Did Amazon Violate Antitrust Law in Order to Dominate the Sale of E-Books?  The other day I received a query from someone who, like many others, was under the impression that Amazon had used antitrust abuses in order increase its sales at the expense of impoverished writers, vulnerable book publishers, and even mighty Apple, Inc.   The query was well meaning but had things exactly backwards.

Yes, there has been a mighty competition between Amazon and others for the sale of e-books, and for a time Apple openly feared Amazon’s computer tablet, which is called the “Kindle Reader.”  Apple specifically dreaded that the Kindle would encroach on sales and after-market sales that Apple wished to make with its own computer tablet, famously called the “I-pad.”  Apple likely continues to have the same fear:  Those who buy Kindles will not buy I-pads, and, worse, they will not become hostage to Apple’s closed, lucrative universe of songs, videos, e-books and other content.

As a seller of books and now e-books, Amazon has had no peer.  It offers seemingly every book ever published at unbeatable prices, and it sends your books to you wherever you want within a few days.  It can deliver e-books to you within seconds.  It was willing to do so at $9.99 per copy, even though you must pay much more to buy paperback or hardbound versions of the same content, just as it has been willing to use aggressively low prices to win sales in its ever-growing line of product offerings.  Thus it poses an immense threat to book stores as well as the book-publishers who furnish the books to the book-sellers.

Amazon:  A Looming Menace to the American Way of Business?  For better or worse, and there are many who say it has been for the worse, Amazon has developed a devilishly attractive business plan that has immense appeal to an extraordinary number of purchasers across seemingly all or at least most product markets, including those for digital books (e-books).  Amazon has emerged as a leading competitor for the sale of just about any product that it can arrange to ship to you within a few days after you effortlessly click your mouse a few times while munching away on cereal at home.

Why endure crowds, the hassle, the off chance of a lunatic gunman on the premises, and the unpleasant certainty of losing half your day in “shopping-mall hell,” when from the safety and comfort of your home you can purchase precisely what you seek at better prices than you could find even if you did sally forth to the mall along with all of the other customers (aka, herring-like victims)?  No, it is far better to stay safe and comfy at home or at the office, or to place your order on a Kindle from a pleasing cafe.  Then Amazon will have the desired merchandise delivered to you at the location you specify in a few days at minor expense.  It can even do so on the following day or two days later for many purchases in many parts of the country (in the past few years it has established immense warehouses on the outskirts of most major metropolitan centers so that it can deliver many products to your home or workplace within one or two days).

Is this then the last word on retail sales?  Are brick-and-mortar retailers merely so many ducks that Amazon now has in its sights?  I think not (see below).

Amazon Has Succeeded the Old-Fashioned Way — By Offering More Appealing Products, Prices and Services.  Did Amazon use antitrust abuses or merely a superior business model to emerge as this formidable competitor whose products, services, and prices pose such a threat to its rivals, but such a boon to consumers slouched over their computers at home while munching on cereal?

So far as I can tell on the basis of limited information, Amazon has merely developed a brilliant business that has succeeded far beyond anyone’s reasonable expectation.  It has not committed antitrust abuses (so far as I can discern) but on the contrary has brilliantly succeeded at the very kind of competition our antitrust laws favor.

The fitting response to its threat — which imperils the existence of many businesses — is superior competition:  Apple, the book-publishers, the bookstores, and all of the others must constantly strive to offer better products and services on more favorable and convenient terms.  Perhaps some of them will be run out of business, and perhaps others will develop a business approach that in turn runs Amazon out of business or obliges it to improve its own offerings.  This is the stuff of “competition on the merits,” which is what the antitrust law exist to protect.

In the matter of e-books, it now seems reasonably clear that Amazon, so decried by its rivals, has done nothing that remotely implicates any sort of arguable antitrust offense.  I wrote before that I am not sure whether there even exists a “relevant market” for the sale of e-books, and, if even one exists, whether Amazon acquired a monopoly position in it, or, even if it did, whether it did anything improper in order to acquire this monopoly position, which besides I doubt exists:  Rather, Amazon won sales of e-books by selling them at $9.99.  If by so doing it were able to corner, say, 80% of all sales of e-books, then what?

