Thiel makes an important point: The Internet-age monopolies are a different species; they flummox our conventional ways of thinking about corporate concentration and have proved especially elusive to those who ponder questions of antitrust, the discipline of law that aims to curb threats to the competitive marketplace. Part of the issue is the laws themselves, which were conceived to manage an industrial economy—and have, over time, evolved to focus on a specific set of narrow questions that have little to do with the core problem at hand.
Whether Amazon, which does $75 billion in annual revenue, has technically violated antitrust laws is an important matter, of course. But descending into the weeds of predatory pricing statutes also obscures the very real threat. In its pursuit of bigness, Amazon has left a trail of destruction—competitors undercut, suppliers squeezed—some of it necessary, and some of it highly worrisome. And in its confrontation with the publisher Hachette, it has entered a phase of heightened aggression unseen even when it tried to crush Zappos by offering a $5 rebate on all its shoes or when it gave employees phony business cards to avoid paying sales taxes in various states.
In effect, we’ve been thrust back 100 years to a time when the law was not up to the task of protecting the threats to democracy posed by monopoly; a time when the new nature of the corporation demanded a significant revision of government.
The progressive era’s most venomous screeds against monopoly came from the pen of one of its stodgiest characters, Louis Brandeis. In the early 1900s, before he became a Supreme Court justice, he took on a series of clients whose cases exposed him to the Gilded Age’s worst excesses. It radicalized his thinking. “If the Lord had intended things to be big, he would have made man bigger— in brains and character,” he
wrote his daughter. He believed that the new corporations had only managed to thrive by dint of their dirty tactics: secret contracts, price fixing, and the purchase of potential competitors. On a level playing field, he lectured a Senate Committee in 1911, “these monsters would fall to the ground.”
Brandeis often wrote on behalf of exploited American consumers, but they were hardly his primary objects of concern. In the great Jeffersonian tradition, his heart truly bled for the small producers and sellers squashed by the monopolists. To protect these businessmen, Brandeis launched a crusade for “fair trade,” which revolved around a doctrine called Resale Price Maintenance. The idea was that manufacturers should legally control the retail value of their wares, rather than hand the power of pricing over to large chains and department stores, whose size gave them the unstoppable advantage of offering deep discounts. If this campaign forced consumers to pay slightly higher prices, Brandeis didn’t mind one bit. In an essay he wrote for Harper’s Weekly in 1913, he excoriated the consumer who cared only about short-term prices: “Thoughtless or weak, he yields to the temptation of trifling immediate gain, and, selling his birthright for a mess of pottage, becomes himself an instrument of monopoly.” And in the generation that followed Brandeis, Midwestern liberals, Southern populists, and assorted other politicians continued to inveigh against the debasement of small businessmen.
By the postwar period, however, the producer was edged out of liberal thinking and replaced by a figure better suited to the affluence of the times. In the 1960s, Ralph Nader portrayed the consumer as the true victim of corporate greed. (Michael Sandel elegantly narrates this transformation of liberal thought in his book,
Democracy’s Discontent.) To the Naderites, antitrust laws remained as necessary as ever, but only for the sake of driving down the very prices that Brandeis had once hoped to maintain. Mark Green, a leading disciple of Nader’s, wrote that the “primary focus of antitrust enforcement” should be “efficient production and distribution—not the local farmer, local druggist, or local grocer.”
Conservatives, it turned out, were only too happy to hear such talk. After years of defending monopoly as perfectly justifiable, they began publishing books and articles conceding that consumer welfare was a legitimate purpose of antitrust, perhaps the only one. Robert Bork denounced all of Brandeis’s attempts to protect small producers as a “jumble of half-digested notions and mythologies.” A cottage industry of like-minded critiques emanated from the University of Chicago’s Law School and then traveled straight to Republicans in Washington. In the hands of Ronald Reagan’s Justice Department, not to mention the judges he appointed to the federal bench, efficiency and low prices provided the justification for dismantling much of the old antitrust infrastructure. No subsequent administration, either Democratic or Republican, has meaningfully tried to revive it.
And Amazon is the price we’re paying for that bipartisan turn in thinking. As he built the company, Jeff Bezos carefully studied the example of Walmart, America’s largest retailer. He borrowed his personal style from the parsimonious Sam Walton and also poached from his C-suite. Walmart’s executives aren’t extravagantly compensated; neither are Amazon’s. For a time, they didn’t even receive reimbursements for office parking. Meanwhile, both companies have studiously avoided unionization and treat their workers miserably. In one famous incident, Amazon
hired paramedics to revive heat-sick employees at a Pennsylvania warehouse rather than buy an air-conditioning unit.
