The New Monopolists

A week or so ago, a U.S. District Court approved the e-book settlement between Hachette, Simon & Schuster, and HarperCollins and the Department of Justice, a settlement that opens the way for Amazon to sell ebooks from those publishers at any price Amazon chooses.  The Justice Department, of course, hails the settlement as a groundbreaking and anti-monopolistic agreement that will provide cheaper books to consumers. In thinking this all over, I realized that the entire structure and operation of monopoly has changed in the last twenty years, while the definition has not, so much so that the Sherman Anti-Trust Act, designed to prevent the harmful effects of monopoly has, in the case of the publishing settlement, become an instrument to support monopoly – and no one seems to realize this.  How did this happen?

A century ago, the operation of a monopoly was clearly defined.  A company, such as Standard Oil, bought up all the competition, or the majority of it, sometimes used low prices as a temporary measure to bankrupt competitors or drive them out, then took control of the market and raised prices to make a greater profit.  Today, companies like WalMart and Amazon have developed a very different monopolistic approach. They begin with selectively low prices and equally low wages for employees.  The low prices of highly visible selected goods attract more customers, and few people notice that other goods aren’t any cheaper, and in some cases, are even more expensive. WalMart gets around this by allowing customers to show competitors’ prices and then matching those prices… but most customers can’t and won’t do that for the majority of goods.  In the case of Amazon, Jeff Bezos lost money for years building that bookselling customer base.

Then, once the new monopolists have that customer base, they exert pressure on suppliers to provide goods for lower and lower prices.  Both WalMart and Amazon are excellent at this.  Amazon provides its marketplace for online retailers, then scans their sales, discovers what items are selling well and in large quantities, and either pressures the supplier to sell to Amazon directly for less, thus undercutting the Amazon affiliate, or finds another supplier to do so more cheaply. Recently, reports have surfaced that Amazon is using similar tactics with small and independent publishers, who don’t have the clout or the nerve that some of the larger publishers have.  Thus, in the end, the new monopolists aren’t gouging the consumer, but using excessive market power to gouge the suppliers and their own employees.  All the while they can claim that they’re not monopolists because people are getting goods for lower prices.

What the Department of Justice and the legal scholars seem to be overlooking is that such behavior is still restraint of trade – it’s just restraint of trade from the suppliers and through low employee wages rather than price-fixing from the retailer… and it has a definite negative impact on both local economies and the national economy, most obviously in the outcome that lower paid employees can’t live as well, don’t buy as much of other goods, and pay less in taxes.

In fact, Jeff Bezos even declared that his goal was to destroy the traditional paper-based publishing industry and take over the information marketplace. If that isn’t a declared intent to monopolize an industry, I don’t know what is. The new monopoly structure also may well be a far more deadly form of monopoly than the old one because it impacts the entire supply chain and effectively reduces incomes and the standard of living of tens of millions of Americans, both directly and indirectly. As I’ve noted before, already the publishing marketplace has changed, in that there’s less diversity in what’s published by major publishers, and more and more former midlist authors are having trouble getting published… or have already been dropped.

While Borders Books had its management problems, the final straw that pushed the company out of business was likely Amazon’s predatory pricing. In the years before its final collapse, Borders annual sales were around $4 billion, and it operated close to 400 brick and mortar stores with approximately 11,000 employees.  Those sales, and payrolls, not to mention the store rental costs, likely generated a positive economic impact of anywhere from $40 to $70 billion. While some of those sales have gone to Barnes & Noble or Amazon, most have not, and the operating expenses and payrolls paid by Borders are almost entirely an economic loss, since Amazon and Barnes & Noble didn’t add many new employees or, in the case of B&N, open new stores.  Books-A-Million did open some new stores, but only a handful.

Amazon’s policies have also resulted in lost revenue for independent bookstores, as well as closure of a number of stores of smaller regional bookstore chains, just as WalMart’s policies have adversely affected local and regional retailers. Yet the Department of Justice claims a victory in a settlement that reinforces the practices of the new monopolists where, apparently, the only determining factor is how cheaply consumers can obtain a carefully selected range of ebooks.

All hail the monopolists of “cheap” and “cheaper.”


