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Another Perspective on Amazon as Publisher & Bookseller, Plus a Contrarian View on Disruption in Publishing

October 27, 2011

I can’t seem to stay away from articles about disruption and disintermediation in the publishing industry, and especially those about Amazon’s role in it.  So here are a few articles of potential interest, and some comments on them.

In “The Trouble With Amazon“, author/publisher/consultant/etc Thad McIlroy opines about Amazon’s recent foray into vertical integration and publishing.  In this article, Thad suggests that the real danger Amazon presents to the publishing industry is not their mucking about in the publisher’s playground, but their bread-and-butter core business of bookselling.  The problem, he suggests, is that Amazon is systematically devaluing books.  His article includes this painfully true zinger:

Writing has become badly debased when a $4.99 e-book is thought overpriced, but people will line up at six in the morning in front of an Apple store to pay $499 for the skinny tablet to read it on.

Thad outlines a number of other problematic practices of Amazon – censorship, remote deletion of books, contrarian e-book format support (and opposition to industry-accepted standards), and so on.  All of these problems boil down to one over-arching concern: market power.

Thad concedes that “Amazon does not have a monopoly on selling e-books”, though it has much of the power of one, and then suggests perhaps Amazon is an “oligopoly”.

This is where I part ways, somewhat, with the article.  Mainly because, as an MBA, this is more my area of expertise, and I find he’s using the terms somewhat incorrectly.  Because I can’t help it… I’m going to be a bit of a pedant here and explain where he got this wrong and then relate it back to the main point of his article.

First of all, strictly and technically speaking, the terms “monopoly” and “oligopoly” do not describe a seller or actor in a marketplace. They describe the marketplace as a whole.  Monopoly, as you’re probably aware, is a market where there is only one seller of a product, good, or service (it’s also a laboriously dysentertaining boardgame that has very little to do with the technical definition).  An oligopoly, as you may have guessed if didn’t already know, is a market where there are relatively few but still more than one sellers of a product, good, or service.  In some ways monopolies and oligopolies behave in similar ways; in others they are quite distinct.

Colloquially speaking, however, the word “monopoly” has entered general use to refer to that sole seller of product/good/service in a monopoly market – they are said alternately to have a monopoly or to be a monopoly.  The word “oligopoly” however doesn’t have the same general use – it is rarely used except in its technical sense.

All that said, when economists and business students talk about monopolies and oligopolies, they are rarely speaking in absolutes.  These things exist – as so many things do – on a continuum, and market power accrues both in terms of absolute market share and relative market share.

Examples may be in order.  The carbonated soft-drink business, for instance, is an oligopoly.  The vast majority of the market is largely split between two main competitors: The Coca-Cola Company and Pepsi.  Between them, they own virtually all of the carbonated soft-drink beverages you are likely to enjoy on any given day.  One of the two typically has a slight market share advantage over the other, but not enough to act independently in the market.  There are a handful of other players in the market, but any action taken by any of those will not be enough to disrupt the market.  If Coke or Pepsi do something, however – introduce a new product line or a new flavor or introduce significant pricing changes – the other is certain to act in kind, and the entire market will change as a result.

There are, on the other hand, few pure examples of monopolies, but as I said above, we discuss these things in terms of degrees.  Microsoft, for instance, has a virtual monopoly on the desktop operating system market: they control somewhere in the realm of 80% of the total desktop operating system market.  Apple makes a very distant second with some 10 to 15% and Linux-based systems come in third.  But whatever Apple or Linux-geeks do with their OSes in the market really have little to no effect on the overall desktop OS market.  This isn’t a statement on the quality of those products, but on the market realities.  Microsoft is able to act entirely as a monopolist, and they’ve gotten in trouble with regulators for doing just that.  It is only recently, with the rise of mobile computing, that rivals have regained the market advantage.

So those are some solid examples you can probably relate to.  Back to Amazon and bookselling.  It’s difficult to track down reliable statistics on market share in the bookselling market: the best data is proprietary to a company called Bowker, and to get it you’ve got to pay for it.  The most recent data I’ve seen is for 2010 – from before the demise of Borders – and breaks down the large players thusly:

  1. Barnes & Noble: 23%
  2. Amazon: 15.1%
  3. Borders: 13.1%
  4. Wal-Mart: 5.8%

…and so on.

In this world scenario the majority of the market was split by the three largest players – a textbook oligopoly, as Thad McIlroy pointed out.  These players were likely to move tightly in reaction to each other.  Except… one of them has recently disappeared entirely, which is a major upset of this market.  13% of the demand for books didn’t just disappear overnight.  It went somewhere. 

Now… what about e-books?

Reliable market statistics for e-books are even harder to track down: the sales figures of each vendor are completely proprietary.  Amazon doesn’t share it’s e-book figures, for example.  But anecdotal data – information posted on blogs by authors who have self-published – suggest that Amazon’s share of the e-book market might be anywhere from between 60% to 95%.  That, my friends, is pushing the boundaries of monopoly. 

