April 17, 2012
Competition Needs Protection
By EDUARDO PORTER
To believe publishers and authors, the government just handed Amazon a monopoly over the book market: The price-fixing suit against Apple and the nation’s top publishers filed by the Justice Department last week will free Amazon to offer ruinous discounts in the booming new market of electronic books, drive brick-and-mortar bookstores out of existence and kill off publishers’ lucrative business of ink on paper.
Yet there is a different reading to this story. Publishing companies — like bookstores — fear they are on the losing end of a technological whirlwind of digital distribution that will make much of what they do obsolete. They would like to stop it. But though publishers may be happy to subvert competition to protect their business, this can entail a heavy cost for the rest of society.
The media industry’s efforts to limit competition date at least as far back as the 1920s and 1930s, when the emergence of radio threatened newspapers’ stranglehold of local markets.
At a meeting at the Biltmore Hotel in New York in December 1933, newspaper executives offered what was essentially a plan to divvy up the audience between radio entertainment and newspaper news. The newspapers would stop their campaign against radio and reinstate radio listings if the major radio networks would limit their news offerings to a couple of short bulletins a day from the newspapers’ wire services.
The Biltmore Agreement, as their pact was known, soon fell apart, as independent stations not part of the deal started buying information from new radio news services and offering real news. Despite that cartel’s failure, the anticompetitive impulse survives to this day.
The Internet is walloping media perhaps like no other technology before. And the media establishment again looks upon competition as a hindrance to its survival.
Flailing under the loss of readers and advertisers to online competition, newspaper executives approached regulators three years ago floating the idea of an antitrust waiver. They wanted to coordinate on a strategy to charge readers for their online news and take steps against the aggregator Web sites that were republishing much of their content. Though they gained the sympathy of crucial members of Congress, the government rightly shot down the idea.
The top record labels, meanwhile, are facing a class action antitrust suit that accuses them of colluding to keep the price of online music artificially high to protect their lucrative CD business.
The suit filed last week against Apple and five of the nation’s six main publishers has a similar plot. Amazon had been buying e-books wholesale and selling many best sellers at a heavily discounted $9.99, taking the loss to encourage sales of its Kindle e-reader. Fearful that this discounting could destroy the $25-a-book hardcover business, publishers took advantage of Apple’s entry into the market to change the terms. According to the lawsuit, they colluded with the computer colossus to establish an “agency model” under which publishers would set e-book prices in a range of $12.99 to $14.99, and give the distributor — be it Apple or Amazon — a 30 percent cut.
It’s natural to feel some sympathy for old media firms as technology juggernauts bear down on them. To many of us, book publishers and newspapers are more than just businesses. They are the keepers of the culture, the guarantors of our democracy. And they are small compared with Amazon, which controls 60 percent of the growing e-book market, as well as a big share of the market for books on paper. Absent any collusion, Apple’s entry into the e-book market would be the kind of competitive challenge we should welcome in the digital world.
But the charges aren’t trivial. The kind of collusion alleged by the Justice Department is called price-fixing. It has been illegal for a very long time, even if one is fighting a very large rival. According to the Consumer Federation of America, it would cost readers about $200 million this year alone. More important perhaps, this behavior could arrest the development of innovative platforms to sell digital goods on the Web.
Competition in the digital domain doesn’t look like carmakers’ slugging it out for market share. In digital markets, dominant firms are almost inevitable. There is no other social media firm with anywhere near Facebook’s 850 million members. Almost two-thirds of all Internet searches in the United States happen on Google.
The concentration is driven by the economics of the Web. The cost to Amazon of selling one more e-book is pretty near zero. This increasing return to scale makes big digital companies much more profitable than small ones. It is compounded by what economists call “network effects”: If many programmers design apps for iPads, they will become more popular, which will encourage more programmers to write apps for them.
Competition is nonetheless crucial to keeping innovation alive. Think of Google’s successful move into the smartphone business with Android, or its less successful stab at social media with Google Plus. A lot of innovation is also built on top of the dominant platforms. That is perhaps where competition most needs protection.
European and American regulators are looking into Google’s behavior not to check how it treats Microsoft’s Bing, but to determine whether it abuses its dominant search engine to increase secondary businesses — like, say, its shopping guide — while pushing innovative rivals down the rankings. The Justice Department is interested in how Apple sets terms for media companies because it wants to make sure they have a shot to innovate on the iPad and Apple’s other platforms.
Just as important as ensuring that platforms cannot abuse their dominance is to ensure that the companies that make the products that flow on these platforms — book publishers, say — do not use anticompetitive tactics to benefit one platform at the expense of others. This is the kind of competition that the Justice Department’s civil suit against Apple and the book publishers is meant to protect.
Admittedly, the Justice Department’s case may be bad news for the established book industry. Amazon and other online competitors have squeezed Borders out of business. It is only a matter of time before cheap e-books put an end to hardcover tomes selling for $25. And with Amazon pushing into publishing itself, some publishers could become victims as well.
But what really matters to society is what the case means for the production and consumption of books. That might not be so dreadful.
For sure, if brick-and-mortar bookstores disappear, browsing will die with them. But writers and publishers will have plenty of other ways — think Amazon, Facebook or Google — of letting readers know about their books. E-books, moreover, can be profitable. Mark Cooper of the Consumer Federation of America estimated that producing, distributing and selling an e-book costs about 25 percent of the cost of a physical tome; a $10 e-book still gives publishers about $4 to cover overhead and profit. And in an e-book world, publishers’ costs are sure to fall.
While Amazon remains dominant, its share of the e-book market has fallen to about 60 percent from 90 percent. Barnes and Noble, which has about a quarter of the market, would suffer if Amazon discounts sharply. But it could shed costs by getting rid of bookstores. And publishers can recover pricing power. Apple and two of the five publishers decided to fight the charges in court. But three settled. Though they must allow Amazon to resume discounting, they must do so for only two years.
And even if every existing publisher were driven out of business, reading would probably survive. Without the middlemen, publishers might even pay higher royalties to creators.
Music offers perhaps the best parallel of what could happen to the written word online. Record labels that originally welcomed Apple’s iTunes soon realized it was a killer in disguise, allowing consumers to unbundle $13 CDs and buy only their preferred singles for 99 cents.
But it wasn’t generally terrible for musicians. ITunes offered a shot to garage bands that could never have signed with a label. And fans didn’t fare too badly. Last year, consumers bought 1.3 billion singles — saving about $5 billion by not having to buy entire albums. This is hardly chump change. Would we be willing to give this up to save endangered record labels? While we ponder this, why not consider reviving Blockbuster, Circuit City and Tower Records?
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