Amazon's online monopoly game

Amazon's move to offer customers discounts in return for scanning prices at its offline competitor's stores has sparked outrage in the US, but the bigger issue is Amazon's ambition for the eBook sector.

Whoever thought up Amazon’s latest idea for squeezing other retailers - offering money off to people who scanned prices in US stores with its smartphone app and then bought the goods on Amazon - deserves an award for bad timing.

Amazon’s $US5 offer is a textbook example of why the Supreme Court changed US antitrust laws four years ago to discourage free-riding by discounters. It has caused outrage among retailers and politicians at a time when Amazon needs all the political support it can get.

While Amazon is blithely using its rivals’ property as a storefront, it wants antitrust authorities in Europe and the US to help it control the eBook market. The European Commission and the Department of Justice have launched twin probes, provoked by deals under which publishers set prices for their eBooks rather than letting Amazon, Apple and Barnes & Noble do so.

The chances of the European Union abolishing such “agency” deals as an illegal form of price-fixing are significant but it should hold back. As the US accepts - and the eReader case shows - it can be good for consumers if suppliers price their products as they wish rather than giving a distributor free rein.

Amazon is eager to discount eBooks on the Kindle in the same way that it discounts everything else but has been stymied by publishers who fear it will eliminate all eReader competition. As Mike Shatzkin, a publishing industry analyst, says: “It is an incredible irony that antitrust law is being used to protect the biggest monopolist.”

Amazon’s $US5 bonus to customers who entered stores on Saturday, scanned the prices and left empty-handed did not apply to books. It has still riled bookstore owners and authors, including Richard Russo, who wrote in the New York Times: “Maybe Amazon doesn’t care about the larger bookselling universe because it’s simply too big to care.”

That’s unfair on Amazon. In many ways, it has not only shaken up the publishing industry for the better - allowing authors to bypass traditional publishers and sell directly to readers - but has helped publishers to make a smoother transition to the digital world than, for example, music companies.

It has innovated with the Kindle, providing a seamless way for readers to buy ebooks, which aids publishers. The fact that book stores no longer control distribution, and that anyone can publish an ebook at a higher royalty rate than the big publishers offer is also beneficial - two of this year’s Amazon bestsellers were self-published novels.

Amazon lets anyone who self-publishes an eBook on the Kindle set a list price, but reserves the right to discount. It wants to do the same with big publishers - obtaining their books at a wholesale price and then discounting popular ones in order to draw more people to its service. It can afford to take bigger losses than B&N and is eager to do so.

Other things being equal, lower prices are good for consumers, but I fear a world in which Amazon squeezes out the Nook; pushes B&N into the same fate as Borders, which was forced to liquidate in July; marginalises all independent stores; and dominates the industry from publishing to printing to distribution. That would be a dystopia for both readers and authors.

I am not a neutral observer. Penguin, which along with the Financial Times is owned by Pearson, is one of the publishers facing these antitrust probes and has just published an eBook by me on the Kindle and other devices. This would have been unthinkable only a couple of years ago and Amazon helped to make it possible.

Yet there is good reason not to take Amazon’s side in the antitrust case. Minimum price deals between suppliers and distributors are presumed to be illegal in the EU and those on books have mostly been eliminated - the UK’s Net Book Agreement was struck down in 1997. But such arrangements have been examined case by case in the US since 2007.

Amazon’s $US5 discount offer is precisely the kind of behaviour cited by the Supreme Court in deciding that it was not always in consumers’ interests to stop suppliers insisting on minimum prices. Otherwise, as a group of economists argued, “a customer may take advantage of one retailer’s informed sales staff [and] convenient locations” and then buy from a low-cost discounter.

As a 2008 study by the Organisation for Economic Co-operation and Development noted, most economists do not think “resale price maintenance” of the kind that the publishers want is necessarily bad for consumers. Under some circumstances, it can be “benign and often pro-competitive”.

The eBook industry is such a case. The best thing for society as a whole is to encourage vibrant and open competition, with millions of readers, thousands of authors, hundreds of publishers, and plenty of outlets, not only physical but virtual. Assisting Amazon to become the monopoly eBook interface between author and reader would not be.

If some publishers want to set eBook prices above the level Amazon prefers, that is fine providing they do not collude to fix prices and there are alternatives. There is little danger on the latter front - anyone can now become a publisher and new ones are springing up all the time. Amazon has itself become a publisher and displays its titles generously in the Kindle store.

Minimum prices deals helped to erode Amazon’s initial dominance in eReaders by encouraging competition from B&N and others. Even so, the Kindle still accounts for 60 per cent of eBook sales. It is not the job of antitrust officials to hand Amazon back its monopoly.

Copyright The Financial Times Limited 2011.

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