Still, the biggest lesson that Bezos drew from the Waltons was in how to handle suppliers. Both Amazon and Walmart promise its customers the same feat—undercutting their competition on price. But frugality and innovation can only go so far in keeping prices headed southward, especially in the face of the stock market’s impatience. Growing profit margins depend, therefore, on continually getting a better deal from suppliers. At Walmart, this tactic is enshrined in policy. The company has insisted that suppliers of basic consumer goods annually reduce their prices by about 5 percent, according to Charles Fishman’s book,
The Walmart Effect.
It’s hard to overstate how badly these price demands injure the possibility for robust competition. But when Amazon engages in the same behavior, it acquires a darker tint. Where Walmart is essentially a large-scale, cut-rate version of the old department store and grocer, Amazon doesn’t confine its ambitions to any existing template. Without the constraints of brick and mortar, it considers nothing too remote from its core business, so it has grown to sell server space to the CIA, produce original televisions shows about bumbling congressmen, and engineer its own line of mobile phones.
And as it amasses economic power, it also acquires greater influence in the cultural and intellectual life of the nation. Consider Amazon’s relationship to the publishing industry. A recent survey conducted by the Codex Group, released in March, found that Amazon commands a 67 percent share of the e-books market (not at all surprising given that it invented a wildly popular device for consuming digital tomes). And when it comes to the sale of all new books—hard, soft, and electronic—Amazon accounts for 41 percent.
Even though the five major publishing houses have political connections and economic power of their own, they just can’t compete. When Amazon first set the price for e-books at $9.99, it did so unilaterally and didn’t inform publishers in advance of its live-streamed announcement. The company continually finds new schemes for exacting tribute from the houses. Amazon requires a contribution to a “marketing development fund”—which hits publishers for an additional 5 to 7 percent of their gross sales. All the wondrous tools on the Amazon site are open to publishers, but only if they write appropriately sized checks: Pre-order buttons, appearance in search results, and personalized recommendations are hardly enlightened services provided by your friendly bookseller. Sure, Barnes and Noble and other chains have long charged fees for shelf placement, but Amazon has invented a steroidal version of that old practice. There seems to be no limit to Amazon’s demands—and its current negotiations with Hachette prove the point. The New York Times has reported that Amazon apparently wants to increase its cut of each e-book it sells, from 30 percent to 50.
To justify this approach with publishers, Amazon portrays them as deserving of rough treatment. One
ex-Amazon employee told The New Yorker’s George Packer that the company views publishers as “antediluvian losers with rotary phones and inventory systems designed in 1968 and a warehouse full of crap.” In the mid-2000s, the company famously launched an initiative called the Gazelle Project to extract better terms from small publishers. Its moniker was derived from a Bezos suggestion that his team pursue its prey as a cheetah tracks a “sickly gazelle.” (Lawyers a bit more sensitive to antitrust laws renamed it the “Small Publisher Negotiation Program.”) Or as one executive charged with dealing with the book industry confessed to the reporter Brad Stone, “I did everything I could to screw with their performance.”
In their desperation, publishers have tried various gambits to alter this dynamic. They have attempted to fight size with size—a misbegotten notion that led them to collude with Apple in blatant violation of price-fixing laws. And in the same spirit, they have accelerated the old tendency to seek safety in mergers. Just last year, Random House joined Penguin to form a mega-house, which controls 25 percent of the book business, in the dim hope that this new brawn would insulate them from Amazon’s harshest demands. But even a giant corporation ultimately has to bend to the will of their big buyer. That’s been the iron law of Walmart, which imposes its terms on the largest corporations in the world. As the New America Foundation’s Barry Lynn has described, “Walmart ... has told Coca-Cola what artificial sweetener to use in a diet soda, it has told Disney what scenes to cut from a DVD, it has told Levi’s what grade of cotton to use in its jeans, and it has told lawn mower makers what grade of steel to buy.”
So, no matter how large they grow, publishers will continue to strip away costs to satisfy Amazon. And more attention will fall on a strange inefficiency at the heart of the business: the advances that publishing houses pay their writers. This upfront money is the economic pillar on which quality books rest, the great bulwark against dilettantism. Advances make it financially viable for a writer to commit years of work to a project.
