Most of us got into book publishing because we wanted to make a life immersed in great ideas and great literature and to share those ideas with others. So how come during the last few weeks all we are hearing about are arcane economic theories explaining restraint of trade?
Several weeks ago the Anti-trust Division of the Department of Justice announced that it had been conducting an investigation into whether the 6 largest US book publishers had combined with Apple to fix prices on e-books. Today the DOJ filed a lawsuit against Apple, Macmillan, and Penguin USA alleging that they had made agreements to restrain trade and keep retail prices for e-books higher than they would otherwise be under free competition. At the same time three other major publishers; Simon and Schuster, Hachette Book Group, and HarperCollins; announced that they were settling with the DOJ to avoid this litigation.
The issues aren’t all that complicated. Several years ago the major publishers changed the way they sold books to retailers. Previously they used a “wholesale” model in which the publisher set a low wholesale price in which books were sold to retailers and the retailer could set its own price, usually higher, so that the retailer made money on each sale. Seems reasonable. However Amazon.com started aggressively selling e-books below cost in order to keep other potential competitors from getting into the e-book business. Amazon used a proprietary format for their Kindle Edition e-books that could only be sold through Amazon. Essentially if you wanted to buy e-books to read on your Kindle Reader, there was only one place you could shop.
Back in 2010 about 90% of all e-books were being sold in the Kindle format and only by Amazon. Publishers, authors, and other booksellers were understandably concerned about Amazon’s power in the marketplace and decided to do something about it. The major publishers adopted a new business model where the publisher would set the retail price and give the retailers a 30% commission but only under an agreement where the retailer couldn’t sell at a discounted price.
The DOJ is arguing that this arrangement (called “the agency model”) keeps prices artificially high for consumers, and they are seeking to end it. The 3 publishers who are settling with the DOJ have agreed to allow retailers to discount e-books below the suggested retail price.
This is a victory for Amazon. Now they can return to their practice of heavily discounting e-books and discouraging competition. Amazon can afford to sell books at or below cost. They know that customers coming to the Amazon site for a cheap e-book are likely to pick up some other more profitable products at the same time.
Everyone else in the book business is alarmed and I think consumers should be too. In the short run, there are going to be some good deals for e-books on Amazon. But Amazon’s potential for monopoly power raises some pretty ominous questions. In a word, Amazon has not been shy about removing “buy” buttons from titles by publishers who won’t cave to Amazon’s terms, terms which are becoming increasingly unsustainable to publishers as Amazon consolidates its market power. Several weeks ago Independent Publishers Group announced that it could not agree to Amazon’s new and draconian demands for favorable terms. As a result Amazon refused to sell Kindle editions for 6000 IPG titles. As of now, those books are still not available at the Kindle Store.
A lot of people in our business are throwing around words that are not often used at literary cocktail parties. We say that Amazon.com is gaining monopoly power. A monopoly is a market arrangement where a single company controls all sales and distribution of a particular product. At the moment, Amazon is not a monopoly. It’s market share of e-books is down to about 60%, due to the entry into the market of major players like Apple and Barnes and Noble. To some extent this is a result of the the agency pricing model that the DOJ is seeking to undermine . If Amazon is successful at cutting out the other competitors by aggressive price competition, it will once again have a monopoly on the sale of e-books with the help and support of the Department of Justice. A most ingenious paradox. Your tax dollars at work.
At the moment, we have an oligopolistic structure in the sale of e-books. An oligopoly is characterized by a small number of producers or distributors. Almost all e-books in the US are being sold by Amazon, Apple, Barnes and Noble, Google, and Sony. A lot of industries are oligopolistic. And it doesn’t necessarily pose problems for competition as long as the parties are not acting in concert to control prices or limit supplies.
There is another relevant economic concept: Monopsony. This is distinguished from monopoly because it describes a market with only one buyer that forces sellers to accept lower than socially optimal prices. The decision by the Department of Justice to litigate against Apple and the book publishers will help establish a market for e-books where Amazon will be the only seller of e-books (a monopoly) but also the only buyer of e-books from the publishers ( a monopsony).
This is a truly alarming situation for an industry that can only thrive in a diverse marketplace. We are, after all, in the business of disseminating ideas. And a monopoly of the marketplace of ideas is an enormously troubling development for those of us who see books as something more than just another consumer product.