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Government's e-book case helps Amazon build toward a monopoly

The government walked blithely past the increasing threat of an Amazon e-book monopoly and went after the stakeholders who were trying to keep it from taking root.

Everyone knows that new technologies can upend old industries, whether the victims are makers of horse-drawn carriages or television broadcasters. Last week's settlement in a federal price-fixing case involving book publishers, Apple and Amazon.com shows that they can also turn the law upside down.

 

To hear the government talk, this is all about breaking up a conspiracy to drive up the price of e-books on your Kindle, iPad or other device. "Ensuring that e-books are as affordable as possible," as Atty. Gen. Eric Holder declared in announcing the original settlement in April.

What's wrong with nipping a nefarious scheme in the bud, especially if the result is that Amazon.com, which was the supposed target of the alleged conspiracy, is liberated to resume selling e-books to you at the rock-bottom price of $9.99?

Plenty, if that price is designed to drive off all of Amazon's e-book competition — and kill off the last remaining brick-and-mortar bookstores too — so it can set its own prices as it wishes down the line.

To recap: In 2010, five major book publishers decided to change their sales method for e-books from the conventional model, in which online booksellers paid wholesale prices for the books and sold them for whatever retail price they chose, to an "agency" model, in which the publishers set every book's retail price and the sellers took a fixed percentage of every sale.

The idea was (1) to entice Apple, which was just about to bring out the iPad, into the e-book market by guaranteeing Apple a profit on e-book sales, and (2) to create competition for Amazon. Amazon's $9.99 price often meant it was selling books at a loss, presumably to cement its dominance of a market that it then controlled to the tune of 90%. The publishers imposed the agency model on Amazon, Barnes & Noble and other e-book sellers too. The prices of e-books, which were keyed to the hardcover price, moved up to as much as $14.99.

The feds howled "price-fixing," brought an antitrust lawsuit against Apple and the five publishers, and settled with three of the five. Apple and two publishers, Penguin and Macmillan, refused to settle and are scheduled to go to trial next year. Last week, U.S. District Judge Denise Cote approved the settlement. It requires the settling defendants to terminate their agency deal with Apple by Friday.

Amazon hasn't commented recently, but did say when the settlement was announced in April, "We look forward to being allowed to lower prices on more Kindle books."

Before looking deeper at the background of this case, some obligatory disclosures. Of the three settling publishers, Simon & Schuster is the publisher of two of my books (and a forthcoming third) and HarperCollins two others. The four already published are sold in all e-book formats, including Amazon's and Apple's.

Moreover, while I still browse in bookstores and seldom exit one without a purchase, I do most of my reading on a Kindle; I've already ordered one of Amazon's new "paperwhite" Kindles, which look like a major advance in resolution. And I can't stand reading on an iPad. As a book buyer, I'd love to get all my books at $9.99 or less; as a book author, I'd like my work to sell for more. As a reader, I delight in discovering new writers and new works that impinge on my consciousness from left field, as happens in a bookstore but never via the rigorously algorithmed recommendations pushed at me on Amazon.com.

So I've got all the conflicts faced by any average reader, and a few more. But the most important concern that should be shared by all participants in the publishing world — readers, publishers, retailers, device manufacturers — is that it's in no one's interest to have a single company controlling 90% of the market.

No one, that is, except the big player, which is Amazon.

Amazon's position in the e-book market was so close to unassailable at the time the publishers reached agreement with Apple that many in the industry are still reeling from the government's response. "I'm amazed the Department of Justice is so myopic in bringing this case," says Peter Hildick-Smith, president of the publishing market research firm Codex Group.

In essence, the government walked blithely past the increasing threat of an Amazon monopoly and went after the stakeholders who were trying to keep it from taking root.

Publishers have grounds for anxiety about Amazon. In 2010, they feared that the point had almost arrived at which no one would be able to enter the e-book market to compete with Amazon. Apple, in fact, already was muttering about the difficulty of turning a profit from e-books in a world ruled by Amazon pricing. Barnes & Noble, the dominant brick-and-mortar book chain, had zero percent of the e-book market and was staggering toward oblivion.

And it wasn't as though Amazon has acted as a benevolent dictator. Instead, it seemed to delight in testing its market power over publishers. In early 2010, for example, it responded to the publishers' deal with Apple by picking a fight with Macmillan, removing the "buy" buttons from its pages featuring Macmillan titles and removing Kindle versions of those books from sale. After a few days, Amazon backed down, but no one in the trade missed this sign of what the future might hold.

Plainly, Amazon's behavior didn't resemble that of a retailer laser-focused on serving consumers. It resembled the behavior of a cable company fighting with a TV network over transmission fees by cutting off its viewers' access to the network's programming. You want to buy your books from a company that models itself on your cable provider? Me neither.

Therefore, it's rational to believe that once it drove all its e-book competition into the ground by predatory pricing, Amazon would feel free to stop subsidizing e-books as loss leaders and set prices high to maximize its profits at the expense of publishers, authors and readers.

Judge Cote bought the Justice Department's argument that such an outcome was "speculative." Well, yes, the future is always speculative. Yet the same federal agency fought Microsoft for years over very similar allegations — including the contention that by bundling its Internet Explorer Web browser in its Windows software, Microsoft was aiming to drive browser competitors, especially Netscape Communications, out of the market so it could control pricing and distribution by itself.

And it's worth noting that publishers were so terrified of this speculative prospect that they agreed to an agency deal that made them less money in the short term — the online sellers' commission on e-book sales was an enormous 30% — on the reasoning that having more competition in the market would help them in the long run.

In any event, the publishers' counter play did work. Amazon's e-book market share fell to 60% from 90% after the publishers moved to the agency model. Ironically, the surprise winner was Barnes & Noble, which now has at least 25% of the e-book market, served by its Nook e-reader. In May, Microsoft shored up the company's efforts by pledging to invest $605 million in the Nook business over five years.

"If it hadn't been for the agency model, it's questionable whether Barnes & Noble would still be around for Microsoft to invest in," Paul Aiken, executive director of the Authors Guild, told me. "How could they have gone toe to toe with Amazon if they had to lose money selling e-books to stay in the game?"

Critics of the government's e-book case, and of the judge's endorsement of the settlement, say the fundamental error lies in treating the relevant market as the book market. It's not. What's at issue is the e-book market, which is inextricable from the sale of proprietary e-book readers like the Kindle.

"An e-book has no value to the consumer outside the device," says Bob Kohn, a music and copyright lawyer who filed a friend of the court brief in the case — inventively presented in graphic novel form to meet the judge's directive that it be no longer than five pages. That introduces the "network effect": because an e-book sold by Amazon can be read only on its Kindle or a special Kindle app for other devices, such as an iPad, every e-book purchase from Amazon tends to enhance its grip on the market, and thus its power to set prices as a gatekeeper.

Kohn has asked Judge Cote to stay her ruling until it can be appealed. If she refuses, Amazon will be free as soon as next week to resume $9.99 e-book pricing. Book buyers will think they've gotten a bounty, but Amazon will have some of its old power to build toward a monopoly, albeit from a lesser competitive position.

Technology is confronting publishers with plenty of tsoris. Finding an audience for unfamiliar new literary voices is immeasurably harder online than in the aisles of a physical bookstore. People may read more after buying a Kindle, but buyers of the iPad and the multimedia Kindle Fire may not. Games, video, Facebook, Twitter, all compete with books for the customer's attention.

The last thing publishing needed was to compound all that with the resurgent threat of a single domineering retail behemoth. Yet with this settlement, that's what they're getting.

 

Source: latimes.com