May 28, 2014 6:03 pm

Publishers must become giants to take on Amazon

If it turns publishing into a lossmaking business, the profession of writing will suffer
Ingram Pinn illustration©Ingram Pinn

Inefficiency is not a quality usually associated with Amazon but Jeff Bezos’s company is behaving as if it is a small, disorganised bookstore that cannot quite control its stock. “You want that book, do you? Very sorry but we have run out. We can order you another copy but they are taking a long time to arrive at the moment. How about buying another title instead?”

It is a ruse, of course. When Amazon tells its US customers that The Silkworm , the new novel by Robert Galbraith, a pseudonym for JK Rowling, is “currently unavailable”, it is not telling the truth. What it means is that it is not making the book available for preorder because it is published by Hachette, from which Amazon is trying to force discounts.

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John Gapper

This is the moment publishers have feared since they last year lost an antitrust case in the US and Europe. “They were concerned that, should Amazon continue to dominate the sale of ebooks to consumers, it would start to demand lower wholesale prices,” wrote Denise Cote, the US district judge. She ruled that the publishers had conspired with Apple to raise prices in its store.

By forming a blatant cartel, the “big six” publishers and Apple botched their effort to resist Amazon’s dominance of ebooks with the Kindle. It made the strangest antitrust cases of recent years – the US government and the European Commission rushing to the aid of an emerging monopolist.

Mr Bezos once suggested that Amazon treat small publishers “the way a cheetah would pursue a sickly gazelle”, wrote Brad Stone in The Everything Store, his corporate biography. Hachette is one of the smaller big five – reduced from six by the Penguin-Random House merger – and is vulnerable.

I have mixed feelings about Amazon. Mr Bezos has created a remarkable company whose devotion to pleasing customers and cutting prices puts competitors to shame. It reimagined what retailing should be like, not just by putting it online, but by making it easier.

He also cut through the fumblings of rivals such as Sony in creating the Kindle. It did not overtake the Sony Reader and the Nook merely because of Amazon’s marketing power and manufacturing efficiency. It is a superior device and is linked to a brilliant (when Mr Bezos lets it work) online store.

Despite its current tactics, Amazon has been a profitable partner to publishers – bringing innovation to a business of custom and practice. “Amazon is the publishers’ best account. It offers tremendous volume with no returns [of unsold books] and preordering helps them put their books on bestseller lists on day one,” says Mike Shatzkin, a consultant.

But it appears disturbingly ruthless, with a hardly disguised ambition to force other suppliers and intermediaries – including publishers and bookstores – out of business. It is a machine for squeezing margins, including its own, to near-zero in order to cut prices.

These margins include not only publishers’ profits but royalties and advances to authors, which have been falling. “This is a punitive, vindictive, vicious anti-culture company,” says Andrew Wylie, the authors’ agent. “If it doesn’t like the way negotiations are going, it punishes the publishers and readers. I don’t understand why this is not subject to legal redress.”

The question is less who wins the contest between Amazon and publishers than what benefits the reader and author and wider society

There lies Amazon’s advantage – it need not form a cartel to squeeze its suppliers because it is already large. With a 30 per cent share of the physical book market in the US and more than 60 per cent of ebooks, it clearly has market power in the antitrust sense. But there has never been a case in US competition law of a single company being declared an illegal monopsonist.

“In the US, the simple use by one company of monopsony power to extract lower prices from suppliers is not illegal. There is general intuition that buyer power means lower prices and lower prices are good,” says Jonathan Jacobson, an antitrust lawyer at Wilson, Sonsini, Goodrich & Rosati in New York.

Amazon may trigger a legal challenge over its deceptive sales practice – telling its customers that Hachette books in the US (and Bonnier books in Germany, where it is waging a similar campaign) are “unavailable” when they can be bought quickly from its competitors. In terms of antitrust law, however, the biggest force in books is secure.

There is a moral for publishers: get bigger. Penguin has merged with Random House (Pearson, the owner of the Financial Times, holds a 47 per cent stake in Penguin Random House), and HarperCollins has just bought Harlequin, one of the biggest independents, for $415m. The remedy to market power is to bulk up.

The question is less who wins the contest between Amazon and publishers than what benefits the reader and author (I am both, having had books published by Penguin Random House), and wider society. Amazon has done some things for the public good – the ability of any writer to self-publish on the Kindle platform aids freedom of expression and the spread of ideas.

It is hard, though, to see the public benefit in Amazon treating book publishers as just another bunch of suppliers, like the makers of toys or garden furniture. For now margins on ebooks remain high, offsetting the squeeze on hardbacks, but Amazon’s intent is clear. If it turns publishing into a lossmaking business, the profession of writing will suffer.

The irony is that publishers’ efforts to set book prices themselves and treat Amazon as an agent were legal; it was the cartel that undermined them. The solution in US law is to grow into giants themselves. So much for craft industry.

john.gapper@ft.com

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