Bob

Kohn

Refuting Amazon's Simplistic Argument

July 3, 2014

In my opening remarks earlier this week at the NYPL, I tried to point out the challenge authors and publishers have in responding to Amazon's oft-repeated mantra: that Amazon is only acting in the interests of consumers. Since consumers have an interest in the low prices, Amazon is justified in taking whatever action in its power to reduce its cost of goods.

 

Because it sounds so much like "mom and apple pie," it's a very difficult argument to refute, especially in as short a soundbyte as the mantra can be stated. But when subject to serious scrutiny, Amazon's defense falls apart.

 

The problem is with the false premise: that low prices are always good for consumers. That premise is wrong, because market failures occur that make higher prices better for consumers.

 

For example, the price of clean air is zero. Good for consumers? No, because it causes people and companies to pollute the air without taking into consideration the costs imposed on others for doing so. (Economists call this market failure a "negative externality" -- an action which imposes costs on others which you do not have to take into consideration in taking the action). The problem stems from the fact that no one has a property right in clean air; because no individual has a legal basis to raise the cost of clean air, no one person can curtail the pollution of others. So, governments enact laws to impose those costs that affectively raises the price of clean air.

 

Ok, so how does this apply to books, music, film and other copyright works?

 

Books (like music) have a their own market failure: if authors did not have a property right in the books they create, they would not have the right to charge others for making copies. As a result, no one would have to compensate authors for those copies. (Economists call this a "positive externality" --  when an action which costs you something benefits others who do not have to bear those costs, aka the "free-rider" problem).

 

The result of this market failure is an undersupply of books. Authors, of course, could write books, but they would have to earn money by other means.

 

That's because the price of books would be zero. Good for consumers? No. Clearly, consumers of music are not better with a zero price. Imagine John Lennon having to drive a London taxi to earn money while writing songs on the side. Consumers are better off with a price above zero to compensate Lennon so that he could not only devote as much as full time to it, but to finance the cost of recording the songs. 

 

The means chosen to correct this market failure, and encourage the production of books and music, is the copyright law. The Constitution gave Congress the power to create the copyright law to promote writings; they did not need the power to promote fruits, toilet paper, and garden hoses (or other such things you can buy on Amazon), but copyright law, a property right in an author's creations, was necessary because of the market failure that would be caused without it: the underproduction of works of authorship.

 

So, the copyright law exists so that consumers will pay higher prices for works of authorship. The property owner gets to set the price depending upon either the costs of creating it (e.g., the author's time) or the value of the book to the consumer -- which depends upon the specific book compared to similar alternatives. A high price, even a very high price, could be good for the consumer if that's what it takes to produce the book.

 

But there is another market failure going on: Amazon's significant monopsony power (i.e., the power to reduce the price of the goods it buys, like e-books). To deny it is to ignore the facts: for example, when Macmillan approached them with a new pricing model, Amazon deleted all of the buy buttons on Macmillan's printed and electronic books. In an instant, 90% of Macmillan's e-book revenue and 25% of its printed book revenue disappeared. If it continued much longer, Macmillan would have gone out of business.

 

Since the marginal cost of digital goods can actually go to zero (or very near it), Amazon's monopsony power poses a direct threat to the purpose of the copyright law. Again, we want to compensate authors, not because we like authors, but because the public is better off with an efficient production of books.

 

Thus, what Amazon is really trying to do is delete the copyright law. It would be happy pay nothing for ebooks and give them away as part of Amazon Prime.

 

Now, it is naive to think Amazon will stop at Hachette. Once traditional publishers are gone and Amazon has 90% of the market for e-books, they can easily turn their turrets against self-published authors. Read your Amazon Kindle Direct Publishing Agreement, especially paragraph 2, which gives Amazon the right to drop your royalty rate from 70% to zero on 30 days notice. (A traditional publisher would require an author's permission to change the royalty or any other term of the agreement).

 

In other words, if you like Amazon's leverage over traditional publishers, you'll just love their leverage over self-published authors. After Amazon tells you they won't pay you any more for your e-books, what stops them from charging you to help you reach out to new readers? (That's what Amazon is trying to do now to the major publishers). When the traditional publishing industry morphs into an Amazon algorithm, where else are you going to get your book published?

 

If I have demonatrated anything with this post, I hope it is this: serious scrutiny takes serious debate, and debate is something which Amazon has been avoiding. This is why they refused to send an executive to participate in the NYPL panel, opting instead to repeat their simple, but misleading mantra in the WSJ

 

We can only hope that Abraham Lincoln was right when he said: "You can fool all of the people some of the time, and some of the people all of the time, but you can't  fool all of the people all of the time."

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