Amazon’s monopoly is not predatory
July 11, 2013 | 8:33 pm
As I survey the responses to and discussions of the recent decision in the Apple e-book antitrust trial, I’m disheartened by how many people seem to be buying into the publishers’ and Apple’s narrative of Amazon as the evil predatory-pricing monopolist. You see it in comments and articles here and there, that take for granted Amazon has been selling all its e-books at a loss, not just a small handful. Even Adam Engst of TidBITS has been taken in:
Initially the U.S. Department of Justice filed this lawsuit against Apple and five of the Big Six publishers (Random House didn’t agree to the initial iBookstore contracts). Over time, though, all five publishers settled with the Department of Justice, basically agreeing to terminate existing contracts with Apple and other ebook retailers, and renegotiate contracts that don’t prevent retailers from discounting ebook prices. However, retailers are not allowed to discount below the point of breaking even — Amazon’s loss-leader approach is no longer kosher.
This is wrong, by the way. Pg. 14-15 of the settlement document explains that retailers can loss-lead as much as they want; they just have to make a profit on the publisher’s works overall. [After I pointed this out to Engst in comments, he updated the paragraph in the article to be more accurate.]
And the thing is, that’s just what Amazon was always doing. Yes, it discounted a lot of (but not all) New York Times bestseller hardcovers to $9.99. But it turned a profit on e-books overall. (The government acknowledged this, in its anti-trust complaint, calling Amazon’s e-book business “consistently profitable”—exactly what a predatory pricer would not be.) It was not selling everything at an overall loss, which would have been necessary before it could be considered predatory pricing.
This also comes up in a book I discussed recently:
In sworn statements, Amazon officials claimed the company’s $9.99 pricing was both sustainable and profitable. Most of the new releases Amazon sold at $9.99 were at break-even margins, [Amazon VP of Kindle Content David] Naggar testified. Amazon was taking a hit on some titles, such as Greenspan’s memoir. But Naggar insisted that such negative-margin titles accounted for only a small percentage of Kindle revenues— maybe 15% to 20%. And those titles, he stressed, represented nothing more than “a classic loss-leading strategy” common to the book business—including with print books.
Overall, Kindle e-book sales were profitable, he insisted, because the $9.99 price on new bestsellers encouraged readers to buy more previously published books from deeper in the catalog, known in publishing parlance as the backlist (as opposed to new releases, which are considered the frontlist.)
“One of the great things about attractive pricing on frontlist titles is that it often prompts customers to make immediate purchases from the backlist,” Naggar explained in his direct testimony. “You’re lying in bed, and it is 11 o’clock, and you’ve just finished a book that you loved and you’re not ready to go to sleep, you want to read some more. Given that you’re holding a bookstore in your hand with a Kindle, you’re likely to buy another book by that author, which generally means a backlist title, where the deep discounting was not in effect.”
—Albanese, Andrew Richard (2013-06-18). The Battle of $9.99: How Apple, Amazon, and the Big Six Publishers Changed the E-Book Business Overnight (Kindle Single) (Kindle Locations 262-272). Publishers Weekly. Kindle Edition.
It’s the same loss leader thing that big box stores do every week with a few really cheap items in their sales circulars, or especially on Black Friday. If some store is all but giving away 50” TVs for $200, well below what they must have cost to make, is that predatory pricing? No, it’s just a way to get people into the store to buy stuff that isn’t marked down so much. Amazon is doing it on a larger scale, but it’s still doing the exact same thing—losing a little money to make a lot of money, not losing a lot of money to drive competitors out of business.
Furthermore, as Nate Hoffelder points out on The Digital Reader, if Amazon really was trying to drive competitors out of business, it’s been doing it wrong. At the time it launched, Amazon had no serious competition, because none of the existing companies had been able to make any inroads on the e-reader and e-book market. Amazon priced New York Times bestselling books at $9.99 from the very beginning, when there were no major competitors to try to drive out of business. But instead of shedding competitors, it gained them. Barnes & Noble. Kobo. Google. Samsung. Apple. Baker & Taylor. And, ditto Nate, Amazon isn’t even always the cheapest place to buy e-books anymore.
Why has this erroneous belief that Amazon was selling everything at $9.99 and losing money hand over fist sprung up so freely? I guess it could be because Amazon was charging it for the most popular books, the ones that were “supposed” to cost $18 to $20 or so, so it was much more visible. People always notice when something that’s supposed to be so expensive is so much cheaper. The squeaky wheel gets the grease. It draws their attention. They don’t notice that the backlist titles aren’t nearly so much of a bargain.
For example, the “most discounted” NYT Bestseller fiction book I see on Amazon right now is $10.99 for Mary Kay Andrews’s Ladies Night, which is $26.99 suggested in hardcover ($17.22 hardcover Amazon price). If we go by the not always necessarily accurate rule of thumb of wholesale price being 50% of suggested retail, Amazon is losing $2.50 a pop on this book.
But flipping through to Andrews’s backlist, I see a number of $14.99-suggested paperbacks that sell for $9 to $10 in e-book form. (With the exception of one that’s $2.99, but that may be a Kindle Daily Deal.) Which means Amazon is probably making around $1.50 to $2.50 a pop on those. Or even more if the wholesale price is lower. It only takes selling one or two of those for Amazon to break even on selling Ladies Night so cheaply, and if someone reads that and just has to have the rest, Amazon’s made a chunk of money it wouldn’t have seen if it hadn’t sold Ladies Night so cheaply.
But the publishers and Apple see it as in their best interest to paint Amazon as an evil monopolist every chance they get. It gets them sympathy, which they need pretty badly at this point. And I expect Amazon hasn’t exactly done much to discourage the perception of being the place where you go to get e-books insanely cheaply compared to what they “ought to” cost, either. After all, for the consumer side of things, it helps drive more business.
That Amazon is so reticent about releasing sales figures publicly doesn’t hurt either. Nonetheless, one analyst estimated that the Kindle was responsible for just over one third of Amazon’s consolidated segment operating income, with e-books accounting for the lion’s share of that amount. Granted, the chart just covers the years since the imposition of agency pricing, but still.
The word “monopoly” has, through its association with anti-trust affairs, gained negative connotations. The thing is, not all monopolies are bad. If the monopoly came about just because Amazon was so darned good at competing, without doing anything overtly illegal, then legally it’s considered kosher.
And let’s face it, Amazon had the first mover advantage. It created the first e-book device that was convenient for ordinary people to use. It had some pretty amazing innovations (who would have expected Amazon to be able to talk a cell carrier into providing unlimited lifetime 3G data for its devices?) in addition to having an extremely readable screen and a great selection of books at great prices. It had a year in which to consolidate its market base before its first close competitor could even get to market, three years before Apple could hit the scene. And it had loose cannon entrepreneurial genius Jeff Bezos at the helm, which is practically an unfair advantage all by itself.
Don’t get me wrong, Amazon is no saint. We’ve already written about plenty of the annoying or downright obnoxious things it’s done here: removing Buy buttons, pulling certain categories of novel from sale, the 1984 thing, buying MobiPocket and killing the planned Mobi iOS app, and of course locking consumers into a walled e-book garden with its DRM, among others.
But when it comes to its frontrunner slot with the Kindle, Amazon by and large got its success the old-fashioned way—it earned it. And no amount of $9.99 e-book sour grapes from publishers can change that.