Wednesday, December 28, 2011

Jeff Bezos wins again

After Christmas, I wanted to do a meeting with one of my LinkedIn friends, Sasha Cole, an economics PhD student who (like me) was home to visit family during the Christmas break (but unlike me is Jewish and not observing Christmas).

We met at the Pannikin, the well-known local chain of gourmet coffee shops started by Bob Sinclair in 1968 (before Starbucks). In addition to running coffee shops, as a coffee roaster he supplied hundreds of local restaurants and caf├ęs. Both my friend and I recalled hanging out at the Pannikin in high school (long before Starbucks came to California), because it was one of the few places you could spend a small amount of money and sit around and talk for several hours (e.g. at the end of a Friday night date).

Long before every Barnes & Noble had a built-in Starbucks, Sinclair found a natural complementarity with independent booksellers who colocated with his coffee shops. (I had always assumed that they were under the same ownership, but instead the two businesses were independent). The two Pannikins I have visited most — the original in La Jolla and the nearby Del Mar location — eventually added funky bookstores next door where you could buy a book to read while sipping your coffee.

The La Jolla venue still has DG Wills, a used bookshop that proudly proclaims past appearances by leftist literary luminaries like Norman Mailer, Maureen Dowd, Christopher Hitchens and Oliver Stone. For Del Mar, it was the Book Works, located in the Flower Hill mall. However, when we met Monday in Del Mar, the Book Works was gone, having closed over the summer after 35 years in business.

Both locations serve students and faculty at UCSD, and local tech workers at Qualcomm and other firms. The nearest Barnes & Nobles are 7 and 9.5 miles away, where they have been for 15+ years. So it was clear that if anything killed the Book Works, it was Amazon.

In noting the bookstore’s passing, we recognized our own complicity (as Amazon patrons) in its death. Even yesterday, when browsing through a couple of bookstores with my family, I realized I was unlikely to buy any books in the store, because the two books I wanted were a) a novel I’d download for my e-reader and b) music books for my biggest Christmas gift (a handmade ukelele) that were not going to be found in a bookstore inventory.

Next to Steve Jobs, Jeff Bezos is the most brilliant and transformative tech executive of the past two decades (even if two Stanford grad students stumbled into better margins). He effectively created e-commerce, then leveraged that to become an online seller of everything, and now is leading the shift of cultural content from atoms to bits.

However — like Google and Apple and Microsoft and others — Amazon aspires to be a monopolist by forestalling rival entrants and growing (in the case of entertainment downloads) or maintaining (for books) his marketshare. Much like patrons of Walmart (or Target), in our search for convenience and low cost we customers of Amazon are reducing our options for the future: not just quirky (and often badly run) independent bookstores, but also physical bookstores of all sorts.

This seems to go unremarked in the US — at least in tech circles. A rare exception comes from a New York-based correspondent for Britain’s Financial Times, John Gapper. Earlier this month he wrote a scathing column about Amazon’s two-faced attitude towards antitrust as it uses price (and its superior scale economies) to squeeze out its competitors.

On the one hand, Amazon developed a plan to crowdsource spying on its competitors pricing, using a $5 bribe for customers to use a special price-check smartphone app to report prices of competitors. (To its credit, the NYT quickly covered the literary backlash.)

Beyond this, however, Gapper decried Amazon’s efforts to seize pricing power for ebooks — rather than allow publishers to set the same price for all ebook downloads — and then use that to push out all rivals:

While Amazon is blithely using its rivals’ property as a storefront, it wants antitrust authorities in Europe and the US to help it control the ebook market. The European Commission and the Department of Justice have launched twin probes, provoked by deals under which publishers set prices for their ebooks rather than letting Amazon, Apple and Barnes & Noble do so.

Amazon is eager to discount ebooks on the Kindle in the same way that it discounts everything else but has been stymied by publishers who fear it will eliminate all ereader competition. As Mike Shatzkin, a publishing industry analyst, says: “It is an incredible irony that antitrust law is being used to protect the biggest monopolist.”

Other things being equal, lower prices are good for consumers, but I fear a world in which Amazon squeezes out the Nook; pushes B&N into the same fate as Borders, which was forced to liquidate in July; marginalises all independent stores; and dominates the industry from publishing to printing to distribution. That would be a dystopia for both readers and authors.

Minimum prices deals helped to erode Amazon’s initial dominance in ereaders by encouraging competition from B&N and others. Even so, the Kindle still accounts for 60 per cent of ebook sales. It is not the job of antitrust officials to hand Amazon back its monopoly.
In physical retailing, Target has created a different shopping experience and higher quality brand to provide meaningful alternative to Walmart — much as the quirky independent bookstores next to the Pannikin gave booklovers a chance to browse when they were relaxing with their coffee.

For online purchases of digital goods, ambience isn’t going to be a differentiating factor. Much as I love price competition, I agree with Gapper that this is one choice we don’t want to have — a short-term price war that lads to a long term monopoly.

Jeff Bezos will still get richer, as his shareholders have doubled their money in the past three years. However, as with Steve Jobs competition will force him to continually innovate, while (limited) antitrust regulation will maintain consumer choices of technology and vendors.

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