How book publishers can beat Amazon



Amazon has caused no small controversy of late by refusing to accept presale orders on books to be released by the publisher Hachette and by understocking Hachette’s titles. These punitive maneuvers, which follow a dispute between Amazon and Hachette about e-book contracts, have led to significant delays in shipments of Hachette’s books to Amazon’s customers.

If you are wondering why Amazon would subject its customers to this inconvenience and wish to understand what’s really happening between Amazon and Hachette — and, indeed, all the major book publishers — you need to know the meaning of the word monopsony.

The Supreme Court justice Sonia Sotomayor, when sitting on a lower court, once described monopsony as the “mirror image” of monopoly. Unlike a monopoly, which occurs when a seller of goods has the power to unlawfully raise prices of what it sells, a monopsony occurs when a buyer of goods has the power to unlawfully lower the prices of what it buys. Each violates antitrust laws: As the Supreme Court has long recognized, they both result in a misallocation of resources that harms consumers and distorts markets.

Take the e-book market, dominated by Amazon, which buys what a federal court once found to be 90% of all e-books sold in the United States. The monopsony power of Amazon, which has a current market share of 65% of all online book units, digital and print, is not just theoretical; it’s real and formidable. When Macmillan, the fifth largest book publisher, displeased Amazon in 2010 by proposing certain changes in business terms, Amazon exercised what has been described as its “nuclear option”: It promptly deleted the “buy” buttons in the Amazon online store for all of Macmillan’s books. In an instant, Macmillan’s entire business was in jeopardy.

The nuclear option was exercised for only a few days, a mere flexing of Amazon’s muscles. But imagine what would have happened if it had continued. With a major publisher out of the market for new manuscripts, authors would receive less money. And less money would mean fewer authors, and fewer books. (Nor are self-published authors safe from the power of a monopsony: While a traditional publisher like Macmillan needs an author’s consent to change the terms of his or her publishing agreement, Amazon reserves the right to change any provision of its agreement with any author at any time for any reason.)

How did Amazon attain such monopsony power? By providing valuable services? Perhaps, to some extent. But consider that from the moment it introduced its Kindle product, Amazon sold e-books at prices far below what it was buying them for. If Amazon bought an e-book from Hachette for $13, it resold it to a consumer for $9.99, losing $3.01 per e-book. It should come as no surprise that under these circumstances, e-book buyers flocked to Amazon.

But there was a problem. When a company has dominant market power and sells goods for below marginal cost, it is engaging in predatory pricing, a violation of federal antitrust laws.

What was to be done? Fortunately, in early 2010, a natural market solution presented itself: The introduction of the iPad and Apple’s entry into the e-book market. At Apple’s suggestion, the major book publishers were persuaded to change their e-book business model to reflect how Apple had been selling its popular apps for the iPhone. Under the app model, the publisher sets the price, not Apple or Amazon — with the e-retailer keeping a 30% commission. Here, price competition does not go away; it just moves from the e-retailer to the app developers, book publishers and authors.

As a result, Amazon found itself no longer selling e-books at below cost, and its rivals began competing on service, spurring new entrants to the market and the release of innovative e-book devices.

All was well until the Justice Department, supported by a white paper supplied to it by Amazon, filed an ill-advised lawsuit against Apple and five of the major book publishers for antitrust violations. The publishers were charged with “price fixing” — but not for fixing prices: Not a single e-book price was fixed by the conspiracy contrived by the government. All the publishers did, as I argued in a friend-of-the-court brief at the time, was to move to the lawful app store model, which eliminated Amazon’s self-serving distortion of the e-book market.

Unfortunately, the publishers never had their day in court. Buckling under the expense and risk of antitrust litigation, they settled and agreed to restrictions enabling Amazon to resume many of its practices. With these restrictions set to expire, a new round of negotiations between Amazon and the publishers have ensued. Amazon is now wielding its monopsony power, beginning with Hachette, to drastically lower what it pays for e-books. A 30% take off the top, it seems, is not high enough.

So far, Hachette, to its credit, has been unbending. But Amazon still has its nuclear option. It would appear that unless Amazon backs down — through public pressure or government intervention — publishers will have no choice but to employ their own nuclear option: Pull all their books from Amazon and throw their weight behind a law-abiding alternative. Perhaps the best solution would be an online marketplace controlled by the publishers — with the 30% commission being split 50-50 with the authors in addition to the author’s royalty.

If consumers are inconvenienced by the switch, once again they will have only Amazon to blame.

(Bob Kohn, a lawyer, is writing a book about artificial intelligence and the law.)

Filed in: News, Technology News

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