Amazon’s monopoly is not predatory

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 wher
e 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.

17 Comments on Amazon’s monopoly is not predatory

  1. I agree with most of this post but I would suggest that Amazon does NOT have a monopoly, merely market dominance, As a self-published author, I might not have the same ratio as traditional publishers, but I make 2/3 of my sales from Kindle books, with Apple and B&N splitting most (but not all) of the remaining 1/3, pretty close to equally. I would headline this post “Amazon’s Pricing Is Not Predatory.”

  2. Gotta agree with Carmen on this. I do have a few outlier sales at B&N (none at Kobo so far), but the vast majority is on Kindle. Same book. Same price everywhere. It’s market dominance.

  3. Elliott Starr // July 12, 2013 at 9:30 am //

    You also didn’t mention that Baen(for instance) seems to be making tons of money pricing it’s frontlist hardcovers at $9.99(and that’s only at Amazon’s insistence).

  4. Where did you get that Amazon insisted Baen price stuff at $9.99? There has been no such statement I’ve ever seen (it’s of course possible I missed Toni saying something), only that Baen worked out the new pricing structure to take into account commissions/discounts given to retailers that they weren’t dealing with when it was only Webscriptions/BaenEbooks doing the selling.

  5. @carmen, @juli: I can’t remember where I saw it, but one of the articles I read pointed out that even if Amazon was a monopoly, as long as it wasn’t arrived at collusively it was a legal monopoly. I may have oversimplified. Perhaps I should have made the headline say “If Amazon Has a Monopoly…” But so many people like to call Amazon a monopoly anyway, I figured that I’d just cede that point.

    @Elliott: Good point. I could also have mentioned that Baen has been giving away books for free as loss leaders for over ten years and nobody’s accused it of predatory pricing. Maybe I’ll amend the article to say so after I’m home.

  6. As I recall, Amazon is notorious for withholding detailed information on their costs, revenues and profits. We do know that Amazon overall profits are quite thin. So, is there any independently verifiable evidence to support or refute the testimony of Amazon execs? Specifically, is there independent evidence outside of David] Naggar’s testimony supporting the assertion that Amazon profits on each and every publisher relationship?

  7. Only what the Justice Department says on page 9 of its antitrust complaint against Apple and the publishers, linked above:

    “From the time of its launch, Amazon’s e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles.”

    They don’t provide any details to back up this assertion, but I would expect that they were able to finagle them out of Amazon. There’s a difference between releasing information in the open where your competitors could see it and releasing it to the DoJ for use in an investigation—especially since the DoJ was on their side against Apple and the publishers.

  8. David Thomas // July 12, 2013 at 5:25 pm //

    Back in 4Q 2009, there were 2 big fears about the $9.99 Amazon e-book: 1) it was cannibalizing the hc format sale and making it appear that publishers were gouging the consumer on the hc 2) in establishing $9.99 as ‘the price’ for an e-book with consumers, Amazon would eventually turn it back to the publishers and demand a wholesale discount based on a $9.99 retail price. Item 1 is true then and now, item 2 is half-true: Amazon was successful in establishing $9.99 as the ‘legitimate’ price for an e-book. I think every publisher is right to beware of Amazon’s long game and prepare accordingly. The DOJ never said Agency was illegal, only the apparent collusive manner in which the publisher’s rushed to use it as a proactive response to the Amazon long game. Remember, too ,that it became crystal clear in the trial that Amazon had options: they could have kept the wholesale terms with windowing, or go with Agency for immediate access. Last point: Amazon is a digital book monopsony — one buyer with many sellers.

  9. As a small publisher and also an author, I find that amazon has too much power to influence the prices I must charge and the ability to achieve sales unless I accept all their terms.

    They have driven down prices to the point that few people would want to write for what they could get paid now. Look at the massive amount of truly bad ebooks that are being pumped out. When everybody is an author nobody is worth reading. And the few good books get hidden in the avalance of slush.

    We can only hope that after they finalise their monopoly that new channels of distribution will arise that connect worthwhile authors with people willing to pay a fair price for our knowledge.

