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The Shared Monopoly of Big Publishing

4 February 2012

In the comments, David Gaughran suggested revisiting the downside of monopolistic behavior. Here’s a repost from last October:

From Mike Shatzkin:

Here’s an assumption that is not documentable; it is my own speculation. I think we’re going to see a US market that is 80% digital for narrative text reading in the pretty near future: could be as soon as two years from now but almost certainly within five.

. . . .

We’re already at the point where new narrative text units sold are well north of 25% digital (percent of publishers’ revenue is lower than that, of course) and we are still in a period that has lasted about five years (soon to end) where the penetration of digital has doubled or more annually.

. . . .

Now here’s a fact which is documentable, and would be documented right here on a day when time wasn’t in such short supply: brands that are not publishing houses are directly publishing their own ebooks with increasing frequency. Magazines and television networks and web sites are recognizing the reality that self-publishing ebooks is something they can do themselves without the complications (or revenue-sharing) that working with a publisher would require.

This is not a surprise to me, but it does really raise a point that major publishers have to consider: can book publishers add enough value to the ebook publishing process to persuade another brand with content credibility, one that has direct contact with the vertical community that is the audience for their books, to do their ebooks through the publisher rather than directly?

. . . .

This is an existential question for big trade publishers. They have forged partnerships with other brands, even media brands, for many years based on their unique ability to deliver printed books competently and to put them on bookstore shelves. Those are things that a magazine, a broadcast network, a movie studio, or a packaged goods company couldn’t do for themselves.

. . . .

I raised the question [to a publishing executive]: “will publishers be able to persuade these non-publisher brands that it is worth giving up margin and some control to work with publishers in the years to come?”

“That’s a very tall order,” he said.

. . . .

And the profound danger to the big publishers is that if outfits like Politico and RCP start by doing their own ebooks, who is to say they’d stop there? It would be a natural extension to start publishing other people’s ebooks themselves once they had built up a network and infrastructure to sell these files successfully. The thing for trade publishers to fear is that they would lose their role in the value chain, vertical by vertical.

Link to the rest at The Shatzkin Files

One of the elements in the numerous conversations about the future of traditional publishers that Passive Guy has not seen anyone discuss is the effect of being a participant in a shared monopoly.

Many people fear the effect of a monopoly on a particular market. Some of the comments regarding Amazon made in response to recent blog posts have reflected this concern. While Passive Guy can certainly understand such worries, he takes a different view of monopolies.

Absent stringent government protection or physical boundaries that protect the monopoly, the long-term effects of overly-dominating a market tend to weaken the company or companies involved. If competition is permitted, the bloated and inefficient monopolist can present an easy target for an innovative and flexible competitor.

Let’s look at Microsoft as an example. During its early years, Microsoft gained an accidental monopoly opportunity for operating systems when IBM asked it to produce an operating system for the IBM PC. That operating system was, of course, IBM DOS. Since IBM was a monopolist itself, it made a stupid mistake in its contract with the then-tiny Microsoft: Microsoft was permitted to sell its own version of DOS, MS-DOS.

Prior to IBM introducing its PC, an active market existed for competing operating systems for small computers. After the IBM PC was introduced, everyone believed it would dominate the market. While IBM was never able to do this, this perception focused everyone on the MS-DOS operating system. People correctly assumed many different software developers would write software, business software in particular, to operate on PC-DOS or MS-DOS.

Microsoft used its sales from MS-DOS to fund the acquisition and/or development of other products, including word processing, spreadsheet, database and presentation software. None of the Microsoft products were very good at first and Microsoft had lots of competition in each of these software categories.

Microsoft moved into the big time when it developed Windows. This was a complex and difficult project and the first few releases of Windows bordered on being unusable. However, Microsoft persevered and, beginning with version 3.1, Windows became a successful product.

During this time, Microsoft had very good programmers and worked hard to rapidly release improved iterations of all of its programs.

Microsoft was also very smart with its marketing. It aggregated its word processor, spreadsheet, database and presentation software into Microsoft Office. Microsoft made it relatively easy for other software developers to build products based on Windows and a large ecosystem of Windows products was the result.

If you looked at Microsoft during the 1990′s, you saw a company packed with smart people doing generally smart things.

Microsoft was making a great deal of money and could afford to hire top talent. Top talent wanted to work there. Given the increase in the share price of Microsoft stock, a good software programmer coming out of college could start work at Microsoft with a realistic assumption that he or she would have stock options worth $2-$3 million when they vested after three years. Lots of tech startups were funded with the proceeds received from exercising Microsoft stock options.

