Monopoly, Monopsony, and Oligopoly in Book Publishing

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.

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Battle of the (E-book) Titans

Ask the Agent has been covering the developing story of the changing models for selling e-books and the struggle for market share between  Amazon and Apple.

An article appeared in the New York Times on March 17 that adds a new and troubling wrinkle to the story.

90% of the retail sale of e-books is now done by Amazon. This would be a monopoly by any reasonable definition. Amazon is cementing its dominance in the marketplace by offering  e-book downloads that can only be read by the Kindle, a media device that is manufactured by Amazon and sold exclusively  through Amazon. Thus if you own a Kindle, you can only buy e-books from Amazon. If you buy e-books from Amazon, you must buy a Kindle to read them.

Amazon has come to dominate internet retailing by aggressively discounting products in order to increase market share. They did this to great effect with books from the very beginning. They have been doing the same thing with e-books. Publishers have been selling e-books to Amazon for approximately $12.50. Amazon has been selling below cost at $9.95 for their  e-book  best- sellers.

If you ask the  major publishers how they feel about this, they will tell you privately, as they have told me,  that they are profoundly troubled by the market power of Amazon and are concerned that the deep discounting practiced by Amazon will devalue  what the marketplace thinks is a fair price for books. Last month the sixth largest American publisher, Macmillan, announced that it was changing its retail terms for e-books to the “agency model” which would not permit Amazon to discount titles. Amazon retaliated by pulling  “buy” buttons for all Macmillan books both electronic and physical.   This lasted only a week, but it should be a cautionary tale regarding the dangers of monopoly power in the distribution of ideas in a society or, in the case of Amazon, in the world.

Enter Apple and the iPad. It is difficult to imagine that Steve Jobs can be considered the friend of the little guy and a force against monopoly. Certainly the clout that Apple exercised with  the music industry in forcing them to accept   the iTunes model has done considerable damage to the music companies and artist royalties. But in publishing, as in Mid-East politics, the principle that “the enemy of my enemy is my friend” rules.

Five of the six largest book publishers fell into the arms of Apple and negotiated a new  sales model that allows the publishers to control the retail price sold to consumers of the book. But Steve Jobs is not Mahatma Gandhi and has imposed his own stringent conditions on the publishers. Under the new agreements with Apple, publishers will not be permitted to allow any other retailer to sell books below the price that is sold by Apple.

Amazon has reluctantly gone along with the new model, but is insisting on having a 3 year contract that would lock publishers into the current arrangement and guarantee that no other retailer will get better terms. Publishers are reluctant to agree to such a contract. The whole e-book market is in flux. Nobody knows what the e-book firmament will be like in three years.

But according to the New York Times, it gets a lot worse. Amazon has only agreed to the new “agency model” for the six largest publishers. The other 10,000 smaller publishers have not yet signed on with Apple. Amazon  has been speaking to them and telling them that they prefer to stick with the old model where Amazon can sell books for whatever price it chooses.

 These same publishers have spoken to Apple and have been told that Apple will only work with them if they sell to all other retailers under the same terms as  they are selling toApple. In other words, there is reason to believe that in order to do business with  Amazon, publishers will not be able to do business with Apple –and vice versa. A tough choice for the smaller publishers and a distressing possibility for the consumer.

The message Amazon sent forth during  last month’s negotiation between Macmillan was eloquent and persuasive.  That message was that  a publisher who doesn’t agree to Amazon’s terms risks having their books not be carried by the largest book retailer in the world.

Book publishers, and particularly smaller book publishers, are clearly getting whip-sawed by the two giants. The stakes are high for both Apple and Amazon. But the stakes are even higher for book buyers and the free marketplace of ideas.