WW: A Hachette Job

 

A Hachette Job

By Lina Khan, June 19 2014.

We could’ve seen this coming. Amazon, embroiled in protracted negotiations over new contract terms with the book publisher Hachette, is using its muscle to pressure the publisher for a bigger cut. Since May, Amazon’s been making it difficult for customers to purchase Hachette’s books by, for example, disabling “pre-order” buttons on select titles and slowing down delivery.

Media have exploded with opinions about the dispute, not least because caught in the crossfire are popular authors like Malcolm Gladwell and J.K. Rowling. Each side has its stalwarts: those who decry Amazon’s actions as a threat to the future of books, and those who defend its actions as a boon for readers. Several commentators have staked out a position in the comfortable middle. As Brian Fung from the Washington Post summarized, “If you’re having trouble picking a side, don’t feel bad. This is a complicated issue.”

But some of the main arguments justifying Amazon’s actions fall apart once you look at them more closely. Here’s a rundown of the top defenses of Amazon, and what they get wrong:

1.     Amazon’s playing hardball to benefit people who buy books.

Amazon says it uses combative negotiations to win a better deal for its customers, so that we can all pay $14 for the latest release rather than $28. And, no doubt, Amazon offers some of the steepest discounts on books around. But low prices are not an unadulterated good  – especially if they decimate the margins publishers need to keep producing a rich ecosystem of diverse and substantive books. That requires sizable upfront investment with no guaranteed payoffs. Publishers have traditionally used profits from smash bestsellers (think Fifty Shades of Grey or Outliers) to subsidize culturally and socially important yet riskier books (think Infinite Jest or The Meat Racket). The danger is that as Amazon eats up a larger share of publishers’ margins, publishers won’t have the means to fund these weightier tomes.

Matt Yglesias and others dismiss this concern, claiming that as long as there are people interested in buying high quality books, there will be a market that produces them. But this view overlooks the economics of book production: It’s impossible to predict whether Doris Kearns Goodwin will sell enough copies of The Bully Pulpit to cover the cost of production. In other words, it’s not enough for demand to cull supply: you need a market structure that distributes revenues such that publishers can afford to take on risk. Amazon may argue that it’s championing readers by strong-arming publishers – but if it’s shattering the business model required to support a diverse and vibrant book market, readers will ultimately lose out.

2.     There’s nothing new going on here: tough negotiations between suppliers and retailers are routine. Plus, Amazon’s actions essentially mimic the hardball tactics Borders and Barnes & Noble used against publishers in the 1990s.

It’s true that neither the nature of the wrangling we see today between Amazon and publishers – nor the alarm it has elicited from much of the literary community – is new. The industry has been in a constant state of power plays and predations ever since conglomerates first began swallowing up publishers and chain retailers began crowding out local bookstores as early as the 1960s. Many of the concerns we hear today echo those aired in earlier decades, whereby writers, publishers, and booksellers worried that steady industry consolidation could harm the diversity and richness of ideas. In the 1970s and 1980s the government convened a series of hearings responding to these concerns, while the proliferation of stores like Barnes & Noble and Books-A-Million in the 1990s inspired an entire genre of culture encapsulating the tension between the chains and the independents (remember You’ve Got Mail?).

Two facets of the current fight, though, are new. One is that we previously enforced laws that policed negotiations between retailers and suppliers. Today, these laws are still on the books but government officials and courts are far less likely to enforce them, largely due to a fundamental change in antitrust thinking ushered in 30 years ago. Through the 1980s and into the 1990s “fair trade” laws limited how much massive retailers like Borders could use their bullying power to squeeze publishers, while predatory pricing laws curbed how drastically stores could discount. So even though publishers and retailers were having the same tense negotiations, rules limited the damage any one party could do the other. Today, by contrast, the negotiating table harkens back to the Wild West.

The other big difference is that Amazon’s power over the book industry today is notably greater than what Barnes & Noble or Borders enjoyed – neither of which, at its height, commanded close to 40 percent of the total book market (like Amazon does; and, in the case of e-books, it dominates with 70 percent). What’s more, the mainstay business of chain bookstores was selling books. “Barnes & Noble and Borders had a vested interest in ensuring the book business was protected,” said Oren Teicher, head of the American Booksellers Association, which sued the chain bookstores in the 1990s for price discrimination. “Amazon’s strategy is radically different. Amazon can afford to use the entire book industry as a vehicle to sell everything else.”

3. Amazon dominates the book industry because it is technologically superior.

No doubt, Amazon’s control over the book industry stems, in part, from technological changes: the advent of online retail and e-books, and Amazon’s pioneering role in promoting them, established it as a formidable player. But technology doesn’t innately guarantee winners or losers – it all comes down to the rules that shape markets. We saw this play out when the major publishing houses partnered with Apple to introduce the “agency model” for selling e-books in 2011, whereby publishers would set the final retail price and retailers would take a 30 percent cut. This model – which Amazon strongly resisted but was ultimately compelled to adopt – ended up making the e-book market vastly more competitive: After agency pricing was introduced, Amazon’s share of the e-books market fell from 90 percent to around 65 percent.

This form of agency pricing fell apart after the Justice Department sued the publishers and Apple for collusion in 2012. DOJ officials weren’t targeting agency pricing itself, but the settlement terms they worked out force publishers to revise the model in ways that critically undermines its original purpose: to hand publishers control over pricing, by halting the license of retailers to discount.

The big takeaway is that technologies can reshape the balance of power in a market, but ultimately markets are ours to shape. We can always design rules to make them more fair and competitive.

4.     Amazon creates a huge opportunity for independent publishers and authors who have suffered under the reign of the “Big Five” publishers. Siding with Hachette in this fight is just a way of protecting the incumbents, who don’t promote the best interests of readers or writers either.

Amid the response from the literary community, some smaller publishers and authors have come to Amazon’s defense. Independent publishers point out that Amazon returns fewer books and drastically expands the market to sell them. Many writers, too, have hailed Amazon’s self-publishing venture for offering opportunities where the major houses have shut them out, and pointed out that it shares more of the pie with writers. Amazon also has touted itself as a supporter of smaller players: In its only public recognition of the impasse with Hachette, it linked to a blog post by an independent publisher who outlined a few reasons why Amazon makes for a beneficial business partner.

It’s worth noting that designing a fair and healthy book market isn’t about protecting the interests of any one party over another – authors, publishers, or retailers – but rather ensuring a balance of power among them. Many of the complaints small publishers and authors lodge against the big publishers stem from the fact that they are so consolidated. (The “Big Five” publishers sell around 85 percent of books in America.)

It is true that the big publishers buckling under Amazon’s thumb today are themselves tightly consolidated and have used their power in the past in ways that didn’t promote the best interest of writers and readers. But to champion as the antidote to their power an even bigger and consolidated power like Amazon ignores the lessons of the past – and sets up writers, publishers, and readers for fewer avenues and hence greater risks ahead.

See Lina Khan, A Hachette Job, The Weekly Wonk, June 19 2014.

(Emphasis added)