During this period, Microsoft became an aggressive monopoly. With the rapid rise of the Internet, Microsoft felt threatened by a browser company called Netscape, which offered its browser at no cost, a revolutionary idea at the time.

Microsoft actively worked to destroy Netscape and was successful. These actions were the basis of an antitrust suit against Microsoft that marked the beginning of the long decline of the company.

The antitrust suit coincided with an explosion of innovation on the internet. Despite its monopoly with Windows and the cash that it generates, Microsoft has never been able to become a truly successful player on the Internet.

Google began in a computer lab at Stanford and, despite spending billions of dollars, Microsoft has never been able to create a successful competitive offering.

Apple has returned from a near-death experience to become far more valuable than Microsoft and has responded to the Microsoft monopoly by completely changing the playing field. Apple’s most important products don’t require Windows or anything remotely like Windows. Nobody except hard-core techies ever thinks about the operating system on their iPhone or iPad.

Facebook? In a million years, the current crew at Microsoft would never think of something like Facebook.

Microsoft has basically lost the ability to innovate because it could always rely on its monopoly revenue streams. Friends who work for Microsoft say it is nothing like the company it used to be. Decisions take forever. Programming projects are fraught with delays. Money is wasted left and right on products that never go anywhere. Other than its core cash cows, Windows and Office, Microsoft is not very good at making money on anything.

This overly-long exposition does have a point for writers.

Major publishers have worked themselves into much the same position that Microsoft has. There are separate publishing companies, of course, but in important ways, they act in concert like a single monopolistic company.

For example, each offers virtually identical royalty terms to writers. Each offers very similar contract terms to writers. The only way publishers compete for a particular manuscript is by the amount of the advance. They have tacitly agreed not to compete in other ways.

As others have observed, big publishers have a remarkably haphazard manner of finding what they need to survive – new books.

Generally speaking, big publishers don’t develop their own products. Each sits around and waits for someone outside the company to give them a good new product idea. PG suggests that only in a shared monopoly could such a bizarre business practice be sustained.

The big publishers work with highly monopolistic big book wholesalers. The big book wholesalers work with a network of bookstores that has extensively consolidated over the last 20 years.

PG suggests the entire distribution chain from publisher the wholesaler to bookstore manifests classic features and behaviors of a monopolistic system – lack of innovation, lack of flexibility, narrow-gauge management and inbred thinking.

As one evidence of monopoly among Big Publishing, PG would point to what he believes to be a credible suit against all the large publishers for price fixing, one of the harms of monopoly.

If past antitrust suits against IBM and Microsoft are any indication, the biggest harm to Big Publishing from this suit (with more to come) will not be any financial penalties the courts award, but rather a hardening of management arteries as each major business decision has to go through a legal review for antitrust implications. Microsoft has never been the same after its antitrust litigation.

While it is possible that Amazon may someday become a monopoly with all of the drawbacks that accompany such status, today, Amazon is primarily an Internet company. It is very close to its early history fighting its way up through a very competitive environment and is most definitely committed to innovation and very fast and flexible.

In your wildest imagination, can you conceive of Simon & Schuster or HarperCollins developing the Kindle? Elephants would flit back and forth among the clouds before that would happen.

A monopoly believes it is a permanent fixture in its industry. An Internet e-commerce company worries obsessively that it can be destroyed at any time if it doesn’t stay fast and smart. The contrast between Amazon and big publishing could not be more stark.

Big publishing is essentially unable to compete because its monopoly position has caused it to become inflexible and it has lost the ability to innovate. In the same way that Microsoft bumbles and stumbles when it tries to take on Apple or Google, big publishing is slow and oafish when compared to Amazon.

Big Publishing, Mike Shatzkin, Passive Guy

13 Comments to “The Shared Monopoly of Big Publishing”

  1. The thing that has been bothering me the most lately is that in all these articles about the publishing industry, the Big Publishers all seem to operate under the assumption that they have some sort of inherent right to dominate book publishing. HOW DARE someone else come into our industry and do everything better than us! This is OUR territory!

    I just don’t understand how they can think like that. And part of me really hopes that they all go down in flames because they deserve it.

  2. When your belly is so big you can’t see your feet, it’s hard to see where you’re going.

    What strikes me as funny (as in odd) about all this, is I don’t think Amazon actually sees the big publishers as competition. Yeah, they’re a force to be reckoned with, but I suspect it’s the little, nippy, fast-moving, fast growing internet sites that keep Amazon on their toes. The Big 6 and even B&N don’t have what it takes to do real damage to Amazon. But the little guys, the ones that are just like Amazon when it started out? Those are the ones who’ll keep Amazon honest.

