One of the most interesting things about the ongoing DOJ lawsuit against Apple and a handful of US publishers is the way in which the public debate has been framed. First, although the company is not named in the lawsuit, Amazon is seen by many commentators as being a central presence in discussions, the ‘elephant in the corner’. And second, the lawsuit is seen by many as being about the wholesale vs agency book pricing models, which isn’t really the case; the DOJ isn’t critical of the agency model itself, but of the way in which it was (allegedly) arranged in this particular case.
To be clear, the DOJ isn’t coming out as an opponent of agency pricing. Agency pricing is a legitimate, effective way for products to change hands. There is no debate here about whether agency pricing is right or wrong. If one company wants to do an agency pricing deal with another company, the DOJ will have absolutely no problem with that. What the DOJ is alleging is that there are questions to be answered about how the agency pricing model was arrived at in this particular case. How were decisions made? Who talked to who? Here’s my view, in a nutshell: I’m no fan of monopolies, but I also think they’re best broken down by healthy competition and by the innovations of rivals. Sure, monopolistic companies gain certain advantages thanks to their success, but it’s up to their rivals to find ways around this. Smart ways. Legal ways.
Many publishers seem to be very wary of letting Amazon have too much power. That’s natural. The problem here is that Amazon is accumulating power for two simple reasons: it is providing the innovations that seem to be beyond the publishers; and it is giving customers what they want. The first point is perhaps a little unfair, because Amazon can afford to innovate without thinking about the bottom line of profitability in the ebook market, i.e. Amazon has certain freedoms that the publishers don’t have. Nevertheless, we are seeing what we have already seen in other areas of the entertainment industry: the traditional companies are not innovating, are not giving customers what they want, and as a result they are suffering. History suggests this is nothing new: large, traditional powerhouse companies do not tend to innovate as successfully as younger, newer rivals.
The agency model has a lot to recommend it. So does the wholesale model. Both are old, established ways of doing business. The DOJ has not suddenly come out and decided it doesn’t like the agency model. What is at stake is the way in which the agency model was decided upon in this particular case. You might wonder why the DOJ has latched onto this example, and this industry, when there are so many others that would potentially be worthy of investigation. Amazon has such power that it does not really need to do deals with others, which gives it an advantage. But you cannot legislate in such a way as to get rid of the natural advantage built up by a successful business.
Capitalism is the system that defines our current economic model in the west. Capitalism is based on the idea that those who succeed, get to keep the profit that they make. And those who do not succeed, get little or no profit, and fall by the wayside. It’s an imperfect system (like all systems) and there is a good debate to be had on the way in which capitalism currently manifests in western society. But Amazon is in many ways a perfect example of successful capitalism: starting from nothing, it grows exponentially over a relatively short period of a couple of decades, becoming a powerhouse. If we then try to legislate to remove some of Amazon’s power, what does that say about capitalism in our society? That we love it, but it has limits? Do we have rules written into western society about how successful a company is allowed to be before we have to cut them down?
In my view, the argument here isn’t about how much power different companies have, but about how they gain that power and how it is sustained. Amazon seems to have gained its current level of power by innovating and by giving customers what they want at prices they can afford. From a technical point of view, that’s an almost perfect capitalist business model. If Amazon did something that was seen as an abuse of its power, there would be room for legislative attempts to prevent this, but then how do you define ‘abuse’ in this context? It’s subjective, and that’s where much of the current debate comes from. And now we come back to my earlier point about the DOJ’s lawsuit against Apple and the other publishers: it’s not about what they were doing, it’s about how they were (allegedly) doing it.
Monopolies occur when one company consistently outperforms all the others. Amazon is arguably doing that right now. Monopolies are sustained when the leading company accumulates so much power that it can use multiple tactics that others cannot use, such as loss-leaders (i.e. selling items below cost price in order). This is what many publishers seem to be trying desperately to stop Amazon from doing. But Amazon is far from perfect. There is room for someone to come along with a better ebook system, a better ereading device. Breaking Amazon’s monopoly (if that is what Amazon has, which is debatable) would be best done by coming up with a product to lure customers away. It’s a daunting task, but it can be done. The challenge is there for anyone who thinks they’re ready…
What happens next in the DOJ’s case? Who knows? The complexities of the US legal system are such that even if one were to use pure logic to analyse the options, one would still likely fall short of an accurate prediction. It’s a fool’s game. Meanwhile, millions of dollars will be spent on legal fees, whereas those millions of dollars could have gone into innovations that might have knocked Amazon off the top spot. Then again, innovation isn’t really about having millions of dollars. You can come up with an Amazon-killing idea while you wait for the bus. Money is no advantage when it comes to developing the idea, although you need money (but not millions, usually) for implementation. And the real kicker is that these things work in cycles. Amazon is still seen as an upstart innovator, at least by the publishing companies. But one day, Amazon will be facing down an innovating rival, and the game will start all over again…