  10. If you have much experience with financials, you know with a company the size of Amazon ‘you can draw your circles’ of revenues and expenses an infinite number of way to make any particular portion of the business to appear profitable or running at a loss. The DOJ complaint, considering they are the ones filing the suit, means nothing given accounting creativity and Amazon’s complete lack of transparency with their detailed financials.

    The most amazing thing about Amazon is that they’ve been running as the worlds “largest non-profit” organization for so long and getting support from investors for doing it. For the 12 months ended 2012-12-31, Amazon LOST 39 million dollars on….wait for it…revenue of OVER 61 **BILLION** dollars. The have recently had some barely profitable quarters and it is amazing that investors still support this lack of profitability as they “build for the future”. The reason this is still garnering support is the hope of future profits as they drive out competition and position themselves for the future.

    You also make the mistake of saying Amazon had no competition in ebooks — but it’s books you should be mentioning, not just ebooks. They see the long-term advantage in driving bricks and mortar bookstores out of business, of cornering the electronic market, and having command over publishers and authors. For direct publishing, look at Amazon royalty rates for authors before iBooks was born, or even today for books over their $10 limit, or for countries with iBooks competition. Honestly, follow the money here and you will see some truth start to emerge.

    I find it hard to believe you think the ‘loss leader’ argument really is Amazon’s strategy to drive more sales of other books priced at a profit. Be an Amazon strategist for a second, and consider the market and long term considerations. Clearly the goal is to drive existing players from the market and make it unprofitable for others to enter. And please do not be fooled by the page 9 ‘consistently profitable’ statement, not only is that subject to accounting games, but it’s not even part of this case against Apple so it would be irrelevant to challenge it here.

    In the long term, investors will demand Amazon start to generate real profits, when that time comes, you can be sure the controlling player in this game will begin to change the rules significantly and the reap the harvest from these years of preparing the soil. As consumers, choice will be gone and Amazon will be in complete control. Yes, you hope the government inclined to save us then, don’t you?

  11. And you think that Amazon’s pricing on e-books is going to make up more than a fraction of $61 billion in revenue?

    Amazon’s been foregoing profit on account of building out infrastructure. As many new services as it’s introduced in the last few years—Prime, e-books and e-readers, Prime video, music and file hosting, cloud service hosting, tablets—it requires a lot of infrastructure. If it wants to start making a profit, all Amazon has to do is slow down the build-out.

    If Amazon gets too big for its britches, the government will step in to cut it down to size, just like they did for AT&T. If you think the current administration is too friendly to them, well, that administration will be out of power sooner or later. If they really are doing something illegal, they’ll get called on it sooner or later.

    Judge Cote actually did rule on whether Amazon’s pricing could be considered predatory in her opinion allowing the settlement with the publishers to go through. She wrote:

    Second, the Complaint asserts that Amazon’s e-books business was “consistently profitable.” Moreover, to hold a competitor liable for predatory pricing under the Sherman Act, one must prove more than simply pricing “below an appropriate measure of . . . costs.” Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222 (1993). There must also be a “dangerous probability” that the alleged predator will“recoup[] its investment in below-cost prices” in the future. Id. at 224. None of the comments demonstrate that either condition for predatory pricing by Amazon existed or will likely exist. Indeed, while the comments complain that Amazon’s $9.99 price for newly-released and bestselling e-books was“predatory,” none of them attempts to show that Amazon’s e-book prices as a whole were below its marginal costs. See Ne. Tel.Co. v. Am. Tel. & Tel. Co., 651 F.2d 76, 88 (2d Cir. 1981) (“[P]rices below reasonably anticipated marginal cost will be presumed predatory.”).

    I think it’s telling that the publishers’ response to Amazon behaving in a “monopolistic” way was not to file complaints with the proper authorities (the way Amazon did in response to them!) but to collude in a way they were fully aware was illegal (“double delete this email”). Might they not have been as sure of the legal ground they were standing on as their bluster suggested?