So, while Amazon plays a close second-fiddle in the overall book market to Barnes & Noble, it has the overwhelming advantage in growing e-book market.  This accrues significant market advantages to Amazon – and these are advantages that B&N has to struggle to counteract.  Because of this, Amazon is able to act in ways that are similar to or approaching the practices of a monopolist, and this gives rise to many of the questionable business practices Amazon has engaged in.

I’ll pause here to note, however, that being a monopoly – or a part of an oligopoly, for that matter – is not a moral question.  There’s nothing inherently wrong with having a monopoly.  If you have a superior product, it’s natural that you’ll gain a significant advantage in the marketplace.  Having a monopoly is merely a description of the realities of a market.  The problem arises from behavior.  Power, they say, corrupts and absolute power corrupts absolutely.  Monopoly power often causes companies to act in ways that are anticompetitive or otherwise unethical or problematic.  When a company already exhibits tendencies to act in these ways even before they have a full monopoly, one tends to develop a distrust of said company’s ability to restrain itself as its market share grows. 

So… with a little economics lesson there, that’s all I have to say about Thad McIlroy’s article on Amazon.  What else have I got in my sack of goodies today?

Author/poet Guy LeCharles Gonzalez weighs in on “disruption” in the book publishing industry in “The Truth About Disruption in Publishing“, and he is not impressed.  His take-away argument is based on how things have typically worked out in technology markets: as new and potentially disruptive technology start-ups begin to make a name for themselves and gain the attention of big players, they are typically summarily bought-up and their technologies integrated into some big player’s offerings – or else disappeared from the market entirely.  Relatively few new entrants in any market have long-term staying power.

He also suggests that futurists attempting to predict the future of books and media not discount the importance and value-add of physical brick-and-mortar locations.  In the long run, Guy takes a positive view:

My optimistic hope is that, unlike the music industry, we’re going to see the publishing industry actually grow as the evolution (and definition) of the “book” takes us beyond short-sighted debates over formats into far more interesting experiments with content, subject matter, and experiences, not to mention new audiences who were previously under-served due to limited physical shelf space.

Finally, there’s this post on publishing agent opines about the premature warnings of the “death” of publishing, and recasts these dire bleatings as not a future of “death” but merely of “change”, while conceding that it’s uncertain where that change will lead for the current players in the publishing industry like author’s agents.  He doesn’t make many big or earth-shattering pronouncements or predictions, and it’s hard to disagree: whatever is happening, it is certainly change, but at the end of the day people will still read books.  They may not be on paper.  And they may not look like what they are today.  But they will still exist.  Because people have a need to read, and to experience story and narrative and mythology, and all of that wonderful stuff that we get in books.

So there’s your round-up of posts on the state of the publishing industry – with shout-outs to Tobias Buckell and Jay Lake for the links – along with a probably-too-long digression on economics.

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5 Comments leave one →
  1. October 28, 2011 4:45 am

    Good and useful commentary!

    I’m not an economist, and surely was misusing the terminology. I started with “monopoly”, the meaning of which is clear and unequivocal. But it doesn’t work for Amazon, so I dredged up oligopoly (and linked to Wikipedia’s entry for those who wanted to explore the term).

    I was thinking mainly about ebooks because:
    1. The print side of the business is not growing, and the bankruptcy of Borders points to the problems ahead.
    2. Ebooks are exploding. Amazon deftly initiated the explosion and has brilliantly capitalized on it.

    As I was writing the post and considering Amazon’s impact on the marketplace for authors and publishers I saw that the distinction between monopoly and oligopoly is unimportant in Amazon’s case, as you also suggest. Amazon so fully dominates market that it might as well be the only player.

    Today I learned that Barry Eisler, another bestselling author, offers his latest ebook as an Amazon Kindle exclusive. He gave up a $500,000 US two-book offer from his long-time publisher to go with Amazon. If Eisler doesn’t need any other retailer to be a success…well…

    Interesting times. I agree with you that “there’s nothing inherently wrong with having a monopoly.” It’s just that there’s few if any cases in the last century where a monopoly has conveyed to suppliers and consumers greater benefit than they had with an open market.

    • October 28, 2011 8:58 am

      Hey, thanks for chiming in. My apologies for the pedantry… In this case I thought a quick overview of the terms actually helped illuminate a little about how and why Amazon acts the way it does. And when it comes to e-books, Amazon does indeed have an effective monopoly, if not a true monopoly – rather like how Microsoft has an effective monopoly on desktop OSes but not technically a true one. When it comes to market power, once you cross a certain threshold you’ve basically got it. And for Amazon, the increasing importance of e-books means that their overwhelming market power in that specific sub-market enables them to act as monopolists and to do some pretty crazy things. As you point out (and I alluded to here) being in a monopoly isn’t necessarily a bad thing – but there are few if any examples of when a monopoly situation lead to good market behavior and outcomes.

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