Hold the Applause for Amazon.com

By Jeff Milchen, AlterNet. Posted August 13, 2005.

In July, Amazon.com executives had more reasons to celebrate than just pre-selling 1.5 million copies of the latest Harry Potter hardcover. 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." Which is 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 2,000 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 seven percent 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 percent). 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 six to eight percent 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. All of this is disturbing to anyone who values market competition.

Jeff Milchen directs ReclaimDemocracy.org, a non-profit organization working to restore citizen authority over corporations. He was a co-founder of the American Independent Business Alliance.

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