eBook Prices & Monopoly

The classic construction has it that monopolies enforce higher prices. And in the current suit by the U.S. Department of Justice, accusing book publishers of price collusion on eBooks, the bad guys are the ones raising prices. By that definition, Amazon could not be a monopolist. They want lower prices. Way lower prices.

The reality is a little more complex. But, for the sake of argument, let’s assume that Amazon is not a monopoly. Where does that lead us?

The business literature is filled with examples of how firms use lower prices to gain market share or competitive advantage. In the Amazon case, we have the example of “penetration pricing,” or price discrimination. That’s exactly what they’re doing:

Setting lower, rather than higher prices in order to achieve a large, if not dominant market share.

The question, of course, is whether any of this can lead to an eBook monopoly for Amazon. This much we know:

  • When any firm gains competitive advantage, it can begin to dictate terms to its suppliers. Take Wal-Mart, for example. Or Apple’s iPhone/iPad supply chain.
  • Before Apple and agency pricing, Amazon had 90% market share. They had the eBook market to themselves and were pricing aggressively to gain competitive advantage. The adoption of agency pricing, to my mind, proves they were on their way.
  • With the advent of agency pricing, Amazon’s eBook market share fell to 60%. Barnes & Noble gained 25%, Apple gained 15%.
  • Almost as soon as the U.S. DoJ announced a settlement with three of the six parties on the collusion allegations, Amazon announced it would again lower eBook prices.
  • As it must. Under the settlement, the publishers are required to “to grant retailers – such as Amazon and Barnes & Noble – the freedom to reduce the prices of their ebook titles.”

REPLAY: Amazon gains 90% share of the eBook market?

The sad thing here is how many apologists (sorry, I lack a more elegant term) contend that there is “spin” involved when making the argument that Amazon is lowering prices to gain competitive advantage. In the most egregious example, Peter Scheer makes the specious claim that Amazon cannot be simultaneously selling eBooks AND Kindles at a loss.

Now, both of these statements can’t be true. It’s not possible for Amazon to both (1) sell e-books at a loss in order to reap big profits on Kindle devices, and (2) sell Kindles at a loss to reap big profits on e-books. It may be doing 1 or it may be doing 2, but it can’t be doing both at the same time.

Of course, Peter Scheer is correct. Unfortunately, he’s casting the question in such a way that the only logical answer is the one he wants. Getting to first causes, let’s pose the question differently:

To gain a dominant market share in eBooks, Amazon is willing to sell eBooks AND Kindle Readers at a loss. Because, really, you can’t have one without the other.

Still sound “impossible?”

Again, think Wal-Mart. They sell lots of things, make money on many of them and can afford a few losses elsewhere. Same for Amazon. The idea of using those few losses to gain a dominant position in one corner of a business has to be… Ummm… Appealing. And, up to a certain point, it is perfectly acceptable business behavior. There are other examples… Take Dell. Or Nokia, just for starters.

We grant that this strategy doesn’t always work, or doesn’t work forever. But it’s always nice to have powerful friends helping you out along the way.

Scott Turow on the DOJ

I am not really a fan of Scott Turow’s books. Potboilers, mostly. But hey, I still like crime mysteries, so… There you go. Maybe it’s just a case of professional jealousy…

But count me among those who agree with his stance as Authors Guild President that the DOJ, in its investigation into price collusion between Apple and major publishers, “may be on the verge of killing real competition in order to save the appearance of competition.”

One set of numbers tells the tale:

  • Before Apple entered the eBook market, Amazon accounted for an estimated 90% of eBook sales.
  • After Apple entered the market, that figure dropped to an estimated 60%.

Yeah, I know he’s been criticized… Called a turncoat… It’s the same rhetoric over and over… In the three-legged stool represented by publishers, authors and consumers… The consumer is king. Yeah, we all like cheap. And while we’re at it, let’s kill the goose.

Placing Bets on Disruption: A Losing Game?

In 1998, Microsoft was under investigation by the U.S. Department of Justice for antitrust violations, including charges that it held a monopoly position in computer operating systems and used its market power to reach anticompetitive agreements with its partners.

In his defense, Bill Gates wrote a response piece in the June 13, 1998, edition of the Economist. It’s worth quoting:

The current popularity of Windows does not mean that its market position is unassailable. The potential financial reward for building the “next Windows” is so great that there will never be a shortage of new technologies seeking to challenge it.