    • Kobo and a couple of other Asian sites are going to be Amazon’s primary threat vector. They are working on some models for reading ‘episodes’ of books on their phones (while on the train/airplane/bus) and are experimenting with the subscription model rather than owning individual pieces.

  3. Thanks for reposting this, PG.

    There is a lot of talk in the industry about the “monopolistic” tendencies of Amazon – mostly coming from publishers and booksellers. At the same time, Barnes & Noble, Books-A-Million, and a whole string of indie bookstores have proudly announced an embargo on any books published by Amazon. And, lest we forget, five of the largest publishers – and Amazon’s biggest competitor, Apple – are being investigated for alleged price-fixing in multiple jurisdictions, and are facing a number of class-action suits.

    The antipathy towards Amazon – from booksellers at least – seems to focus on their ability to charge prices that no-one else can match. Ardent free-marketers say: suck it up, that’s capitalism. Booksellers say: we can’t compete with someone of Amazon’s size. They invoke the specter of a world without bookstores and a market completely dominated by Amazon where they raise prices once they have vanquished the competition (and cut royalty rates for authors and so on).

    In the defense of booksellers, one of the ways that a monopoly can arise is through barriers-to-entry. And while there are few physical barriers-to-entry in launching an online bookstore, having to compete against a company with the scale of Amazon – who can amortize capital costs across billions of transactions – acts as a disincentive-to-entry.

    But as PG’s history of the software world shows: a monopoly will ultimately destroy itself. Competition is what makes companies efficient. Without proper competition, companies weaken to the point where up-and-coming, more nimble competitors can quickly grab market share. (Until one of them then triumphs and the cycle begins anew.)

    People like Joe Konrath and Barry Eisler (and PG) have been arguing for some time that the large publishers were acting as a quasi-monopoly, and I think that’s a fair assessment. Before the Digital Revolution, publishers were an essential part of the business of getting books into the hands of readers. They had a lock on print distribution. But this quasi-monopoly made them bloated and inefficient.

    Since the Digital Revolution, where authors can easily publish, distribute, and sell their own work, the industry has radically changed. There are now only two essential component parts: readers and writers. All of the other players are optional. Some add lots of obvious value: for a percentage, Amazon lets writers sell their books to readers all over the world, takes care of the transactions, and pays them monthly – at hitherto unseen royalty rates. The value of other players is less generally agreed upon such as literary agents, or book publicists, or aggregators, or, it must be said, publishers.

    The industry publishers had controlled was ripe for a disruptive change that would allow serious market share to be up for grabs. The company that has done more than most to facilitate that change and open the industry up for competition – Amazon – is the company now getting accused of monopolistic tendencies.

    Having worked for a company that went from a 35 person start-up to nearly 2,000 employees in 18 months, and having worked for a tech company that was subject to a big IPO, I can attest to the challenges inherent in scaling up quickly, keeping a focus on developing radical new products, and maintaining a tendency towards the kind of long-term risky bets that made the company so cutting edge in the first place. To date, Amazon has handled this remarkably well.

    The challenge facing publishers and booksellers is no different to that facing any company in an open marketplace: innovate, or die.

    The challenge for Amazon is to keep developing new products and to keep entering new markets, so that they continually face strong competition and are themselves forced to keep innovating.

    For writers, it couldn’t be better. The old players have to prove their value to us, and if they don’t, we can bypass them (thanks to the new players). And if the new players – like Amazon – start exhibiting the bloated inefficiencies of the old players (which manifests itself in things like treating suppliers like dirt (authors) and farming out product development to a third party (letting agents act as gatekeepers), then newer more efficient players will take their place.

    Thanks to the Digital Revolution, reading is a cheaper, more convenient, more interesting, and more popular pastime than ever. I can’t remember the last time there was such global media attention on books, writers, and the business of publishing.

    Writers never had it so good. Readers too.

  4. I made the same point in a piece I wrote a while back about fear of Amazon. I am not at all convinced that, barring a major systemic change to the internet (government intervention), that it will even be possible to build any kind of sustained monopoly in the future. We live now in an age of constant disruption, and every company, big and small is susceptible to those forces.

    I get why traditional publishing is so hostile to Amazon, but I don’t buy their implication that they have gained their position through somehow illegitimate means. They’ve gotten where they are by building a better mousetrap, as it were, and they continue to provide and create better tools and services than the traditional players, providing large improvements and benefits to both readers and creators. The minute they stop doing that, and get comfortable with their position and try to squeeze more profit out of the value chain without offering additional benefits, which all monopolies eventually do, someone else will rise up and smack them down. Probably several someone elses. That’s the very nature of the age we live in now.