  12. joe thompson // July 15, 2013 at 7:57 am //

    Chris:

    amazon notoriously does not make much $$ and never has…..whether their ebook businesss is profitable or not is still an open question…..as you admit – you are basing your assertion on the DOJ’s – and I am not confident that they are equipped to vet whatever they managed to “finagle” out of amazon…..the case should never have been brought and was simply a situation where the DOJ was doing amazon’s bidding – and why they were so willing to do it is, for me, the big question…..there are so many cultural questions and the nature of the “offense” – which, at its core was dealing with a potential existential threat to a culturally important business – was hardly on a par with the money laundering, bank fraud, libor and other benchmark gaming, etc – that has been largely ignored…..

    Chris Meadows says:
    July 12, 2013 at 3:20 pm

    Only what the Justice Department says on page 9 of its antitrust complaint against Apple and the publishers, linked above:

    “From the time of its launch, Amazon’s e-book distribution business has been consistently profitable, even when substantially discounting some newly released and bestselling titles.”

    They don’t provide any details to back up this assertion, but I would expect that they were able to finagle them out of Amazon. There’s a difference between releasing information in the open where your competitors could see it and releasing it to the DoJ for use in an investigation—especially since the DoJ was on their side against Apple and the publishers

  13. @Joe Sixpack – Well said.

    Amazon behaving illegally, doesn’t seem like it. Good for authors OR publishers–definately not. I work at a small publisher, Amazon might as well have a monopoly.

    The damage is probably worse for authors. Amazon is destroying the entire marketplace–with both the low retail prices it forces and the free/deeply bargained junk it offers.

  14. You make some interesting points on the way the publishers have dealt with Amazon. The question we can’t answer is ‘why’? I wonder if they felt Amazon had too much power to deal with my making a complaint that may not win. Anger Amazon and they drop your books – we’ve seen that before haven’t we? Another factor here is the amount of money Amazon spends on lobbying. The tax issue alone has meant they are VERY close, and SPEND A TON in Washington.

    I have no doubt the publishers colluded in a horizontal fashion. I have no doubt that Apple gave them the opportunity and method they were waiting for. While I think MFN clauses are legal, I personally think they are anti-competitive despite what the law says. I also think that Apple seeking one shows they weren’t the ringmaster, because if they were they wouldn’t have bothered with the MFN clause. I also think investors will not give Amazon the ‘free pass’ forever, they will feel pressure to make more money than a slower build out will confer. There present valuation prices in an amazing amount of earnings and growth rates on future earnings have an interesting curve ahead.

    Do I think Amazon will change course when this pressure arrives? Without question.

    Do I think that lobbying dollars and money influences people? Not sure….never happened before has it?

  15. Sorry for the poor grammar/spelling in the previous post. I have to go now…..all I can say is ‘follow the money’.

  16. The reason why Apple was seeking the MFN clause was to ensure that Amazon couldn’t stick to a wholesale pricing scheme and still undercut Apple. Since Amazon had an app for the iPhone/iPad, there would be no incentive for Apple owners to use the iBookstore if buying from Amazon was cheaper and the Amazon App reading experience was comparable to the Apple reader. The agency pricing with MFN practically guaranteed that Apple’s iBookstore would be successful regardless of Amazon’s actions. What would it take for you to consider Apple the ringmaster, Ted?

  17. Many commenters here are missing the point. First of all, one is not “selling” ebooks on Amazon, one is leasing them to the buyer. Amazon can and does yank titles whenever it pleases, so the buyer does not technically own the book. Thus, the accusation that Amazon engages in predatory sales practices is an accurate one. Next, as long as authors are made to feel that the content they provide Amazon as publishers is less worthy than the devices they are read on, you will find more and more authors looking for other places to sell rather than continue to work with Amazon. I certainly will not, having experienced first hand what it is like. After being pushed aside by badly written books and those given first consideration because they come out of traditional publishing houses, I prefer to stay Amazon free, thank you very much. While Amazon may not be a technical monopoly, I sicken of the notion that everyone depends on Amazon for everything, from a good review to its bloated catalog as the best place to go. If that is the case, I would rather stop publishing altogether than be treated like trash.

Leave a Reply

wordpress analytics