Generally speaking, I’m a fan of Amazon, and feel that Judge Cote got it right when she smacked down Apple for conspiring with the Agency Five publishers to impose higher ebook prices on Amazon. Under the interpretation of antitrust laws that is currently in vogue, Amazon’s act of discounting new-release and bestseller ebooks to $9.99 was not considered “predatory pricing,” and was in fact perfectly legal.
But the question is, should it be?
On the Yale Law Journal, Lina M. Khan takes a crack at arguing that the interpretation needs to be changed. It’s an exceedingly long and well-documented law journal article, and could take an hour or so to grind your way through, but it’s certainly thought-provoking and well worth the read.
The fundamental issue is that the way antitrust law has worked since the late 1970s is to focus on “consumer welfare.” Anything that lowers prices for consumers is good, whereas anything that raises the prices is bad. (Hence, Amazon’s $9.99 ebook prices were good, while the Agency Five and Apple’s decision to raise them by fiat was bad.) But it didn’t always work that way. For much of the 20th century, antitrust law focused on the structure of businesses, keeping them from getting so horizontally or vertically integrated that it harmed competition.
Khan’s article argues that the simplistic yardstick of consumer welfare doesn’t work well when dealing with new Internet businesses such as Amazon, for a number of reasons. Such businesses are capable of thinking in the much longer term than “traditional” predatory pricers, especially when stockholders are willing to defer rewards themselves in favor of allowing the business to continue growing.
Another point is that Amazon is diversified into so many different fields that it can often use its investments in one field to help it gain advantages in others. It turns its competitors into its customers via the “Fulfilled by Amazon” program. It uses the Amazon Marketplace for new product development, duplicating bestselling products from third party businesses into its AmazonBasics store-brand line. It uses the data it’s able to mine from customers to do more and better market research than any of its competitors are capable of.
Khan also argues that the dichotomy of “loss leading” versus “predatory pricing” isn’t quite so clear cut as Judge Cote and the Justice Department argued, because platform lock-in is involved:
Unlike with online shopping, each trip to a brick-and-mortar store is discrete. If, on Monday, Walmart heavily discounts the price of socks and you are looking to buy socks, you might visit, buy socks, and—because you are already there—also buy milk. On Thursday, the fact that Walmart had discounted socks on Monday does not necessarily exert any tug; you may return to Walmart because you now know that Walmart often has good bargains, but the fact that you purchased socks from Walmart on Monday is not, in itself, a reason to return.
Internet retail is different. Say on Monday, Amazon steeply discounts the e-book version of Harper Lee’s Go Set a Watchman, and you purchase both a Kindle and the e-book. On Thursday, you would be inclined to revisit Amazon—and not simply because you know it has good bargains. Several factors extend the tug. For one, Amazon, like other e-book sellers, has used a scheme known as “digital rights management” (DRM), which limits the types of devices that can read certain e-book formats. Compelling readers to purchase a Kindle through cheap e-books locks them into future e-book purchases from Amazon. Moreover, buying—or even browsing—e-books on Amazon’s platform hands the company information about your reading habits and preferences, data the company uses to tailor recommendations and future deals. Replicated across a few more purchases, Amazon’s lock-in becomes strong. It becomes unlikely that a reader will then purchase a Nook and switch to buying e-books through Barnes & Noble, even if that company is slashing prices.
Khan makes some pretty good points here. Under the current interpretation of the law, Amazon’s conduct is legal—but should it be? And is the interpretation favored by current antitrust jurisprudence sufficient to protect the public from harm given the new paradigm of the Internet retail business model?
I suspect there isn’t an easy answer to any of these questions, but they are ones that people should be thinking a lot about at the moment.
(Found via Philip Elmer-DeWitt’s blog.)
The bottom line here is that ebooks have been a failure compared to the growth of other digital content markets. The major players have caused this thru stunted innovation and walled gardens.
Most of us think of a monopoly as an entity that has undue control over a market by dint of illegal acts.
Amazon has gotten to where it is by ploughing all its profits back into growth. It has used good business practices to gain market share legally.
In the e-book market, they have simply done a much better job. It is a much better experience to shop for e-books on Amazon than anywhere else, by a wide margin. That doesn’t mean that I am a fan of their lack of having an all bold option on the Kindle platform. (Aging eyes.)
I am also not a fan of their latest file format that prevents me from downloading a copy from my kindle to my computer for back-up. (The files that are DRM’ed are still safe from my uploading them or reading them elsewhere, but at least I have a copy that I don’t have to worry about Amazon changing or deleting. No DRM would be even better.
As I noted in one of the articles I linked above, monopolies don’t have to come about due to illegal action. Sometimes all it takes is building a much better mousetrap. The problem is that even a legally obtained monopoly can have deleterious effects on competition.
We saw that just the other day, as Shelfie shut down. Here was a company with an innovative platform and dedicated leadership, which offered something many ebook-reading consumers had been clamoring for: the ability to get a discount on digital copies of paper books they already owned. Yet it couldn’t gain a foothold because it didn’t directly interface with the dominant ebook platform, Amazon’s Kindle. And that was only the latest small ebook company to go belly-up because it couldn’t sell to the majority of customers Amazon already had.
And that’s why having a monopoly can be bad, whether it was legally obtained or not.
For example, in the early part of the 20th century, movie studios also owned their own movie theaters. They didn’t obtain those movie theaters illegally; they simply started the businesses and supplied them with their own movies. It was all perfectly legal at the time.
However, the courts subsequently determined this vertical integration (the same companies owning studios and theaters) constituted a monopoly, so the studios were forced to divest.
So, it’s not beyond the realm of possibility that Amazon could be adjudged an illegal monopoly, even though it obtained its monopoly status legally, if the current thinking on antitrust reverts back to the old ways.
Part of the problem is that the publishers did this to themselves by not following the examples of the music and video industries and requiring that all of the ebook retailers were selling a format that could be read by everyone’s reader, regardless of manufacturer. By allowing at least 3 different formats, and 4 different DRM systems, they’ve created this mess of a walled garden that allowed Amazon to gain a monopoly. I don’t know if there’s any way to fix this except to require everyone still in the game to update their current readers to support a common format and common DRM (or drop DRM entirely).