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Monopoly Power Makes You Fat, Dumb and Slow

16 April 2012

A reprise of two posts from last October.

A few quotes will warm you up for a discussion of monopoly in the publishing industry.

The best of all monopoly profits is a quiet life.

J.R. Hicks

And a quote from Adam Smith:

The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.

[Considering allegations of price-fixing discussions over expensive food and wine at a restaurant in Manhattan], a second quote from Adam Smith is timely:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

PG hesitates to supplement Adam Smith, but he would point out that monopolists can increase their profits by raising prices for what they sell or lowering prices for what they buy. From authors, among others.

One of the elements in the many predictions of 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 late 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 become highly 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.

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, Passive Guy

22 Comments to “Monopoly Power Makes You Fat, Dumb and Slow”

  1. Would you say the same for the monopoly powers we call copyright and patent?

    • Good question. Those tend to be very narrow monopolies, not really allowing domination of a market (with the exception of a few patents).

      • Both copyright and patent permit the holders to dominate the market for the covered work (even if not works of a similar nature), e.g. you have the power to prohibit others from producing copies of, or otherwise communicating your blog posts (though not to prohibit others from producing similar posts).

        In the case where a copyright/patent protected work is particularly lucrative (selling copies at considerable profit) it is just as likely that the recipient of the revenue will become fatter, dumber, and slower – given reduced impetus to focus on producing new works.

        To a large extent, corporations (and some individuals) aren’t too bothered at the prospect of becoming fatter, dumber, and slower – it’s the monopoly profits they’re after first and foremost.

  2. “Microsoft has basically lost the ability to innovate because it could always rely on its monopoly revenue streams.”

    Actually, I would say it’s worse than that. Microsoft can’t afford to innovate because it has to protect its established revenue streams. Most of their money comes from Windows or Office, so any innovation which would pull money away from those products is likely to be stomped on before it reaches the market.

    • Agreed, Edward.

    • That’s the publishers’ root problem, too. If they innovate in ebooks, it’ll likely undermine their established print revenue stream. The Microsoft analogy is a good one. MS saw the changes coming that threatened their position personified in Netscape so they used their monopoly position to crush it. The Big Five saw the changes threatening their position personified in Amazon, and used their monopoly-like cartel position to take steps to stop it. Both cases brought the wrath of anti trust investigators down on their collective heads, as well it should have.

  3. Microsoft can innovate and compete–Just look at XBox. Microsoft went from having no stake in the video game console market to dominating it with ten years. With the release of the Kinect hardware/software they will continue to do so for some time.

    • I think XBox is the exception that proves the rule. It’s about the only notably profitable new undertaking MS has done since the antitrust debacle. And MS has purchased dozens and dozens of innovative companies during that time.

      • I don’t believe the Xbox has been profitable, unless something’s changed radically in the last couple of years. It now makes money on a quarterly basis, but I believe it’s still a long way from repaying the billions that Microsoft spent developing it, and they’re going to have to spend billions more soon developing the next generation.

        In addition, it’s probably harmed their bottom line by pushing gamers away from the PC. The only time I pay Microsoft anything is when I upgrade my Windows PC and the only reason I have to do that is gaming. Since modern PC games are typically developed for console-level hardware similar in performance to a PC from 2005/2006 I haven’t needed to do that for years.

        • I think you are grossly incorrect. MS may sell the console at a loss or break even point, but MS gets a cut of every video game sold for the system–unlike a PC game.

          • That’s included in the Xbox division revenue. For most of the Xbox’s life it’s been making a loss, and you need a long time to pay off multi-billion dollar R&D charges with hundred-million-ish quarterly profits.

            As far as I can see it was an attempt to get a walled garden box into the living room as a console and then expand that into selling other products to consumers. Which wasn’t a bad idea, but it never really panned out.

      • By that measure Google is not innovative either–nothing besides text-based ads has been successful for them–search, youtube, maps and possibly gmail has succeeded for them (nothing to sneeze at)–but all of these products dependent on text-based ads. Google has bought dozens of companies and folded them silently away. And Google hasn’t had a shellacking by the DoJ.

        • I think that’s a slightly different case, as Google has multiple products (search, maps, video, email etc.) all monetized through similar ads. They might monetize things the same way, but the products themselves are very different.

          Google tend to innovate first, then seek to monetize later. Just because the monetization solution is more or less the same doesn’t make the products themselves any less innovative.

        • By that measure Google is not innovative either

          You wouldn’t be the first person to say that.

          But you should also acknowledge Wave [failed], Plus [questionable failure], the driver-less car, Chrome, Voice, Street View (unless you counted that as a part of Maps), Books, Scholar (unless you’re grouping all of those into search), and Android (comparable worldwide market share to Xbox’s US?; developed jointly with others).

          You may argue that those aren’t all that revolutionary, but they are advances. And, really. If we are going to compare Google to Microsoft, adding Street View to Maps is (I think) more innovative than scaling back a computer and putting an Xbox label on it.

          • Interestingly, Amazon beat Google to market with street-view in their old A9 Search Engine.

            Amazon’s A9 street-view came out in 2005.