If it were to raise its prices, say, to an outrageous $22.14 per e-book, what would prevent disgruntled purchasers from turning to another seller of e-books (ergo, Amazon never held a monopoly position, since a monopolist by definition can raise prices without fear of being undersold by an actual or potential rival), and moreover what would prevent some disgruntled purchasers from returning to bookstores to buy paperback and hardbound volumes (ergo, there exists no “relevant market” for e-books, since paperbacks and hardbound volumes remain and are treated as reasonably interchangeable substitutes by a substantial number of customers).

No, Amazon apparently emerged as the dominant seller of e-bo0ks the old-fashioned way: It developed an ingenious system by which it delivers books to readers at low prices in a manner that makes it exceedingly easy and even fun for readers to browse for books at home (online), purchase what they want with a few clicks of the mouse, and receive the books instantaneously (or in hard-copy format within few days by delivery to your doorstep). Amazon did so by accumulating massive computer server farms, state-of-the-art computer technology, an immense network of participating sellers and distributors, immense warehouses of goods located in the key metropolitan centers, superior logistics, an easy-to-navigate website that allows duffers such as me to find and purchase what they want with minimal hassle, and a trustworthy brand.  It could not have been easy to imagine, develop and actually operate such a business.  Even so, its approach now threatens the livelihood of many, including the book-publishers, and even the mighty Apple feared that some of its exorbitant profits might come under threat.

Apple and the Book-Publishers Chose an Antitrust Conspiracy Over Competing on the Merits.  To counter this threat, the book publishers and Apple resorted to another old-fashioned practice, one that is illegal and called blatant horizontal price-fixing.  Caught red-handed in the act, they were sued by the US government and also by fleeced consumers in a massive class action.  So far as I can tell, they have no reasonable defense to what they have done, and so instead have sought to divert attention to Amazon’s success, which is indeed a mortal competitive threat for many, including the dinosaur book-publishers, but also many starving and otherwise meritorious artists who deserve our sympathy if not always our readership.

With their hands in someone else’s cookie jar, Apple and the book-publishers took to yelling angrily that “Amazon is a monopolist, Amazon is a monopolist”!   By this plea, they tricked many, including my correspondent, into stating the case exactly opposite to its truth. It is Apple and the major publishers who have resorted to a blatant and per se antitrust violation — horizontal price-fixing — in order to answer Amazon’s threat and at the same time force customers to pay more for e-books than they would do in competitive markets.

Even if Amazon had employed improper practices in order to emerge as a monopoly provider of e-books, and nothing other than baseless speculation suggests that it ever did so, nothing could justify what Apple and the book-sellers chose to do, which was as follows.  Apple and each of the major national publishers (bar one) agreed that (1) the publisher would set the prices for its e-books rather than allow distributors or retailers to do so, and the publisher’s prices would be much higher than those offered by the now displaced distributors and retailers; (2) Apple would sell the e-books at these prices and earn a commission on each sale; and (3) any other distributor or retailer that wanted to make sales would have to agree to an identical arrangement, and must agree not to offer any lower price, or else it could not receive new e-publications during the first six months of distribution, which is the critical period of distribution for most new publications.

In this manner, the book publishers were assured of sales at the higher, fixed prices, while Apple undermined Amazon’s sales of computer tablets and products that customers buy with computer tablets.  Note that the bad guys succeeded in their mission (temporarily) not by offering better products, prices or services, but by preventing Amazon from offering its e-books at the very low prices that were so appealing to a large number of readers.  Herbert Hovencamp once quipped that the telltale sign of a bad antitrust case is that there is no harm to consumers.   The converse is that the telltale sign of a strong antitrust case is that the defendants have not tried to improve their own offerings but rather have schemed to ruin a rival’s business so that they can charge higher prices to captive customers who might otherwise have turned to the now ruined rival.

