Amazon.com (AMZN) is a monopolist bully, or so goes a spate of recent criticism against the ecommerce giant.
The company is getting pummeled with bad press lately accusing it of engaging in “brutal,” “evil” tactics, comparable to Vladimir Putin’s moves on Ukraine or — even worse — a monopolist violating antitrust laws.
The criticism comes as Amazon is battling with Hachette, the 5th-biggest U.S. book publisher, over terms of future sales. While negotiations drag on, Amazon isn’t offering its typical discounts on Hachette books and is telling customers shipping will be delayed. Starting on May 22, Amazon stopped taking pre-orders for upcoming Hachette titles..
Hardball tactics aren’t unusual in the world of retailing, but the Hachette negotiations with Amazon have taken on outsized importance in the world of publishing. And if you love reading and care about the future of books, you should be rooting for Amazon to come out on top. Why?
After the big publishers got caught colluding to force up ebook prices, they agreed to allow lower pricing and discounting to resume for a few years. That few years is coming to an end later this year, and Hachette is one of the first (and the smallest) of the big publishers to face new negotiations with Amazon under fewer court-imposed strictures. The outcome could determine whether the book industry grows and remains vibrant or fades into irrelevance as consumers turn their attention elsewhere.
The discount ban
Amazon has consistently been a leader in reducing prices for consumers (and thereby helped publishers sell more books). Amazon continued the practice when it cracked open the long-dormant market for electronic books starting in 2007. But it lost that ability in 2010 when publishers decided to take control of pricing to consumers, and banned discounting.
On the other side, book publishers, like movie producers and music labels before them, have resorted to all manner of techniques, including illegal price fixing, to raise prices. And the effect of these foolish price increases has often been lower sales.
Record labels illegally forced compact disk prices higher in the late 1990s, just as digital song trading arrived to crush them. Then they pushed through a huge digital price increase in 2009, despite resistance from Apple (AAPL), the supposedly dominant retailer.
In books, the big publishers most recently illegally colluded with Apple and forced Amazon and all other booksellers to raise ebook prices. Since Random House, the last publishing hold out, joined in, the effect has been a massive slowdown in the growth of ebook sales. Even after settling with government regulators, publishers have kept prices higher than they were before the collusion, and ebook sales growth has continued to slide.
Amazon’s share price has suffered this year amid slowing overall growth at the retailer. After climbing from $50 to $400 in three years, the stock has slid 24% to under $305 so far in 2014. That may be giving extra impetus to Jeff Bezos & Co. to regain some pricing power over ebooks. But the timing of the current flap has more to do with the court-mandated schedule for negotiations in the wake of the price fixing case.
The publisher’s past collusion also demonstrates just where the real monopoly power lies in the book industry – and it’s not in Seattle. That’s not to say Amazon’s tough tactics won’t cause some lost sales – but to suggest Amazon has some sort of durable monopoly power, the kind antitrust laws were designed to curb, simply runs counter to the facts.
Consider some of the nonsense that’s been spouted by authors and publishers (and even some of the reporters who cover the industry).
1. Amazon’s tactics are unfair, extortion-like, brutal, evil yadda yadda.
In fact, anyone who wants to buy a Hachette book online can do so with ease. For example, If someone searches for T.D. Jakes’ latest book, "Instinct", on Amazon and finds it’s out of stock, their obvious next move is to search for it somewhere else. Which is exactly what appears to be happening. Indeed, Jake’s “Instinct” was the best selling book in the advice category in the country last week.
Just how easy is it to shift online sales? A recent study looking at sales taxes found that consumers quickly shifted their buying to other sites as soon as Amazon started charging a few percent more in taxes for their states. The most hilarious aspect of the protesting publishers and authors is the complaint that Amazon isn’t pricing their books with its typical discount. Do they even hear themselves talking?
And the longer the flap goes on, the more likely customers will learn to shop elsewhere. Booksamillion has even run promotions touting its ability to ship Hachette titles immediately. That’s exactly the way free markets are supposed to work, at least in retailing.
2. Amazon’s tactics are bad for consumers.
As noted, consumers who want to buy Hachette books online for immediate delivery can easily do so. And, in the long run, Amazon is fighting for lower prices and a growing book market. It’s much like a health insurer negotiating for lower drug prices. Publishers, like the other major media industries holding monopoly copyright power, have proven time and again that they are not well suited to, or talented at, the consumer pricing game. They should leave it to the experts.
In the very short term, sure, sales of some Hachette books will be lost as Amazon shoppers just looking for something to read buy books from other publishers that are in stock. And that has some of Hachette's authors up in arms. But big publishers rarely have authors' interests at heart. Again, longer term, the best way to boost book sales is to let smart retailers control the consumer pricing strategy.
3. Amazon’s tactics are unique or even unusual.
Truth be told, big retailers have fought with publishers for decades. In the 1990s, it was Barnes & Noble (BKS) applying the pressure. More recently, it was … Barnes & Noble applying the pressure. Last year, the dominant chain cut back on orders from CBS's (CBS) Simon & Schuster unit and stopped promoting the publisher’s books in the high-profile spots in its stores. The pressure from B&N is far more effective that Amazon’s. People buying books in physical stores can’t easily replace B&N – it’s the last big book chain left standing after the demise of Borders, and the only book store around for miles in many communities.
And despite much of the reporting, no one has yet uncovered just what terms Amazon is seeking or Hachette is offering. Maybe Hachette wants to go back to the bad old days of no discounts and higher prices. Maybe not. No one knows.
So ignore the smokescreen and cross your fingers. Maybe consumers will get the win in publishing land after all.