $9.99—one-third of the hardcover price in some cases. The publishers thought this low price was taking sales away from their hardcover books (which were more profitable), endangering bricks-and-mortar bookstores (which sold many of their physical books), and convincing customers that books simply weren’t worth more (poisoning the market for hardcovers). Worst of all, they feared that if Amazon remained the main place readers went for ebooks, Amazon would start getting ebooks directly from authors—eliminating the role of publishers altogether (p. 16).
Amazon was able to sell the publishers’ ebooks for $9.99 because the publishers were selling the books to Amazon on what’s called a wholesale model. That is, the publishers sold ebooks to retailers for a set price per copy and allowed the retailers to set their own retail price (p. 14). Thus it was the publishers themselves who gave Amazon what it needed to threaten them: without the publishers’ consent, Amazon could neither sell their ebooks nor set the price for them. But there were limits to what the publishers could do about it: each publisher feared retaliation if it stood too strongly against Amazon.
The publishers told Amazon they thought $9.99 was a problem. They even tried raising the wholesale price of some ebooks over $9.99. But Amazon stuck to its $9.99 price, even when that meant taking a loss (p. 17). Several publishers resorted to delaying the release of some ebooks until after the hardcovers had been out for a while, even though this led to piracy and lost sales (p. 25).
iPrice
“In 2009,” Judge Cote wrote, sounding—not for the only time—remarkably like an Apple fan, “Apple was close to unveiling the iPad. With this revolutionary tablet, Apple was able to contemplate the arrival of its first great device for reading e-books” (p. 27). And a “great e-reader” was what Steve Jobs required before he’d take his company into the ebook market. So in November 2009, Jobs authorized Eddy Cue to start work on an iBookstore—and try to have it ready in time for Jobs’s dramatic iPad launch, which had already been set for January 27th 2010 (p. 27). Cue scheduled meetings in New York.
Apple knew the publishers were trying to escape from $9.99, and it knew it needed a large catalog of ebook titles to make the iBookstore a success. So Cue walked into his negotiations with the publishers offering to sell ebooks for as much as $14.99 (pp. 31–32). Apple also said, however, that it “cannot tolerate a market where the product is sold significantly more cheaply elsewhere,” and that unlike Amazon, it wasn’t willing to sell ebooks at a loss (p. 33). Cue and two colleagues met with each publisher separately, but followed a script with each one (p. 33). Some of the publishers, for their part, discussed their negotiations with Apple with one another (p. 36).
After its initial meetings, Cue and his team returned to Cupertino and chewed over the situation. They considered a proposal for wholesale ebook prices based on wholesale physical-book prices (p. 37). But Cue instead chose to take up a proposal from two publishers, Hachette and HarperCollins: Apple would sell its ebooks on the agency model, just as it sold apps. It wouldn’t pay a wholesale price, and it wouldn’t set a retail price. Instead, it would let the publishers set the retail prices, and it would keep 30 percent as a commission. But to avoid being “embarrassed” by “unrealistically high prices,” it would impose price caps (pp. 38–39). Those price caps, minus 30 percent, meant that Apple would pay less per ebook than Amazon was paying.
And one more thing. “Apple, quite simply, did not want to compete with Amazon on price” (p. 50). So Apple demanded a “most favored nation” clause that said it could match any other retailer’s low price for a given ebook, at least if that ebook was a new release (p. 47). That effectively forced the publishers to move the other retailers to agency, since otherwise Amazon could have kept its $9.99 price and Apple could have matched it—and unlike Amazon, which had to pay the wholesale price even for ebooks it sold at a loss, if Apple sold an ebook for $9.99, it would get to keep 30 percent of that and give the publisher only $7 (p. 53).
With sixteen days remaining before the launch, Apple sent around its draft agreement. It told the publishers that it would insist on one set of terms for all publishers, and it confronted the publishers with a difficult choice: accept the lower revenues offered under the Apple agency contract, or turn down the chance “to confront Amazon as one of an organized group of Publishers united in an effort to eradicate the $9.99 price point” (pp. 51–52). As Cue warned Penguin: “There is no one outside of us that can do this for you. If we miss this opportunity, it will likely never come again” (p. 118). The publishers pushed back hard on the amounts of the price caps: they knew they were setting the new prices for ebooks. They pushed back on Apple’s commission, too. But they didn’t much resist the MFN clause, which would make sure they all moved Amazon to agency (pp. 55–65).
Cue went to New York one more time and didn’t return till the day before the launch. As he brought one publisher after another on board, he kept the others apprised of his progress: he knew they needed the strength of numbers. When he found HarperCollins intransigent, he suggested Jobs get in touch with James Murdoch of that publisher’s parent, News Corp.