Amazon’s Success Imperils Many Good Businesses:  What to Do?  It is not only Apple and the mammoth publishers who regard Amazon as a threat to their livelihood.  Amazon’s model appears to pose a challenge to established and aspiring writers as well as to all publishers large and small.  All of them apparently fear that, in our new digital era, the printed word might go the way of the recorded CD or movie video.  What to do when your work is to offer a book, film or song, and now your work, which takes so much care and inspiration to prepare, can be transmitted digitally within seconds by a dominant seller, one that has massive computer-server farms that stretch around the world, an extraordinary logistical operation, brand recognition, and state-of-the-art computer technology that allows it to offer all products, including your books, films and songs, to anyone in the world at very low prices upon a simple click of the mouse? What to do?

The proper remedy, of course, cannot lie in committing antitrust abuses to counter the evolution of technology and markets.  But Apple’s rivals are not hapless victims who must perish and go the way of the horse-and-buggy without even trying to improve their offerings so as to provide products and services that Amazon cannot offer.

An Artist’s Union.  For the artists — the dispossessed authors, film-makers, and composers — the answer must lie in union activity, which enjoys significant protection from antitrust review.   I am not a labor lawyer, but my casual understanding is that writers, actors, and musicians each belong to well-organized “guilds,” which act as labor unions that negotiate collective bargains for their members.  Amazon and others would lack good songs, books and films to sell if these people did not employ their creative talents in order to make them in the first place.  While each artist alone might have little say during negotiations with an outfit such as Amazon, and while struggling artists in particular often must endure the most humiliating terms, all of the artists acting together might do much better and might negotiate common terms and conditions that Amazon and others must observe when distributing their works.  Many businesses understandably have real concerns about union abuses, but it seems to me almost impossible for creative artists to get a fair shake without a union that can negotiate terms and conditions for all of its members.  At the same time, an overreaching union tends to stultify and oppress commerce, innovation and opportunity while exacting unaffordable concessions that condemn the entire industry to eventual ruin.

The Real Answer:  Fight Fire With Something Fire Can’t Offer.  But now I reach my central point.  The publishers, like other threatened businesses, must learn to adapt their businesses to changing times, so that they begin to offer new products and services that customers find useful and affordably priced, or else they will go the way of steam-engine sellers and horseshoe makers: I would suggest an alliance between publishers and coffee-stores and other social places, so that readers could enjoy a comfortable, inviting, and social place, one where they could gather to browse, read, and make purchases at discounts.  At these outlets, they would purchase and enjoy coffee, good food, books, magazines, digital downloads, a hooked-up wifi workspace, and other such items.  The really good operations might become irresistibly popular and wildly successful.

But gone are the days when five or six national publishers can decide which handful of authors will receive their stamp of approval and national promotions at bookstores located on street corners.  Antitrust abuses will not bring back the happy good times, nor should anyone try to use restrictive practices to protect his livelihood from the march of progress.

I am not a partisan of Amazon. I grasp only that it has developed an astonishingly successful approach to retail sales of most kinds of products, including intellectual products such as the printed compilation of authors’ works. It has become an enormous retail seller, whose approach threatens many other sellers in an extraordinary range of product markets. But the answer for Amazon’s competitors lies in finding new ways to provide appealing services that an anonymous, low-cost online seller cannot provide.

You can get a book within seconds from Amazon at a price that is one-half or two-thirds the price on offer at a store to which you must go in person. But if going to the store is a delight, then the Amazon experience will seem unfulfilling to many.  This might be especially true for book-purchasers, who famously love to gather, browse, and read at local bookstores.  But it is also true for most purchasers in general, who gratefully appreciate a smile and helpful advice from an attentive employee, social interaction with others, and a chance to kick the tires a little before buying the merchandise.

By William Markham, © 2013.