Market power and the media baron

The anti-competitive practices of Washington Post owner Jeff Bezos

No one should be surprised that Amazon is employing anticompetitive tactics in its negotiations with the book publisher Hachette. As Brad Stone shows in his definitive history The Everything Store: Jeff Bezos and the Age of Amazon, that’s just how Amazon does business, particularly as it has grown in size and importance.

As it happens, Amazon’s founder, chief executive and largest shareholder, in addition to being the most powerful person in books, now controls the most powerful news organization in Washington. This is no small consideration, either for readers or for regulators.

Bezos became a publishing baron out of calculatedly commercial motives. He’s not the sort to fish through a sea of manuscripts and pull out one from a then-unknown David Foster Wallace, as Hachette’s CEO once did. Bezos got into books because they were the easiest-to-ship commodities with the highest inventory variety, which meant his warehouse-and-UPS model could offer customers exponentially more titles than even the biggest bricks-and-mortar bookstore. His ultimate goal was to build the Walmart of the Web, a model he dreamed up while working on Wall Street. And he has clearly succeeded.

On the book side alone, Amazon today sells 41 percent of all books in the US. In ebooks, where the Hachette dispute is centered, it has 67 percent of the market. That market power is boosted by the fact that books account for just 7 percent of Amazon’s revenue. It is not dependent on them. Hachette and its parent company are.

Amazon uses that market power wherever it can, as The Everything Store makes quite clear, and as European regulators, unlike their US counterparts, are now formally investigating.

Stone writes in The Everything Store that Amazon executives took “an almost sadistic delight” in using their heft to squash small publishers. Bezos pushed for what came to be known as the Gazelle Project, which called for Amazon to “approach these small publishers the way a cheetah would pursue a sickly gazelle,” using tactics like it is using against Hachette to sharply reduce a company’s sales. A similar program—forcing smaller-selling publishers to agree to more onerous terms—was actually called “Pay to Play until Amazon’s lawyers forced a change to the more innocuous “Vendor Realignment.”

In 2010, it removed the “buy” buttons from the publisher Macmillan’s books over a dispute on terms. That same year, seeing a threat from, it introduced a program that sold diapers at a huge loss in order to force its competitor to sell out or go out of business, Stone reports. Weeks after Amazon bought it closed the program, which had been losing hundreds of millions of dollars. That’s how John D. Rockefeller’s Standard Oil used to operate at century ago. The Federal Trade Commission looked into it and did nothing.

Amazon does something similar with books as it did with diapers, which is why the publishing industry views it as a mortal threat. Amazon has long discounted physical books, making little or no money on them (as it does with almost every product it sells). Most analysts believe the company loses money on ebooks, which it often sells below cost. It does this, Stone makes clear, to keep competitors out of its space, ensuring its dominant position.

Now Amazon has what’s known as monopsony power, meaning its market position is such that it has the power to dictate terms to suppliers. That reduces costs for consumers, at least in the short term, but it gravely wounds suppliers and makes them even more dependent on Amazon. Even the Wall Street Journal editorial page—no fan of antitrust enforcement—had to concede that “Amazon’s conduct would normally draw the ire of regulators as either predatory pricing or deceptive bait-and-switch marketing.”

The battle of Hachette, if Amazon prevails, could be the industry’s Waterloo.

With calls for government intervention increasing along with his company’s market power, Bezos’ position as the owner of the Washington Post becomes significant. No one really knows why Bezos bought the Washington Post from the Grahams last year for $250 million. But whatever the reason, the deal showed more clearly than any other the degree to which the power of the press is shifting into a Billionaire Savior era, for better and for worse.

The problem is that Bezos needn’t meddle in editorial decision-making to affect how readers perceive the paper’s coverage.

Yes, the Post here has an apparent conflict of interest, if not an actual one, which the paper acknowledges with italicized disclosures at the end of Amazon-related stories, including soft features like this one, speculating about the possibility that a “Bezos phone” may be on the way.

Disclosure is necessary, of course, but it may not sufficient.

For instance, while the Journal and The New York Times editorial boards have both weighed in on the battle with editorials and run anti-Amazon or pro-publishers op-eds, the Post’s editorial board hasn’t. It ran a Steven Pearlstein column that criticized the publishers much more than it did Amazon.

In a disclosure statement, Pearlstein good-naturedly declares himself “hopelessly conflicted,” both because of Bezos’ ownership of the Post and because Pearlstein has a handshake agreement to write a book for a division of Macmillan Publishing.

That’s fine, as far as it goes but clearly the motives of the Post as an organization are open to scrutiny in a way that those of rival news organizations are not.

That said, the Post’s news side has done fine covering the story, the issue with Bezos’ ownership of the paper is a murkier one involving issues of how power works in the new press age.

Where newspapers were once a mighty profit center in and of themselves, in the new model, “the press is not powerful in its own right,” Audit Chief Dean Starkman wrote a day after the Grahams announced the sale. “The titans’ power flows from elsewhere. The press is, in an economic sense, incidental to their wealth. Journalism under this new model is enveloped by, and dependent upon, interests far larger and quite different from its own.”

A big issue these days, we hear (I’m linking to the publisher here; take that, Amazon), is the concentration of economic power in the hands of a few, as well the related question of whether the government has the wherewithal to respond to the rise of individuals and companies with the power to control and ultimately capture whole markets.

The Washington Post certainly still has the journalistic firepower—both on the news side and the editorial side— to take on these questions, but it won’t get the benefit of the doubt until it does.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,