The analogue titans’ last gasp against the digital giants

By Nicholas Wapshott
August 4, 2014

amazon-hachette

Amazon’s bullying of the book publisher Hachette and the uninvited bid by Rupert Murdoch’s 21st Century Fox to swallow rival TimeWarner has caused some economists and commentators to ask, why are such aggressive moves not attracting the attention of the Justice Department’s trust-busters? Both moves are textbook examples of how monopoly power can abuse — or so they would have seemed not long ago.

At stake are the benefits that consumers and employees alike enjoy from the proliferation of competing companies operating in a free market. For markets to work freely and fairly, there must be enough companies competing; when the critical mass of businesses sinks below a certain number, monopolies occur, which is bad for consumers. When that happens, governments in mature societies intervene to prevent over-consolidation and protect people from exploitation.

This isn’t socialism; it is how the free market is meant to work. It is the ordered way of doing business advocated by free-market gurus like Friedrich Hayek, who believed the integrity of free enterprise was paramount to ensure that prices are arrived at fairly.

Amazon CEO and Chairman Bezos receives the Citation of Merit on behalf of the Apollo F-1 Search and Recovery Team during the 110th Explorers Club Annual Dinner, at the Waldorf Astoria in New YorkBut after more than a century of intervening to keep markets honest, U.S. antitrust legislation is proving inadequate to the task. When industries and markets were clearly defined, it was easy to see what needed doing. When John D. Rockefeller’s Standard Oil snaffled the gasoline market, the Supreme Court, in 1910, declared it an illegal monopoly — and demanded it be broken up.

There is no such clarity now. The digital revolution has so upset every aspect of business that the old certainties appear no longer to apply. The Justice Department is left on the sidelines, anxious not to impose an inappropriate remedy on the market.

Take books. Half of all hardcover books are now sold by a single retailer, Amazon, which is also responsible, through its Kindle e-reader, for as many as four out of five digital books sold in the United States. Globally, seven out of 10 digital books are sold by Amazon.

Amazon’s total annual revenue from books is $5.25 billion, which makes it by far the biggest single outlet for authors and publishers. Amazon’s dominance of the book market allows it to extract some extraordinarily lucrative deals for itself. For example, it has wrested from Random House a whopping 53 percent discount on its wholesale book purchases.

Some publishers, such as Hachette, have refused to buckle to Amazon’s demands. So acting like any good monopolist might, Amazon is punishing them, making their books on the Amazon website hard to order, out of stock or slow to deliver. Yet the Justice Department, which is responsible for regulating near-monopolies like Amazon and applying U.S. antitrust legislation, is ignoring Amazon’s harrying of Hachette. As Steve Coll wrote recently in the New York Review of Books, “Amazon and the attorneys that advise it do not fear antitrust enforcement.”

Now let’s take movies, TV and filmed entertainment. 21st Century Fox, the amalgam of movie studio and TV outlets owned by Rupert Murdoch and his family, with a market capitalization $27.7 billion, is in the process of bidding for its principal rival, Time Warner, worth $62.6 billion — or at least it was until Murdoch bid $80 billion for it. Together the two companies could equal the size of Comcast, valued at $142.7 billion.

Rupert Murdoch, CEO of News Corp. and 21st Century Fox, arrives with sons Lachlan and James for the first session of annual Allen and Co. conference at the Sun ValleyBut the proposed deal would sharply reduce consumer and employee choice. It could bring under a single owner: Fox News and CNN; Warner Brothers and the Fox movie studios; and the Fox cable channels and pay networks like HBO. This mega-merger could sharply reduce the competitive nature of the movie business, which would affect everyone from movie stars and directors to moviegoers and TV watchers. There likely would be less choice and higher prices. The same applies to the other monster merger on the horizon, Comcast’s proposed purchase of the cable TV carrier interests of Time-Warner. An industry that already treats its customers with disdain could offer consumers even fewer options.

Not long ago, an amalgamation of such large companies would have prompted the Justice Department to act. Yet amid all the discussion of the merger, few have raised the antitrust issue and — if Murdoch gets his way, as he has before – the Justice Department would likely wave the deal through.

The complicating factor is the rise of immense new technology companies like Apple, Google, Microsoft, Amazon, Netflix and Facebook, all of which offer alternatives to the traditional ways of distributing moving pictures. Old industries like broadcast television and hardcover books, newspapers and magazines are under threat from a new wave of digital businesses that can deliver content quickly, cheaply and on demand.

Little wonder, then, that the Justice Department is reluctant to become involved in judging the consolidation in an old-school industry like moviemaking or bookselling. The market is in a convulsion as profound and far-reaching as any since the Industrial Revolution introduced machinery to the workplace, making a great deal of manual labor redundant. A tacit decision appears to have been taken by the federal government to watch from the sidelines until the dust has settled and it can consider whether it needs to intervene to protect the consumer.

The antitrust debate over media properties is further complicated by digital companies moving into content production. Netflix and Amazon are now making shows themselves.

Meanwhile, Jeff Bezos, Amazon’s chief executive officer, has bought the once mighty Washington Post, and most of the media is looking on with a mixture of admiration and anxiety to see what he is going to do with it.

When the battle between the old-school analogue barons and the digital kings has run its course, will consumers be better off? In many respects, they already are. Curated TV programming is in its last throes as viewers choose the content they like delivered at a time that suits them on the platform they prefer.

When it comes to journalism, there have never been more competing voices than today, nor have the top-down messages of the old bombastic press barons been listened to less. The entry price of starting even a new hard-copy publication has never been cheaper, for the power of proprietors, distributors, printers and trade unions that conspired to keep costs up and newcomers out has collapsed.

There will come a time when the Justice Department will have to take stock to see whether consumers are being well served by the digital revolution. Then new legislation may have to be concocted to protect the diversity of choice and cheapness of price the old antitrust laws were designed to protect. Until then, Justice must pick its battles carefully, for the old certainties about the threat of monopolies no longer apply.

 

ILLUSTRATION: Reuters

PHOTO (INSERT 1): Amazon CEO and Chairman Jeff Bezos receives the Citation of Merit on behalf of the Apollo F-1 Search and Recovery Team during the 110th Explorers Club Annual Dinner, at the Waldorf Astoria in New York, March 15, 2014. REUTERS/Andrew Kelly

PHOTO (INSERT 2): Rupert Murdoch, CEO of News Corp. and 21st Century Fox, arrives with sons Lachlan (L) and James (R) for the first session of annual Allen and Co. conference at the Sun Valley, Idaho, Resort, July 10, 2013. REUTERS/Rick Wilking

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Mr. Wapshott, you say, “when the critical mass of businesses sinks below a certain number, monopolies occur, which is bad for consumers. When that happens, governments in mature societies intervene to prevent over-consolidation and protect people from exploitation.” Yes, and he real problem, and the reason for such unconscionable wealth disparity in America, is that so few people have dominant ownership of the few businesses that are left. Ronald Reagan’s first duty when he was enthroned by Wall Street was to gut anti-trust laws and defund regulatory agencies. This is what we get. Lots of money at the top with no social conscience. Not acceptable. Serious regulation and taxation are required in America if we want a sustainable future.

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