Jobs did. In an email, he told Murdoch that Apple “doesn’t want to make more than the slim profit margin it makes distributing music, movies, etc.” He said Amazon’s model, in which the distributor took losses, “isn’t sustainable for long.” He said four of six publishers were already with Apple. And he gave this warning: “We will sell more of our new devices than all of the Kindles ever sold during the first few weeks they are on sale. If you stick with just Amazon, B&N, Sony, etc., you will likely be sitting on the sidelines of the mainstream ebook revolution” (pp. 79–80).
On January 27th, when Jobs launched the iPad, the iBookstore was ready to show. In his presentation, Jobs identified the five publishers participating; HarperCollins was among them. And he demonstrated how easy it was for an iPad user to buy a bestseller (p. 85).
But that bestseller’s price caught a reporter’s attention: Why, asked the reporter, would anyone buy an ebook for $14.99 from Apple that Amazon was offering for $9.99? “The price will be the same,” said Jobs.
Macmillan told Amazon that if it didn’t switch to agency, Macmillan new releases wouldn’t be released for the Kindle. Amazon retaliated by taking the buy buttons off Macmillan books, both print and Kindle. But then four other publishers made the same demand, and Amazon capitulated—and wrote to Washington (pp. 87–90).
Once Apple and Amazon were both selling ebooks on the agency model, the five publishers raised the prices of most of their bestselling ebooks to the caps Apple had negotiated—“just,” said Judge Cote, “as Apple expected” (p. 94).
The Law
The federal government sued and won. It’s not clear from Judge Cote’s opinion whether Amazon’s letter, which was sent to the Federal Trade Commission, led to the lawsuit, which was filed by the Department of Justice.
Judge Cote found that Apple had rescued the publishers from the $9.99 price point they feared—and that this was illegal. What made Apple’s actions illegal, Judge Cote found, was that the publishers—who were competitors—worked together to set prices, and that Apple participated in that cooperative action. (The publishers were sued too; they settled.)
“Apple’s participation in the conspiracy proved essential,” said Judge Cote.
It assured each Publisher Defendant that it would only move forward if a critical mass of the major publishing houses agreed to its agency terms. It promised each Publisher Defendant that it was getting identical terms in its Agreement in every material way. It kept each . . . apprised of how many others had agreed to execute Apple’s Agreements. As Cue acknowledged at trial, “I just wanted to assure them that they weren’t going to be alone, so that I would take the fear awa[y] of the Amazon retribution that they were all afraid of.” . . . Working against its own internal deadline, Apple achieved for this industry in a matter of weeks what the Publisher Defendants had been unable to accomplish for months before Apple became their partner. (pp. 117–18)
And what’s wrong with that? “Consumers suffered in a variety of ways from this scheme to eliminate retail price competition and to raise e-book prices,” said Judge Cote. Some consumers paid more to get the ebooks they wanted; others, to save money, missed out on the ebooks they wanted (p. 98).
But notice that consumers—ebook readers like you and me—didn’t lose anything we already had. If you had already bought an ebook at $9.99 and the price went to $12.99, $3 didn’t disappear from your bank account and the book didn’t disappear from your Kindle. All that happened was that the publishers decided they were no longer willing to sell us any more of their products on Amazon’s terms. You and I were perfectly free to decide that we weren’t willing to buy ebooks at the new prices.
Those are the sorts of decisions people make in a free market: as producers they set the prices they’re willing to sell for; as consumers they decide whether to buy things at the offered prices. And normally, that’s perfectly legal. But in this case, by co-operating to raise prices instead of each trying to take the others’ customers by lowering prices, the publishers (with Apple’s help) took away something antitrust law says we should have had: the benefit of competition.
As Apple points out in its appeal, it sounds odd to say that Apple eliminated competition. After all, Amazon dominated the ebook market before Apple entered. As we usually use the word competition, Apple didn’t destroy competition in ebooks—if anything, it introduced it!
But in antitrust law, competition is a technical term. What antitrust lawyers mean by competition is not that every business has competitors. Rather, a classic text defines competition as any situation where a judge can’t make consumers better off by issuing a court order (Robert H. Bork, The Antitrust Paradox, p. 51). Thus “competition” can co-exist with monopoly—as long as the monopoly retains its status by serving its customers well, not by engaging in “anticompetitive behavior” a judge could order it to stop. And thus “competition” can be absent even while customers have a choice among what would normally be called competing businesses—in this case, the publishers—if the businesses engage together in “anticompetitive behavior,” that is, activity that makes customers worse off than they might otherwise be. In this case, the publishers worked together to raise prices, which no one publisher would have been able to do alone.
