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Book lovers should side with Amazon over publishers

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Amazon founder Jeff Bezos introduces the new Amazon tablet called the Kindle Fire on September 28, 2011 in New York City. (Photo by Spencer Platt/Getty Images)

A long weekend hasn’t helped bring much clarity to the battle raging between Amazon (AMZN) and Hachette, one of the top book publishers.

The two companies are negotiating the first big contract for future book sales since publishers were caught colluding to raise ebook prices and subsequently forced to sell under court-approved terms for a few years.

As negotiations have dragged on, Amazon has reduced discounts, labeled some Hachette books as out of stock, and stopped taking pre-orders for upcoming titles including J.K. Rowling's "The Silkworm." This is likely an effort to demonstrate Amazon’s value as a seller, though the company isn’t talking. Publishers are, however, and they, along with some authors and too many reporters, are up in arms over the tactics, which they’ve dubbed evil, anti-consumer and monopolist.

[See related: Amazon takes on publishers...again, Pfizer pulls AstraZeneca bid and Pilgrim's wants Hillshire]

Amazon shares, which had already slipped more than 20% this year amid sluggish overall growth, are dragging again in early Tuesday trade, down around 1% to $308.80 amid a moderate rally in the broader market.

One of the major obstacles to strong coverage on this matter is that we still have no idea what terms Amazon is seeking, or what Hachette is offering. Even under the imposed government terms, ebook prices for most best sellers are higher than they were before the price fixing, and sales growth has slowed. Perhaps Hachette wants to return to so-called agency pricing, with higher ebook prices and a ban on discounting.

The New York Times and other outlets have repeatedly said Amazon is seeking better terms from Hachette. Fortune on Sunday said Amazon was looking for “extra concessions.” But it’s the worst kind of spin. Better than what, exactly? There’s been no reporting of what’s actually at issue.

Still no monopoly

As noted last week, Amazon does not have monopoly power, despite the fact that it sells a lot of books. Authors and publishers, granted lengthy copyright terms, actually have the government-sanctioned, monopoly power.

The vast majority of book sales every year are composed of a relatively small portion of best sellers published by Hachette and the other four major publishing houses. No one can sell their books without their permission, and there is simply no substitute for J.K. Rowling to a J.K. Rowling fan (or Stephen King, James Patterson and the like). There are huge barriers to entry to cracking the best seller business, as the major publishers have locked up the top authors with expensive, long-term contracts, and have distribution relationships with major book sellers across the globe.

Amazon, by contrast, competes in an open-ended, free-for-all world of e-commerce. Customers can and do comparison shop with ease. Consumers may have been inconvenienced, but absolutely no one has been prevented from buying anything by Amazon’s tactics. In one click, for example, they can pre-order J.K. Rowling’s upcoming book from Barnes & Noble (BKS), Target (TGT), eBay (EBAY), Booksamillion or many others. A recent study analyzing hundreds of thousands of actual online purchases found that, in states where Amazon had to start charging a small sales tax, customers shifted their shopping away from Amazon within days to avoid it.

Still, as previously noted, Amazon sells a lot of books, so some people have started throwing around the term “monopsony” instead of “monopoly.” Monopsony is sort of the opposite of monopoly — a situation where the buyer of goods has so much control over suppliers that it can drive away competition.

A classic example case that went to the Supreme Court covered Weyerhaeuser’s (WY) efforts to bid so much for logs for its sawmills that other sawmills couldn’t compete. It used its dominant buying power, not selling power, to thwart competition. But raw lumber is a physical commodity, and suppliers had no power to resist the dominant buyer or sufficient other outlets to reach the ultimate consumer. Book publishers, as noted, have both the power to resist and the ability to easily reach consumers via online alternatives.

Even in ebooks

The ebook market is a little bit different, because Amazon controls a proprietary technology standard  a digital-rights management format  encasing every ebook it sells. That is why people who buy Kindle ebooks can’t read them on competing apps.

But this advantage is also subject to several critical limitations. First, at any time, publishers could order Amazon to remove DRM from all ebooks, or could start selling ebooks on other platforms without DRM that could be read on Amazon’s software. That’s exactly what the music industry did to Apple (AAPL) when they felt the company had gained too much power over their business.

Second, consumers can easily accommodate owning ebooks on different platforms, just as movie lovers switch among apps from Netflix (NFLX), HBO and Amazon to watch their favorites. An iPad owner can shift from reading a Kindle-formatted ebook on the Kindle app to reading Nook-formatted ebooks on the Nook app without losing access to any ebooks previously purchased. And third, since print books remain the much larger part of the book market, publishers’ ability to tie ebook deals to print lets them leverage their overall position to check any power Amazon has over ebooks. 

If there was any question about where the power lies, just consider recent history. Amazon has made zero headway as a traditional book publisher, despite repeated efforts (B&N, too). And five of the biggest publishers got together and forced Amazon almost overnight to forfeit its ability to price and discount ebooks at all.  

The future of books is not likely well-served by caving in to what publishers want. The copyright- protected media industries have a long history of opposing change and new technologies, despite the fact that the changes ultimately expanded their markets and increased sales. The whole history of the ebook market before 2010 is yet one more example. Sony came first in 2006 but went along with publishers’ desires and priced ebooks at above hardcover levels. Fail.

Amazon disrupted the market starting in 2007 with $9.99 best sellers, and created and tapped a huge vein of new sales. Importantly, while Amazon used a classic loss-leader strategy, it was not losing money overall on ebooks, and total book sales (print + ebook) grew. Meanwhile, the head of MacMillan, John Sargent Jr., was telling an industry conference in 2009 that there was no hope for growth in the book market, so higher prices were the only answer.

That was the wrong answer back then and it remains the wrong answer today.

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