If Amazon is a monopoly, its customers approve

The term "monopoly" gets thrown around a lot in technology circles. Whether it's one company's domination of online search or another's command of the digital music market, it's easy to argue that there's no shortage of monopolies on the Internet.

It's unfair, then, when a business that doesn't act as a monopoly gets labelled as such. Or at least that's how Amazon.com sees it.

"We've long had an approach as a company to be as customer-centric as we possibly can," said Russ Grandinetti, vice-president of Kindle content for Amazon, the world's largest seller of both physical and digital books.

"If we ever stop focusing on customers and stop offering them the best possible choices, people are going to go elsewhere. There are no lack of large, talented, successful companies that are working hard to serve customers in this area."

Mr. Grandinetti and Amazon as a whole can't help but be a little defensive these days, in light of the recent Department of Justice case in the United States against one its chief rivals, Apple, and a group of book publishers.

Last month, antitrust watchdogs sued Apple and five U.S. publishers for allegedly colluding to raise the price of e-books. The Justice Department settled with three of the publishers, but Macmillan and Penguin vowed to fight on. Similar suits have followed in Europe and Canada.

At the heart of the matter is the "agency pricing model" agreed to by the parties. Under the traditional wholesale model, publishers would sell their books to retailers at a discount, usually around half the cover price, and the merchant was then free to charge whatever they liked.

In many cases, Amazon was selling e-books under this system at a loss to move more of its Kindle e-readers. Publishers worried that Amazon's common $9.99 price point would become the norm expected by consumers, so in 2009 they negotiated an alternative plan with upstart e-book seller Apple.

The agency model restored publishers' ability to control pricing, literally – they could set the price of the e-book, whereupon Apple would take a 30-per-cent cut. The deal also precluded publishers from pricing their e-books lower with other retailers.

The result, according to the Justice Department's lawsuit, is that e-book prices rose between $2 and $3 since the launch of the iPad in 2010, costing consumers a total of $100-million. That wasn't just for books bought through Apple's outlets, but all online retailers.

"Far and away the single biggest factor on any price increases you may have observed in our store would have been because of the agency model," Mr. Grandinetti said. "That means the pricing decision is not ours."

Apple and the publishers say they have done nothing wrong and were in fact acting to prevent Amazon from amassing too much power. In explaining why Macmillan was fighting the Justice Department lawsuit, chief executive John Sargent told the Wall Street Journal that settling would help Amazon "recover the monopoly position it had been building" and "have a very negative and long-term impact on those who sell books for a living."

Critics such as Mr. Sargent have pointed out that Amazon's U.S. e-book market share was around 90 per cent in 2009 before the agency model took effect, while it's now around 60 per cent., indicating that the agency model has indeed helped bolster competition.

But, as Amazon supporters have countered, the Kindle – which launched in 2007 – didn't really have much competition until the iPad arrived. Given the near-seamless link between its online store and e-reader a natural monopoly was to be expected. Amazon's commanding position would likely have shrunk regardless, as competing devices and services improved and gathered steam.

Antitrust watchdogs generally get interested in the existence of a monopoly when it effects consumers negatively. So the question becomes, is Amazon's dominance driving prices upward or limiting innovation?

The answer from the buying public as it pertains to Amazon seems to be a strong "no," or at least "not yet." Amazon routinely tops customer satisfaction surveys for pricing and service, such as the American Customer Satisfaction Index. In the organization's recent 2011 consumer report, the company beat out more than 225 large retailers – traditional or online – and 200 government services to place first.

Mr. Grandinetti attributes the animosity from publishers to a difference in business approaches. He says many haven't yet figured out how they're going to be useful in a digital world, both to authors and readers, whose attention is being pulled in increasingly more directions. Amazon, he believes, is more in touch with how the market is developing.

"It's Tuesday night at 8:30 and you have two hours before you go to bed. Are you going to watch a streaming movie, are you going to play Angry Birds or are you going to read a book? That's bookselling in a digital world," he said.

"That informs how you think of availability, pricing, customer experience and building a cohesive, highly interactive reading experience. That's the box that publishers and booksellers need to put themselves in."

As for Amazon's potential to eventually become a harmful monopoly, Mr. Grandinetti goes for the same answer that all Internet businesses have on hand.

"No matter what level of success we may achieve, in a connected Internet world, other choices are not far away for people."

Peter Nowak is a technology journalist, author and blogger. His blog can be found at www.wordsbynowak.com .