Technically, Judge Cote classified what the publishers had done as a conspiracy among rival firms to fix prices. Such conspiracies are considered illegal by nature because the courts have held they’re always or almost always bad for consumers. Judge Cote also found that even if what Apple and the publishers did didn’t fall under that legal rule, it was still anticompetitive, because “the Agreements did not promote competition, but destroyed it. The Agreements . . . removed the ability of retailers to set the prices of their e-books and compete with each other on price, relieved Apple of the need to compete on price, and allowed the Publisher Defendants to raise the prices for their e-books” (p. 121).
By striving to force businesses to maximize their benefits to consumers, antitrust law takes a stand on a fundamental question of economic life: whom do businesses exist to serve? Antitrust says: businesses exist to serve the consumer—unless the government says otherwise.1
But when people like Steve Jobs create businesses, is their goal to serve the consumer? In a sense, of course it is: As William R Thomas points out in Chapter 8 of this book, businesses make money by providing customers products and services that enrich their lives. Whatever other goals a businessman has, such as making money or bringing a beautiful new technology into existence, he’s not in business unless providing value to paying customers is central to his plan.
But antitrust demands more than that: after all, if customers hadn’t found value in ebooks worth paying the new prices for, they wouldn’t have paid, and that would have made the publishers lower their prices. Antitrust is designed to make businesses benefit consumers, not just as a means to their other goals, but even when this gets in the way of their other goals. In this case, antitrust demanded that the publishers serve consumers even though that meant not fighting back against what the publishers saw as a serious threat to their business.
And yet, the publishers—I hope—had, like Steve Jobs, chosen the work they loved. The publishing business was where they sought their happiness. Amazon, they thought, threatened that—and antitrust told them they could not join forces to fight back, could not stand as a unified group against the unified threat they faced. Their best shot at productive happiness might be destroyed—as a sacrifice to low prices and to their customers.
Market Values
Many libertarians and conservatives defend a more-or-less unregulated market on the ground that by freely producing and trading, businessmen help others. That fits rather neatly with the ethical ideas of altruism (which holds that we must make the benefit of others the goal of our actions) and utilitarianism (which holds that we should seek to produce benefits without regard to who gets the benefits, ourselves or others). On these views, individuals aren’t entitled to focus on their own happiness simply for their own sakes: if the publishers are allowed to remain in business, or if Steve Jobs is allowed to build his business and make a fortune, it’s because that’s good for others, or for people in general.
On such a view, antitrust makes sense. Yes, it interferes with people’s freedom to run their businesses, but it shapes the market in such a way as to make it do a better job of producing value for customers. Or at least it’s supposed to. So it’s not surprising that some individuals and organizations commonly considered pro-market support antitrust. The classic text whose definition of “competition” I mentioned was written by Robert Bork, who ended his career associated with the American Enterprise Institute, still working on antitrust law.
But there’s another defense of free enterprise. That argument holds “that your life belongs to you, and that the good is to live it” (Ayn Rand, “This Is John Galt Speaking,” p. 120). Because you should live for yourself, it holds, you have the right to pursue your own happiness. You have the rights to liberty and property because you need those rights in order to create what you need in order to live and to be happy. Government must uphold those rights for you and everyone else because each of us needs those rights. And each of us should seek values from others by offering value in exchange and gaining agreement to trade, because when we deal by trade we recognize that each of us is entitled to pursue his own good. This is the view introduced by Rand. Jobs did not embrace Rand’s political views, but if you are inspired by his challenge to find the work you love and achieve great things in it, you should consider what a philosophy that affirms your right to your own life and the value of productive achievement can offer you.
On that view, the antitrust laws are deeply unjust. If people should live for themselves, then regardless of whether raising prices was good for consumers, the publishers were right to try to figure out what was best for them and do it. Steve Jobs and Eddy Cue were right to pursue what they thought was best for Apple. And you have the same right to pursue your own happiness in your own life.2
1 Why the exception? Under the “state action” doctrine, if a state legislature excludes competition, that’s legal, even though ordinarily federal laws like antitrust trump state laws. That shows that the fundamental moral principle of antitrust is that businesses exist to serve whatever goals are chosen by government—and that when no other goal has been chosen, the default goal is improving consumer welfare.
2 This chapter was written as part of the author’s work as managing editor of the Business Rights Center and associate scholar at The Atlas Society.