            Google’s street-view (arguably a bigger rollout – although Amazon was winding down its search engine efforts by then anyway) came out in 2007.

    • Microsoft can innovate and compete–Just look at XBox.

      The Xbox was created because Playstation was pulling developers from Windows. It was a reaction. [Ironically, that reaction caused the Windows gaming scene to be hurt because Microsoft was forcing everything onto the Xbox. They’ve said over the past few years that their focus hurt Windows gaming.] Further, it was not supported from the executives. It was the brain child of the DirectX and small games groups. [Side note: Microsoft has been pushing developers to the new DirectX versions that are Vista-/7-exclusive. That supported the monopolistic revenue stream by forcing users to upgrade away from XP.] The executives were not on board at the beginning.

      Xbox is a limited (some would say crippled) computer that runs (at least, the first one did) a derivative of Windows. [The original was basically a stripped-down version of Windows 2000. I think the 360’s has a similar source, but is more customized, although with a lot of the Windows platform lock-in software.]

      The Xbox took off in large part because of Halo. Halo was being produced for Windows and Macs. Microsoft bought Bungie and the game because an Xbox-exclusive.

      I can’t find an article to verify my memory, but I have the recollection that Microsoft was trying to do interactive cable and failing, so it closed that division and moved everyone over to the Xbox. Now that they have a user base, they’re trying to bring that back.

      Your example isn’t a resounding response to PG’s comment about the lack of innovation. Their actions are reactions to support the monopoly properties.

      Microsoft went from having no stake in the video game console market to dominating it with ten years.

      Xbox 360 has ~40% of the US market share, tying it with the PS3. I’m not sure what it has in European markets, but the last I saw in Japan, the PS2 was outselling it. I typically consider dominating to be at least a majority. Also, consider that these numbers exclude the PC gaming market. But I’m not sure whether those numbers should be counted for Microsoft or not. [I leaning towards no since this discussion is about innovation, and that comes from the video game companies.]

      Also, Microsoft doesn’t produce/publish video games like Sony and Nintendo do. You can argue about whether the latter two’s games are good or not, but you can’t say that they’re not producing.

      With the release of the Kinect hardware/software they will continue to do so for some time.

      Won’t know that until the future comes. The last two lines kind of sounded like a press release.

      • The Xbox was created because Playstation was pulling developers from Windows…

        That’s not true. MS wanted to break into a new market that had revenues in the billions.

        Xbox is a limited (some would say crippled) computer that runs (at least, the first one did) a derivative of Windows.

        So, what? All game consoles are crippled computers. My fancy new toaster is a crippled computer. Or maybe not–it can defrost and toast a bagel–can your PC do that? Just because the xbox is a scaled down PC doesn’t make it something lesser.

        Your example isn’t a resounding response to PG’s comment about the lack of innovation. Their actions are reactions to support the monopoly properties.

        PG gave a blanket statement that innovation was dead at MS. My intent was merely to point out it wasn’t quite dead yet.

        Xbox 360 has ~40% of the US market share, tying it with the PS3…

        For some reason I thought their marketshare was a bit larger. But still, they had 0% not too long ago. Not too shabby.

        Also, Microsoft doesn’t produce/publish video games like Sony and Nintendo do. You can argue about whether the latter two’s games are good or not, but you can’t say that they’re not producing.

        They do produce their own games just like Sony and Nintendo, though. Or I am not sure what you mean. Microsoft Game Studios produces both PC and Xbox games, some of which are fairly popular.

  4. Historically, monopolies rise and fall, probably for the exact reason PG mentions. They become the establishment rather than the innovator. The only way a true long-term monopoly can continue to be a monopoly is if they have government protection. (Ma Bell was a prime example.)

  5. I think where Microsoft is really finally innovating is in the user experience space, with Windows 8. That’s their big hope for the future. I think they were scared into it by Apple, and all signs are pointing toward it being a truly innovative product. Time will tell.

  6. “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.”

    Back in the pre-internet days when I was working for a newspaper, this exact behavior was often an inside joke amongst those of us who worked on the editorial side. We saw it all the time, an almost total resistance to trying new things or developing new products. That was until someone else, typically a small startup, found some success with something new at which point, we were pushed to rush out a cheap imitation as quickly as possible, and often taking a loss on it to swipe the new market out from under the startup that had developed it. Everywhere I worked, newspapers were referred to as a “copycat industry.” Not surprisingly, something eventually came along that they couldn’t just rip off wholesale, despite dearly trying, and you can see where they are now. I wanted to believe the book market was smarter than that, but it’s looking more and more like they’re cut from the same cloth.

  7. “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.”

    In the UK, you can’t submit to a publisher without an agent. Publishers, insanely in my opinion, handed over the slushpile to agents to save themselves effort – even though new authors are the raw material on which their businesses depend. You get the feeling they’d get pesky writers out of the equation altogether if only it were possible.

  8. […] an antitrust lawsuit. Utterly ridiculous the obstacles and waste forced on the market by the state.Monopoly Power Makes You Fat, Dumb and Slow (The Passive Voice) — I like this one mainly for this quote:Absent stringent government […]

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