But no bank or investor in its right mind would extend that kind of credit to an author, save perhaps Stephen King. Which means that it won’t take much for this anomalous ecosystem to collapse. Amazon might decide that it can only generate enough revenue by further transforming the e-book market—and it might try to drive sales by deflating Salman Rushdie and Jennifer Egan novels to the price of a Diet Coke. Or it can continue to prod the publishing houses to change their models, until they submit. Either way, the culture will suffer the inevitable consequences of monopoly—less variety of products and lower quality of the remaining ones. This is depressing enough to ponder when it comes to the fate of lawn mower blades.
In confronting what to do about Amazon, first we have to realize our own complicity. We’ve all been seduced by the deep discounts, the monthly automatic diaper delivery, the free Prime movies, the gift wrapping, the free two-day shipping, the ability to buy shoes or books or pinto beans or a toilet all from the same place. But it has gone beyond seduction, really. We expect these kinds of conveniences now, as if they were birthrights. They’ve become baked into our ideas about how consumers should be treated.
These expectations help fuel our collective denial about Amazon. We seem to believe that the Web is far too fluid to fall capture to monopoly. If a site starts to develop the lameness of an AltaVista or Myspace, consumers will unhesitatingly abandon it. But while that meritocratic theory might be true enough for a search engine or social media site, Amazon is different. It has a record of shredding young businesses, like Zappos and Diapers.com, just as they begin to pose a competitive challenge. It uses its riches to undercut opponents on price—Amazon was prepared to lose $100 million in three months in its quest to harm Diapers.com—then once it has exhausted the resources of its foes, it buys them and walks away even stronger.
This big-footing necessitates a government response. It is often said that the state is too lead-footed to keep pace with tech companies; that by the time it decides to take action against a firm, the digital economy will have galloped off into the distance. But there’s a long history that suggests the opposite.
It starts with AT&T’s Bell Labs in the late ’40s. Even though scientists there developed a slew of great inventions—automatic dialing, new switchboards—executives atop the monopoly essentially shoved the new gizmos into a filing cabinet, where they languished. (Unchallenged monopolists have little incentive to disrupt industries they already control.) Under pressure from the government, AT&T began licensing its technology to other firms, including a device called the electronic transistor—which, in the hands of Texas Instruments, became the basis for the computer.
Or take IBM, a company that constantly flirted with breaking the law. The Justice Department hounded Big Blue in the ’50s and ’60s. And though IBM complained about the intrusions, it would always settle with the government and promise to reform its ways. In truth, it should have thanked the trustbusters. With the government at its elbow, IBM turned away from the business of tabulating machines to enter computing, a field it would revolutionize. Then there’s IBM’s successor, Microsoft. The company was known for using its dominance to squash small rivals who made superior products. But the government’s prosecution caused it to back away from that tactic, which, in turn, allowed nascent companies like Google and Skype to grow. “Antitrust gets some credit for restoring uncontested American technological preeminence,” says Tim Wu, author of The Master Switch. “It made sure the web would stay open.”
These stories sound impressive now, but it took decades of experimentation, mostly unsuccessful, before a serviceable approach for curbing monopolies finally emerged. In the earliest days of the Progressive Era, the country was quick to discover the danger of huge corporations and acted with alacrity to legislate it into oblivion, passing the Sherman Antitrust Act in 1890. But wishing the problem away is very different from solving it. Progressives never could agree on how to think about monopolies—would they permit them to exist, carefully regulated by the state, or smash them into bits? The creation of the Federal Trade Commission in 1914 was meant to be the culmination of that long struggle, yet it came to embody all the conceptual fuzziness of the debate. Even Brandeis considered it a “stupid administration.”
It took a Great Depression to provide the clarity that progressives never did manage. When all of Roosevelt’s efforts to revive the economy sputtered, he waged all-out war on monopoly. In 1940 alone, his Justice Department brought 92 new cases and filed 3,412 complaints; it went after big-time players like Alcoa, General Motors, and the American Medical Association. Monopoly no longer stirred emotions, as it had in Brandeis’s time, but Roosevelt’s triumphs set precedents that ensured future victories. He implanted antitrust more securely in government, a technocratic tool for managing the health of the economy.
Perhaps the debate over Amazon won’t take as many fits and starts. There are already a few ideas percolating—one would strip Amazon of the power to set prices; another would deprive it of the ability to use its site to punish recalcitrant suppliers. Those ideas feel like tentative jabs at the problem, rather than coherent solutions to it. Still, if we don’t engage the new reality of monopoly with the spirit of argumentation and experimentation that carried Brandeis, we’ll drift toward an unsustainable future, where one company holds intolerable economic and cultural sway. Unfortunately, a robust regulatory state is one item that can’t be delivered overnight.