13 thoughts on “The New Monopolists”

  1. I wonder if you have a decimal place slipped somewhere… It doesn’t seem to make sense for the presence of Borders, with sales of $4B, to add between 10 and 20 times that value to the economy.

    A fair chunk of the differences between having Borders and not having Borders would involve fractional changes, wouldn’t they?

    I agree that Borders’ disappearance likely injures authors somewhat by diminishing potential sales, but in that royalties tend to be small fractions of book prices, I don’t imagine that the loss is anywhere near the amount of sales (e.g. – $4B).

    I think I mostly agree about the shape of the changes to the publishing industry that you describe, just not with the numbers.

    1. Nope… no decimal place skipped. Between the impact of the rentals, and the multiplier effect, etc., sales numbers are far lower than the economic impact.

      If each employee makes an average of $20,000, the wages paid are $2.2 billion. The standard multiplier effect is 4-6 times. Just for wages that amounts to an economic impact of $8.8 billion to $11 billion.

      I may have been a bit high, but your assumptions are way too low.

      As for the bookselling industry, I can’t give exact numbers, but for my publisher the impact on sales was anything but fractional.

  2. Alison Hamway says:

    I pay for all the books that I purchase, whether they physical books, used books, or e-books. If I don’t want to pay the price, or if I believe the book is overpriced, I check it out from the library. Although I am sorry for the demise of so many bookstores, I live in a smaller town, and Amazon has been a real asset in increasing the availability of books and the range of available books. I also enjoy reading the on line reviews from other readers. While I do not agree with predatory pricing by low wage paying giant corporations, I also do not think that price controls, or high prices set by publishers, help the book industry either.

    One absolute asset to the e-book readers is the ability to make ANY book a large print book; this has enable my 93 year old mom to keep reading her well loved favorite authors.

  3. Tim says:

    This blog worries me. In the UK there is a view that local bookstores are being driven out by Amazon and other web-based companies. I see this as evolution in the same way that the local store could compete with the supermarkets (malls) and so have generally disappeared.

    That said, Amazon offer an absolutely amazing customer service. When I bought an expensive Italian coffee machine which failed, there were no questions asked and a replacement arrived quickly.

    If I order books (including yours) , music or films, I get emails informing me immediately of my purchase, then more emails about shipping and possible delays.

    As a consumer, this is a first rate experience.

    The disturbing part is that I was not aware of the low-wage policy of Amazon. Similar I suppose to major clothing brands who source from China.

    So are you really asking us to use our consciences and become altruists?

  4. Joe says:

    The same phenomenon is occurring in software with the various App Stores.

    To take but one example, Apple sets expectations by pricing complex software at bargain basement prices. On the Mac they charge $20 for a new operating system, or a word processor or a spreadsheet. It is mandatory for all updates to be free. On the iPhone they charge half that. Low software prices are in Apple’s short term interest: the cheaper the software, the more money people have to spend on Apple hardware.

    The problem is that those prices are unsustainable for smaller software companies. Because the consumer has been educated that software is cheap, one cannot survive charging a fair price. Therefore only those with enough capital can afford to invest into a product betting that they will make a profit selling on volume. Long term this means less consumer choice. (Patent trolls are another countervailing wind).

    Smart independent game developers have realized this and view their games as a marketplace. Instead of selling their games, they make them available for free. They make a profit on in-game merchandise (gems, dragons) that only they can provide. People complain their children constantly want them to buy an upgrade, and they wish they could just buy the game once, yet it is their purchasing behavior that shapes the market. Furthermore, it is hard to see how this kind of sale would translate into other categories of software (10 cents to see a document you stored?).

    Unfortunately, although it will reduce market diversity, I doubt the government will intervene since these stores sell cheaper products to consumers. Indeed, had marketplace diversity mattered to governments, globalisation would have been restrained.

  5. R. Hamilton says:

    The inefficient, such as ma and pa stores, however much we might like their convenience, friendliness, or service, should be outcompeted and crushed.

    As long as the consumer gets more cheap stuff, and people continue to work for Wal-Mart or whoever follows such an efficient strategy, I don’t see the problem.

