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Government's e-book case helps Amazon build toward a monopoly

The government walked blithely past the increasing threat of an Amazon e-book monopoly and went after the stakeholders who were trying to keep it from taking root.

September 12, 2012|Michael Hiltzik
  • Journalists try out Amazon.com's Kindle Fire HD during its unveiling at an event in Santa Monica.
Journalists try out Amazon.com's Kindle Fire HD during its unveiling… (Al Seib, Los Angeles Times )

Everyone knows that new technologies can upend old industries, whether the victims are makers of horse-drawn carriages or television broadcasters. Last week's settlement in a federal price-fixing case involving book publishers, Apple and Amazon.com shows that they can also turn the law upside down.

To hear the government talk, this is all about breaking up a conspiracy to drive up the price of e-books on your Kindle, iPad or other device. "Ensuring that e-books are as affordable as possible," as Atty. Gen. Eric Holder declared in announcing the original settlement in April.

What's wrong with nipping a nefarious scheme in the bud, especially if the result is that Amazon.com, which was the supposed target of the alleged conspiracy, is liberated to resume selling e-books to you at the rock-bottom price of $9.99?

Plenty, if that price is designed to drive off all of Amazon's e-book competition — and kill off the last remaining brick-and-mortar bookstores too — so it can set its own prices as it wishes down the line.

To recap: In 2010, five major book publishers decided to change their sales method for e-books from the conventional model, in which online booksellers paid wholesale prices for the books and sold them for whatever retail price they chose, to an "agency" model, in which the publishers set every book's retail price and the sellers took a fixed percentage of every sale.

The idea was (1) to entice Apple, which was just about to bring out the iPad, into the e-book market by guaranteeing Apple a profit on e-book sales, and (2) to create competition for Amazon. Amazon's $9.99 price often meant it was selling books at a loss, presumably to cement its dominance of a market that it then controlled to the tune of 90%. The publishers imposed the agency model on Amazon, Barnes & Noble and other e-book sellers too. The prices of e-books, which were keyed to the hardcover price, moved up to as much as $14.99.

The feds howled "price-fixing," brought an antitrust lawsuit against Apple and the five publishers, and settled with three of the five. Apple and two publishers, Penguin and Macmillan, refused to settle and are scheduled to go to trial next year. Last week, U.S. District Judge Denise Cote approved the settlement. It requires the settling defendants to terminate their agency deal with Apple by Friday.

Amazon hasn't commented recently, but did say when the settlement was announced in April, "We look forward to being allowed to lower prices on more Kindle books."

Before looking deeper at the background of this case, some obligatory disclosures. Of the three settling publishers, Simon & Schuster is the publisher of two of my books (and a forthcoming third) and HarperCollins two others. The four already published are sold in all e-book formats, including Amazon's and Apple's.

Moreover, while I still browse in bookstores and seldom exit one without a purchase, I do most of my reading on a Kindle; I've already ordered one of Amazon's new "paperwhite" Kindles, which look like a major advance in resolution. And I can't stand reading on an iPad. As a book buyer, I'd love to get all my books at $9.99 or less; as a book author, I'd like my work to sell for more. As a reader, I delight in discovering new writers and new works that impinge on my consciousness from left field, as happens in a bookstore but never via the rigorously algorithmed recommendations pushed at me on Amazon.com.

So I've got all the conflicts faced by any average reader, and a few more. But the most important concern that should be shared by all participants in the publishing world — readers, publishers, retailers, device manufacturers — is that it's in no one's interest to have a single company controlling 90% of the market.

No one, that is, except the big player, which is Amazon.

Amazon's position in the e-book market was so close to unassailable at the time the publishers reached agreement with Apple that many in the industry are still reeling from the government's response. "I'm amazed the Department of Justice is so myopic in bringing this case," says Peter Hildick-Smith, president of the publishing market research firm Codex Group.

In essence, the government walked blithely past the increasing threat of an Amazon monopoly and went after the stakeholders who were trying to keep it from taking root.

Publishers have grounds for anxiety about Amazon. In 2010, they feared that the point had almost arrived at which no one would be able to enter the e-book market to compete with Amazon. Apple, in fact, already was muttering about the difficulty of turning a profit from e-books in a world ruled by Amazon pricing. Barnes & Noble, the dominant brick-and-mortar book chain, had zero percent of the e-book market and was staggering toward oblivion.

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