Case Study of Business Negotiations and Deal Making: Giving Voice to Negotiators Away from the Bargaining Table

Behind the table concerns should include the inputs of negotiators outside of the negotiations

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Case Study of Business Negotiations and Deal Making: Giving Voice to Negotiators Away from the Bargaining Table

A deal may seem like a win-win, but to avoid possible ethical and legal repercussions, take time to consider how it will affect outside parties during negotiations.

In negotiations, what might seem like a stellar deal for everyone involved could backfire if you don’t factor in the impact of the agreement on those who aren’t at the table—a lesson that Apple and some of the largest U.S. book publishers are learning the hard way.

Back in 2007, to boost sales of its fledgling Kindle, the first e-book reader on the market, Amazon began selling e-books at the rock-bottom price of $9.99. Five publishers—Simon & Schuster, Hachette Book Group, Penguin Group USA, Macmillan, and HarperCollins—disliked Amazon’s low, flat price, which they felt would undercut the sale of their new-release hardbacks, whose average cover price was $26.


Discover how to boost your power at the bargaining table in this FREE special report, Dealmaking: Secrets of Successful Dealmaking in Business Negotiations,
from Harvard Law School.


Moreover, as e-books caught on, retailers such as Barnes & Noble faced the possibility of being priced out of business by Amazon. But under the publishing industry’s traditional wholesale model, there was little anyone could do about it: publishers sold their books to retailers for about half the cover price, and the retailers were free to set whatever prices they liked.

In January 2010, however, as Apple prepared to launch the iPad, the publishers appeared to catch a break. They negotiated a new business model for e-book pricing with Apple: in exchange for a 30% sales commission, Apple would let the publishers set their own prices for e-books. For the publishers, this so-called agency model—which turned Apple into a sales agent for the publishers—appeared to be a vast improvement on their wholesaling arrangement with Amazon, as we reported in “The E-book Pricing Battle: A Saga Unfolds” in the May 2010 issue of Negotiation. Even better from the publishers’ point of view, they leveraged their deal with Apple into a bargaining chip with Amazon. After at least one of the publishers threatened to delay release of its digital editions, Amazon reluctantly replaced its $9.99 e-book pricing with the agency model, and prices rose industrywide to about $14.99, on average.

Fast-forward two years, and the publishers’ deal with Apple was cast in a new light. On April 12, 2012 the U.S. Department of Justice (DOJ) sued Apple and the publishers for colluding to raise the price of e-books during secretive, anti-competitive negotiations. Three of the publishers settled the suit, agreeing to a deal that is predicted to overturn agency pricing. As of this writing, Apple, Macmillan, and Penguin were unwilling to settle. Amazon was poised to lower e-book prices back down to $9.99.

The publishers’ deal with Apple sounded like a great deal at the time. Moreover, the parties say they undertook it in part to increase, rather than decrease, competition in the e-book market. Yet the negotiators and attorneys involved may have neglected to thoroughly analyze whether their agreement would truly create value for consumers—and thus whether it fell within the parameters of U.S. antitrust law.

In the flush of hammering out a deal that appears to create synergy for everyone involved, negotiators sometimes neglect to consider how their agreement could affect outsiders, an oversight with ethical and legal implications.

When Collaboration Becomes Collusion

How can you ensure that your collaborative efforts don’t turn into collusion?

In his book Dealmaking: The New Strategy of Negotiauctions (Norton, 2011), Harvard Business School and Harvard Law School professor Guhan Subramanian addressed this question, which applies to so-called negotiauctionsnegotiation-auction hybrids in which it’s possible to do business not only across the table but also with your competitors.

According to Section 1 of the Sherman Act, any contract that restrains interstate or international trade or commerce is illegal in the United States. Some businesspeople take this to mean that U.S. antitrust law prohibits any conversation among competitors in an auction, but that’s not the case, writes Subramanian. Bidders are free to negotiate with one another as long as any resulting agreement promotes, rather than inhibits, marketplace competition or efficiency. If an agreement appears to create value not only for the parties at the table but also for the larger economy, then it should fall within the bounds of the law.

Subramanian offers the “clubbing” craze that sprang up in the private-equity market in the mid-2000s as an illustration of the intricacies surrounding collusion and competition. As buyers began teaming up to bid for public companies, the DOJ became concerned about potential anticompetitive effects and launched an inquiry. Private-equity investors argued that clubbing created value—and not just for those at the table—by diversifying risk and increasing buyers’ power relative to sellers.

The DOJ seemed convinced by the argument, but some former shareholders of companies acquired in money-losing club deals were not. Saying they would have gotten better deals if the buyout firms had submitted individual bids, the shareholders sued 11 of the world’s biggest private-equity firms for collaborating to corner the market in 17 acquisitions from 2005 to 2007. In September 2011, a federal judge expanded the scope of the suit, allowing the plaintiffs to seek information about 10 additional high-profile club deals, according to the New York Times.

Returning to our opening story, the DOJ believes it can make a strong case that Apple and the publishers are guilty of collusion and anticompetitive behavior.

All five publishers denied colluding to raise prices and have said the industrywide shift toward agency pricing for e-books has enhanced marketplace competition by giving booksellers such as Barnes & Noble a fighting chance against industry behemoth Amazon.

Related Dealmaking Article: Accounting for Outsiders in Your Negotiation


Discover how to boost your power at the bargaining table in this FREE special report, Dealmaking: Secrets of Successful Dealmaking in Business Negotiations,
from Harvard Law School.


Adapted from “Giving Outsiders a Voice in Your Negotiation,” first published in the June 2012 issue of Negotiation.

Originally published in 2012.

Comments

One Response to “Case Study of Business Negotiations and Deal Making: Giving Voice to Negotiators Away from the Bargaining Table”

  • Mural R.

    With fast changing global, regional and country specific laws and regulations to protect ultimate consumers, it is a good practice for the negotiating parties to agree who all will be affected by the outcome of the settlement prior to the beginning of negotiation.

    Reply

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