In a similar vein, Gates told Forbes author Daniel Gross in 1997:

We’ve done some good work, but all of these products become obsolete so fast… It will be some finite number of years, and I don’t know the number — before our doom comes.

This notion that technological change comes swiftly, is unrelenting and has no sympathy for incumbents is a recurring meme. Certainly no one dared predict that Apple would overtake Microsoft back in 1997. But in the late ’90s, the Justice Department thought it should help shape the future of technology. There’s a cautionary tale here.

Recently, the U.S. Department of Justice has set its sights on Apple and a handful of publishers, whom they are accusing of eBook price collusion. Fair enough. Hell, let the EU jump on, too.

The danger here is that these well-intentioned bureaucrats may create another problem by solving the one allegedly at hand. As the esteemed Frederic Filloux points out in, “Ebooks: Defending the Agency Model,” Amazon’s Kindle format presently accounts for 60% of eBook sales. Sure, that’s not monopoly territory.

Yet.

But a ruling that undermines Amazon’s competitors, while giving it a leg up in the eBook market, may very well take things in that direction.

As Bill Gates pointed out many years ago, bureaucrats often tread on soggy ground when they jump into technology wars, especially those of the disruptive kind. Yes, the current battle is also about prices. And market share. But the underlying causality is something quite different. Oh ye regulators, be careful what you wish for…

The Mess That’s Called eBooks

As we wrote back in November, there’s a battle going on in the world of eBook publishing. The topic then was Amazon using wholesale pricing as a benchmark for author royalties as it promotes its Prime Program (and juices sales of the Kindle Fire). The upshot for content creators: You probably want to review your publisher contract and make sure you are fairly compensated (as a percentage of the retail price, not wholesale).

The battle itself, however, is being fought on multiple fronts. In August 2011, the Hagens Berman firm filed a class-action suit claiming Apple and five top U.S. publishers “illegally fixed prices of electronic books, also known as e-books.” They are demanding a jury trial, always a sign that they want the most generous settlement possible.

The basis of the Hagen Berman complaint is the claim that the five publishing houses “forced Amazon to abandon its discount pricing and adhere to a new agency model, in which publishers set prices. This would prevent retailers such as Amazon from offering lower prices on e-books.”

If Amazon defied the publishers and tried to sell e-books below the publisher-set levels, the publishers would simply deny Amazon access to the title, the complaint details. The defendant publishers control 85 percent of the most popular fiction and non-fiction titles.

The publishers, the complaint goes on, feared Amazon’s pro-consumer pricing, especially as it threatened the established brick-and-mortar model.

Now it appears that the European Union’s antitrust commission wants a piece of the action. The E.U. investigation will look into charges that “international publishers… have, possibly with the help of Apple, engaged in anti-competitive practices affecting the sale of e-books in the European Economic Area (EEA), in breach of EU antitrust rules.”

As Philip Elmer-Dewitt notes in this Fortune piece, the E.U. appears dead serious. “In preparation for the formal proceedings announced Tuesday the commission raided the offices of some or all of the five publishers named in the probe.” [Actually, the E.U. press release calls them “unannounced inspections.” Ah, so diplomatic.]

In case that isn’t interesting enough, back in August 2010, Connecticut Attorney General Richard Blumenthal also investigated potential anti-competitive e-book practices. The A.G.’s complaint?

Attorney General Richard Blumenthal is investigating agreements between the country’s largest e-book publishers and two of the largest sellers — Amazon.com, Inc. and Apple, Inc. — that may block competitors from offering cheaper e-book prices.

WTF? Who’s colluding with whom?

Takeaways
(Hey, I’m no lawyer, but I am an interested party. At least I think I am):

  • If you are a content creator, an Amazon win here means get ready for wholesale to be the new retail.
  • If you are a consumer, an Amazon win means e-books will fly off the shelves at giveaway prices, as Amazon juices its Kindle sales.
  • If you are a publisher, an Amazon win means they are one step closer to moving into the publishing business. As Philip Elmer-Dewitt notes, Amazon is the 500-lbs gorilla in the e-book biz.

And who knows, at the moment, Amazon may need all the help it can get. There’s already speculation that as many as a half-million Kindle Fires will be returned post-holiday (via Philip Elmer-Dewitt). Usability guru Jakob Nielsen, meanwhile, is reporting that “Amazon.com’s new Kindle Fire offers a disappointingly poor user experience.” It gets worse… Over the Black Friday sales season, iPad and iPhone were dominant [Chart of the Day].

Even 500-lbs gorillas deserve some good news now and then…