The Volokh Conspiracy

Mostly law professors | Sometimes contrarian | Often libertarian | Always independent


Stop Amazon? Really?


The "Stop Amazon" movement seems to be picking up steam—starting with all the publicity over the last year about its dispute with Hachette Publishing over e-book pricing, and now comes Franklin Foer's cover article on why "Amazon must be stopped" in this week's New Republic, which is so full of nonsense a response is called for. [Joe Nocera has a nice discussion here of some of the flaws in Foer's arguments]

Amazon, Foer suggests. is "the shining representative of a new golden age of monopoly," one of the new species of "Internet-age monopolies [which] flummox our conventional ways of thinking about corporate concentration and have proved especially elusive to those who ponder questions of antitrust, the discipline of law that aims to curb threats to the competitive marketplace." It turns out, though, what Foer is complaining about—and the reasons, apparently, that he would break up one of the most successful US companies of all time—is that (like Walmart, on which, Foer says, the Amazon way of business was based) they're really, really rough on their suppliers.

In its pursuit of bigness, Amazon has left a trail of destruction-competitors undercut, suppliers squeezed-some of it necessary, and some of it highly worrisome. . . . [T]he biggest lesson that Bezos drew from the Waltons was in how to handle suppliers. Both Amazon and Walmart promise its customers the same feat-undercutting their competition on price. But frugality and innovation can only go so far in keeping prices headed southward, especially in the face of the stock market's impatience. Growing profit margins depend, therefore, on continually getting a better deal from suppliers. At Walmart, this tactic is enshrined in policy. The company has insisted that suppliers of basic consumer goods annually reduce their prices by about 5 percent, according to Charles Fishman's book, The Walmart Effect. It's hard to overstate how badly these price demands injure the possibility for robust competition.

Boy, is that last sentence telling. Squeezing suppliers doesn't "injure the possibility for competition"—it is competition. If you don't like Walmart's terms, or Amazon's, don't do business with them. Unless they're true monopolists, in the old-fashioned definition of the term, that's not a problem, because suppliers have other ways to get their goods to market—and (as Foer himself admits) neither Walmart nor Amazon are monopolists in that sense.

His discussion of the confrontation between Amazon and Hachette is also telling. The dispute is very simple. Hachette, like other publishers, wants the highest possible price for its goods. Amazon demanded that they lower their e-book prices so that they could be sold for $9.99. Not "demanded," to be more precise—they said "we won't sell your e-books unless you lower the price you charge us for the right to sell them to the public. If you won't do that we won't sell your books. And we will give preferential treatment to suppliers who agree to our terms."

Foer calls this "a phase of heightened aggression" on Amazon's part:

Even though the five major publishing houses have political connections and economic power of their own, they just can't compete. When Amazon first set the price for e-books at $9.99, it did so unilaterally and didn't inform publishers in advance of its live-streamed announcement. The company continually finds new schemes for exacting tribute from the houses. Amazon requires a contribution to a "marketing development fund"-which hits publishers for an additional 5 to 7 percent of their gross sales. All the wondrous tools on the Amazon site are open to publishers, but only if they write appropriately sized checks: Pre-order buttons, appearance in search results, and personalized recommendations are hardly enlightened services provided by your friendly bookseller. Sure, Barnes and Noble and other chains have long charged fees for shelf placement, but Amazon has invented a steroidal version of that old practice. There seems to be no limit to Amazon's demands-and its current negotiations with Hachette prove the point. The New York Times has reported that Amazon apparently wants to increase its cut of each e-book it sells, from 30 percent to 50.

They just can't compete? Why the hell not? They can't sell their e-books from their own websites? Why is that? Or at The ebook market is, as the antitrust lawyers say, as "contestable" a market as one can imagine, with virtually no barriers to entry. Sell your stuff there, at whatever price you want to sell it at. If you want Amazon to sell your stuff, you have to take their terms. It's not "exacting tribute"! It's "business as usual." If you don't like it, go elsewhere.

Foer inadvertently gives up the game when he tells us what he (and, I suspect, the other authors who have been howling about Amazon's conduct in the Hachette affair) are really concerned about:

In their desperation, publishers have tried various gambits to alter this dynamic. They have attempted to fight size with size-a misbegotten notion that led them to collude with Apple in blatant violation of price-fixing laws. [A nice reminder that one side in this dispute has actually engaged in behavior that is clearly anti-competitive and violative of the antitrust laws, and it's not Amazon . . . ] [But] no matter how large they grow, publishers will continue to strip away costs to satisfy Amazon. And more attention will fall on a strange inefficiency at the heart of the business: the advances that publishing houses pay their writers. This upfront money is the economic pillar on which quality books rest, the great bulwark against dilettantism. Advances make it financially viable for a writer to commit years of work to a project. Either way, the culture will suffer the inevitable consequences of monopoly-less variety of products and lower quality of the remaining ones. This is depressing enough to ponder when it comes to the fate of lawn mower blades.

Let me get this straight: we should break up or somehow cripple Amazon—Foer mentions a couple of ideas for doing so, including "strip[ping] Amazon of the power to set prices [or] depriv[ing] it of the ability to use its site to punish recalcitrant suppliers," though he acknowledges that those ideas "feel like tentative jabs at the problem, rather than coherent solutions to it"—so that publishers can set higher prices for their e-books, which will allow them to continue the "strange inefficiency" of giving advances to authors?

That's a lot of nonsense to pack into one paragraph. Even if one believed that author advances are "the economic pillar on which quality books rest," and a "great bulwark against dilettantism" (Foer didn't really mean it when he wrote that they're "the great bulwark against dilettantism"—don't publishing houses have editors for that purpose?), why does Amazon's behavior threaten that practice? I can see how it threatens publisher profits, and I suppose it's true that if the publisher's profits are lower, they'll have less money, as a result, to throw at authors in the form of advances. But that's an argument for exempting the publishers from federal and state taxes, and from worker compensation claims, and from paying rent—give the publishers more money so they can give authors more money. Maybe, when their profits are lower, they'll have to be more careful about who they give advances to and for how much—i.e., they'll have to turn a (ridiculously) inefficient system into a somewhat less inefficient system … and I should be worried about that because . . .? (It all reminds me of a prominent music/entertainment lawyer I was talking to a year or so ago, who said something to the effect that the Internet didn't, after all, kill the recording business—but it sure made the record company parties a whole lot less fun.)

[And yes, alert reader, it is true that Amazon founder Jeff Bezos now owns The Washington Post and this website—so I guess I should disclose that, which I have now done, and also let you know that nobody at the Post (or at Amazon, for that matter) had the slightest influence on the views expressed above].