    • Big publishing is upset because someone agile invaded its turf and figured out a way to change the whole comfortable business.

  5. When a business reaches the stage of “big and established”, it starts to look for ways to maintain its advantage. Innovation is no longer so important. You will see the business try to stomp out up-and-comers through lawsuits, threats, and sponsored legislation. Such a business is even willing to have government enforce restrictions or taxes/fees IF it will stop those others. One area where Amazon seems to have moved into the “big and established” phase is in sales taxes. They are having to open distribution centers in more and more states, making themselves liable to collecting sales taxes from online shoppers in those states, just like the online sites for big box retailers. Hence, Amazon will likely be far more friendlier to Congress enforcing some kind of nationwide sales tax standard. It will hurt them some, but it will hurt all those up-and-comers far more, including writers selling books from their own websites. If you sell directly, expect greater sales tax headaches soon.

  6. Very thought-provoking article. And brilliant arguments as always. Thank you, Passive Guy!

    I don’t hope that publishers vanish, though – in contrast to Sarah. My dream is a contract with a big publisher for print books while keeping all digital rights and self-publishing the ebook versions. But that is just a dream … No publisher would agree on such terms.

  7. (My comments from another place, but they seem relevant here.)

    Most of these people who throw out the word monopoly are stuck in the past when oil and steel barons controlled a vital sector of industry. They conveniently forget the last thirty years, but luckily the government actually got it right.

    Once the government broke up AT&T, they realized they had made a mistake. AT&T hadn’t used its power to inflate prices, but the government worried that the potential was great enough that AT&T should be subject to divestiture. This led to, for a time, greater market inefficiencies. The application of antitrust laws should walk a much thinner line in the technology age, and the government finally realized this when it went after Microsoft. In the end, Microsoft received a minor slap on the wrist. Thus we are left with the one scenario whereby the government will proceed with an antitrust probe.

    It involves the one group that rarely gets mentioned in these Amazon vs. (insert company) rants.

    The customer. This is who the government wishes to protect–and rightfully so.

    When Amazon started selling ebooks at the 9.99 price cap, they lost money in an effort to gain market share. That may have been bad for publishers, especially if customers began to expect these lower prices, but the customer was better off; they paid less money for a product.

    So when these publishers all banded together to force upon Amazon the agency pricing model, hence increasing the price of ebooks, the government took notice. Why? Because the publishers were hurting the customer. This is the new application of antitrust laws. The government does not guess what you MIGHT do with your market power and then take action, it only watches what you ACTUALLY do. And when your practices harm the consumer, the government will take action.

    So now the publishers–not Amazon–are under US and European antitrust investigation for price collusion. They are also being sued in multiple class-action cases. Hurt the consumer, pay the price.

    Why is Amazon getting off without even a slap on the wrist? Because the government is smart enough to understand how business operates in the technological day and age. It learned it a bit late in the AT&T case, but it learned it just in time for the the resolution of the Microsoft case.

    The internet has allowed businesses to approach near maximum market efficiency, but it also means those businesses must constantly operate within the boundaries of that market efficiency, else they get replaced by a better rival.

    Remember AOL?
    Yahoo?
    MySpace?

    At one point, these companies had near total control of their respective markets. However, they either made poor decisions or they did not innovate. Their examples are also why I don’t worry about Amazon. If Amazon creates or leaves an inefficiency in the market that adversely affects the consumer, not a long time will pass before another company steps in to correct the inefficiency.

    We no longer live in the days of Rockefeller, Hearst, or Carnegie. Those men are long gone. So is the application of antitrust laws that they inspired.

  8. big publishers had forgotten to read their Porter ‘five-forces’ business threats.

    But they are ultimately doomed. Every established industry had it’s big corporation that was swept under by the new industry taking it’s place. Buggy companies didn’t transition into making automobiles very well. I think the new LCD ‘flat screen tv’ industry is not produced by any of the old tube-type television companies, but I haven’t researched that too deeply (some sales-brands have carried over though). Legacy Publishers are structural costs that are just too big to compete. They have people that spent their careers working up ladders that are meaningless anymore.

    The content creators (“suppliers”) have found Amazon and are now thinking the next steps, even if Amazon decides to alter it’s current trajectory.

    eReaders are only going to get cheaper. There’s a project out there call “raspberry pi” that is making a fully functional ‘desktop pc’ for $25, powerful enough to run a television Media Center, which is a very intensive computing application. They are ‘open sourcing’ the hardware, and it already runs on open source software. So what happens when eReaders are less expensive than a single hardcover book?

    It will be a very different future.

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