“…he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” —Adam Smith
The recent decision of the U.S. Justice Department to file a criminal complaint against five publishers and Apple Corporation demonstrates the degree to which our supposedly free-market system has been stretched beyond recognition.
Long unique in the world of commerce, books were sold by publishers to retailers on a fully returnable basis to ensure that supply met demand when titles were first released—the practice elsewhere was limited to consignment sales. This, over time, indemnified retailers from their buying decisions—they were free to buy in as much inventory as they needed in case a hoard of customers appeared—and the publishers clucked and frowned because they frequently overprinted books and had to eat the excess inventory that was return unsold and, frequently, unsaleable.
Many publishers sought to convert their customers to the more familiar model of final sales—you buy it, Mr. Retailer, and you own it. Others tried hybrid approaches, like “remainder in place,” a euphemism for deep discounting overstock inventory rather than shipping it back to the publisher. Over time, the number of retail outlets dwindled to a few major bookstore chains and a small and quickly shrinking cloud of independent bookstores.
As buying and display became concentrated in a few hands, the retailer became king, dictating what price and terms they would accept to stock and sell a publisher’s books. “Meet my demands,” they said. “Pay me for premium locations in my store,” they demanded. And, faced with a boycott against their merchandise, most publishers caved in and met the demands of the retailers. Grumbling grew louder on the publisher side and, incidentally, on the creative author side as well—authors watched with alarm as marketing and advertising budgets disappeared into low-net pricing, advances tumbled, and royalties were reduced.
Along comes the Internet retailer, and this shaky industry was rocked to its core. In a short decade, publishers and authors served a new master, Amazon.com. Add the inequity of eBooks, and you have concentrated in a single company monopoly powers to dictate terms and pricing on a take-it-or-leave-it basis that serves no public well.
Books became loss-leaders to entice customers into buying other wares, sold below cost, and Amazon gained market share. For eBooks, it’s said, they had over 80% of the entire market. Publishers and authors had a choice of one for selling their books to consumers online—and edicts from the monopolist quickly followed, stripping authors of their copyright protections, publishers of their profit, and the public of quality literature and non-fiction books.
Where was the DOJ when all this was taking place? Applauding—Democratic and Republican administrations alike sat on the sidelines watching a wholesale dismantling of main street and intellectual property in an industry central to our civilization.
There’s no doubt that Apple’s founder looked down at this mess with disdain, having observed the carnage of the music business precede it. He took a different model, the one used for newspapers and magazines, and said to the publishers, we’ll sell your books for a commission. We’ll ask a sales commission of 30% of whatever price you set for your merchandise. It’s the identical model you see in auto retailing and in scores of other industries. It works because costs and profits become predictable, and no one has enough market share to dictate or write edicts. If someone wants to compete on price, they change the commission rate—there’s nothing to stop Amazon from offering publishers 50% of the price of the merchandise…or 10%…as they compete with Apple or other retailers.
As I understand what happened, Apple approached the various publishers individually, making their case for a net agency business model for eBooks. A number of publishers looked at their offer and saw its obvious advantages, and accepted the offer. It’s even possible some publishers asked one another whether Apple had come to them, and what they said. Other publishers sought Apple out. The marketplace was free and working.
In a matter of a couple of short years, Amazon’s market share for eBooks dropped from a monopolistic 80+ per cent to somewhere near 60 per cent. Competition thrived. A variety of commission rates existed between various online retailers and publishers.
Then the shoe dropped, first at the European Union (which deplores free market economics) and then in the Obama Administrations’s Department of Justice. Stern warnings—the carrot—and promised punishment—the stick—were offered in outstretched hands. Amazon chortled.
We’ll see where this dust settles in a few years. But I am not comforted by watching an industry that I was part of for over three decades dismantled and handed over wholesale in a governmental bet on winners and losers by edict and threat of penal power. Equality? The consumer losing?
What loss will it be when quality literature ceases to exist, completely vetted for accuracy by the costly effort of fact-checkers, editors, and authors? Think it can’t happen? Who will write (or edit, or fact-check) when they can’t make a living wage because their wares are discounted so deep that their labor no longer rewards them for their work?
Government is increasing becoming the “visible hand” of our economy, stifling competition and innovative solutions to thorny problems in the name of serving the public. I, for one, long for the day in which the invisible hand of the market drove my decisions to produce or not produce.
Robert Dolezal—Consultiq’s CEO