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.
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.