Hold the Applause for Amazon.com

Hold the Applause for Amazon.com

By Jeff Milchen
As published in August, 2005 (do not quote data)

Amazon.com executives had more reasons to celebrate in July than just pre-selling 1.5 million copies of the latest Harry Potter episode. Spurred by a favorable second-quarter financial report, the company’s stock value jumped 16 percent on July 27, wiping out six months of decline in a single day.

Then Amazon’s tenth birthday sparked a wave of laudatory press coverage for founder Jeff Bezos and his “revolutionary business model.” That’s great for Bezos, but for me, evaluating Amazon’s first decade revived some nagging concerns about the future of books and our decidedly un-free markets.

The “revolutionary” company lost billions of dollars — an average of $376 million annually during its first eight years — yet it kept enticing speculators to pump more money into the company’s stock. Amazon’s speculation-fueled growth contributed to the net loss of more than 2000 independent book and music sellers during its first decade.

Unlike its independent competitors, Amazon operated in the casino economy of the stock market, not the world of market competition.

Amazon accounts for only about 7% of overall U.S. book sales, but in combination with the proliferation of book chains and mass discounters, its growth hurt independents substantially.

The American Booksellers Association (ABA), the major trade group of independent bookstores, saw its membership sliced nearly in half during Amazon’s first decade (independents’ market share for new books has now stabilized, at about 10%). While Amazon operated a legitimized Ponzi scheme for years, it was and still is subsidized by federal law.

In 1992, the U.S. Supreme Court interpreted the Constitution rather creatively for corporate benefit, ruling that states could not unilaterally decide to collect sales tax on catalog or internet sales to in-state residents (unless authorized by Congress). To do so, the Court majority claimed, would unfairly disrupt the expectations of mail order and internet businesses to operate free of sales taxes.

Congress thus far has failed to fix this discrepancy, despite its members’ campaign rhetoric about “supporting small business.” As a result, storefront businesses typically are burdened by a 6% – 8% penalty on every sale (in the 45 states with statewide sales taxes).

Amazon’s use of financial and political power to succeed wasn’t a new model, but a cyber-version of what many chain stores have done for decades. State and local subsidies to book chains and big box discounters regularly disadvantage community businesses and distort market competition.

For example, Wal-Mart (the fastest-growing book seller) alone has extracted well over $1 billion in such subsidies to build stores and distribution centers or to keep the company from following through on threats to shutter a store. Independent booksellers were also harmed for years by collusion between the largest chains and publishers to violate the Robinson-Patman Act — written to prevent big business from using market dominance to eliminate competition.

Among other provisions, Robinson forbids retailers to “request” and receive terms of sale they know to be illegal (i.e., discounts not justified by economies of scale). The chains were accused of negotiating illegal discounts and perks unavailable to the independents.

Barnes and Noble, Borders, and publisher Penguin have all made multi-million dollar payments to groups of independent booksellers in recent years to settle antitrust complaints, but the payments came too late for countless community bookstores driven out of business by a combination of these anti-market conditions before the settlements.

Of greater concern is whether the diversity of published thought will erode in a market dominated by a few centralized powers. Book superstores frequently carry more titles than local competitors, and inarguably increased local book selections when they entered towns lacking a large independent store. And Amazon clearly made it much easier for us to access a wider range of books; especially in rural areas.

Yet our overall choices are endangered by consolidation of book sales. The existence of thousands of independent bookstores, each buying a different selection based on their local markets and personal preferences, creates an overall diversity that will suffer if a few dozen corporate book-buyers determine which books are published or receive promotional budgets.

It’s in our collective interest to stop well-run independent businesses from being driven out by market distortions. So what can be done? Two problems raised here have straightforward (though not simple) solutions.

First, we need to ensure that antitrust law is vigorously enforced, with meaningful punishment applied to corporations that flout the law. This would entail a sharp reversal of course, as prosecutions of antitrust crime plummeted from about 1500 cases annually in the 1970s to less than 300 annually in recent years, primarily due to lack of funding for enforcement.*

Next, states must be permitted to collect the same sales taxes on internet and mail orders that they do on storefront sales.** (Of course, states could — but won’t — level the playing field by replacing sales taxes entirely.)

The Amazon/stock market problem is solved less easily. Consider that the $2 billion-plus that Amazon has lost (net) to date could have capitalized every independent bookstore that closed during Amazon’s first decade to the tune of $1 million each.  

To counter the sometimes anti-competitive nature of stock markets, small business advocates must develop ways of channeling investment to enterprises that enhance communities and opportunities for entrepreneurism — community investment funds as an attractive alternative to the stock market. This is not a quick fix, but a structural change that citizens advocating for community development and entrepreneurism must tackle.

Independent booksellers have stabilized their market share by working together effectively in ways that many other trades could emulate. A strong national trade association in the American Booksellers Association recently has been complemented by the growth of Independent Business Alliances (which encompass independent businesses of all stripes) at the community level.

Bookstores have frequently instigated the formation of these IBAs, which help local businesses pool resources and compete successfully against chains. While booksellers and other small business owners must keep creating new strategies to succeed, their survival benefits all of us.

We should keep all this in mind when choosing where to purchase books — there’s a hidden cost to those discounts from Amazon. But we should be engaging as citizens, not just consumers, to maintain a rich diversity of choices and ensure our children have the opportunity to be entrepreneurs, not just wage workers for Corporate America.

Jeff Milchen co-founded of the American Independent Business Alliance

* One encouraging development since writing this article is the increasing advocacy for antitrust enforcement. The Open Market Institute is now my go-to source for information.

** On June 21, the U.S. Supreme Court upheld South Dakota’s law requiring remote retailers doing $100,000 or more in sales or 200-plus transactions in the state to collect sales tax on purchases by in-state customers. The Court did not directly overrule the 1992 Quill ruling that had let large online retailers avoid collecting sales tax in any state where they did not own or lease physical structures. However, the ruling opens the door for states to follow South Dakota’s lead.

AMIBA has long called for federal policy to level the playing field and stop handicapping brick-and-mortar businesses, including commentary in Businessweek, Wall St. Journal and other media, while offering background reading on the topic. See also this overview from ILSR.

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