There’s obviously much excitement in the publishing world about the Random House-Penguin merger. It’s the kind of merger that makes me wish I was still on the Competition Commission, as the issues are fascinating. The justification given by the parties is that they will be able to invest on a larger scale in e-books. Clearly, all publishers are anxious about Amazon’s market power – 40% of all retail book sales in the UK according to one figure I saw. But this is complicated territory, competition-wise.
I was a member of the Competition Commission group that gave the 2006 go-ahead for Waterstones and Ottakar’s (remember them?) to merge on the grounds that online book sales offered vigorous competition to high street booksellers. Since then, Borders/Books Etc has also gone from British high streets, although Daunts and Blackwells seem to be more than holding their own. Ironically, the publishers – including Penguin – were vociferously opposed to the Waterstone’s merger, saying online sales would not pose an effective competitive threat to a single big high street chain.
What a lot of today’s commentary is not discussing in detail is the question of which markets along the whole value chain need to be assessed. There’s a transaction between author and publisher – mega-publishers look bad for most authors but on the other hand there seem to be quite a few reasonably successful small publishers springing up. Then the wholesale transaction between publishers and retailers – and here there is growing concentration on both sides, with the intriguing wrinkle that Amazon can act as a platform for smaller publishers to reach readers.
Finally, there is the retail market, both in its physical and e-book manifestations. Amazon is clearly dominant, and seems to be pricing Kindle devices at cost to hook customers in, but is not blatantly using its market power to raise prices to consumers, as opposed to squeezing the publishers’ margins – although given that the price of an e-book is a rental rather than a purchase price, that is a hypothesis to be tested. Anyway, one would need a two-sided market model to assess the competitive impact of changes in the two separate margins, as there is no reason these would be the same under perfect competition. Besides, any competition regulator would want to see a standardised e-book format emerge.
All in all, it would be a terrific case to be on! I’m not sure it will be referred – Penguin seems confident it can avert that with sufficient undertakings and disposals – but if there is an inquiry, the report will make a cracking good read.