    In the long run, a narrowing of choices will not serve the consumer – the narrower choice of outlets will sooner or later push back to affect the selection of goods and services. But by then the meddling liberals will have caused the entire world to implode anyway, we’ll all be dead or slaves of the ravenous state, and it won’t matter.

    While not without its points, the argument that loss leaders can be anti-competitive is going to be a very hard sell to most people.

  6. Ryan Jackson says:

    There is still a small market for people who prefer solid service to cheapest goods. The company I work for is such a place. It’s not the market leader in its industry, but it is somewhere between 2nd and 4th depending on how you look at it. We deliberately pay solid wages, we do not outsource any of our call centers. In fact, we make it a strong point to have a center in any country we do business and have that center deal with the customers in its area. (IE as we opened business in China and Mexico we also built centers there and employed people from the area, but they only handle accounts in those areas. All US accounts continue to go to centers employing US citizens within US cities.)

    We offer better customer service, more reliable service, and do a lot more to help our local communities as well as the country and the consumer. And in exchange we cost a bit more than our competition. There’s some complainers, but the ultimate result is that while others in the industry suffered during the last few years, we grew. While others worried about being bought out or having to down size, we aquired new businesses under our umbrella.

    Doing the Right thing can and does work, it just takes better planning and excepting that you won’t always be number one.

  7. Jack says:

    I may be cynical, but I suspect that Mr. Bezos has friends in high places. Not the first time money or favors have influenced decisions by government agencies or even judges. This is part of a broader war by the Amazon machine on Apple’s rise to supremacy in the tech industry.

  8. Jack says:

    I may be getting cynical, Mr. Bezos probably has friends in high places. It wouldn’t be the first time that money or favors changed hand between companies and government agencies. This is just another front in the Amazon machine’s war on Apples rise to supremacy in the Tech world.

  9. Jack says:

    Sorry about that. My first comment didnt show up.

  10. No problem… sometimes that happens… even to me, and it’s my site, but tech glitches don’t play favorites, unlike some businesses and politicians.

  11. Brian says:

    I live in the country at the moment. The closest book store (Coles) is small in size and limits limits selection. It is at least a 30 minute round trip by car. There are two stores in the “Chapters” chain within range (one to the north and the other to the south-east), and they are large in size with lots of selection, but each are about a 90 minute round trip. Add browsing time. Add that the price of fuel here is hovering around $1.30/litre = $4.90/gallon. If the store doesn’t have what I’m looking specifically, I have to order it and will have to return to pick it up. Therefore, buying a book involves a greater expense than the cost of the book itself. Add that inclement weather of a Canadian winter (which residents in the northern and mountain States understand) can derail any shopping trip. I also have a health issue that can at times limit my getting out.

    One could argue that I could include the bookstores in my normal weekly shopping trips and the cost isn’t near as great. All three locations are not on my usual round and therefore are out of the way. The above is also applicable to music and music stores.

    Amazon and its associated vendors allow me to avoid the above. They provide:

    1) the opportunity to cut costs in these difficult economic times;
    2) the convenience of shopping at home (once while a blizzard was raging outside over an entire weekend) at any time day or night;
    3) being able to choose from a selection of associated vendors from across Canada, the USA, and Europe to get what I want to listen to at a price I want to pay (ie. a store’s price to import a particular 2CD was $45 while a vendor in the UK offered it for $23 including shipping);
    4) receiving emails alerting me to what’s new based upon my past buying habits (I delete most but some items I have bought because I could not have found out without searching–especially music and military history); and
    5) delivery to my front door.

    My comments are selfish, I know. I admit this. As a consumer who refuses to steal the intellectual property of authors and musicians through free downloads, what else can I do?

  12. Tim says:

    To Brian. I am with you on this as my earlier posting implied.

    My conscience over supporting an organisation operating a low pay regime does challenge me though.

    I believe the local bookstore has had it’s day, in the same way as the local general store who – let us be honest – offered poor selection and out of date products. In the UK, the village pub has gone the same way as people want more than a local pint.

    My Suffolk village has no pub, no shop and the post office has now also gone. The 10th century church still operates as it has done for 1000 years ( apart from a brief glitch around Henry VII’s time) but the congregation is reduced to 15. Times are a changing.

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