Is the Kindle 2 Leading Towards a Monopoly?

Judging from this earlier post, I leave no doubt that I consider the Amazon Kindle 2 to be a fascinating piece of equipment that may yet change the broad economics of book production and distribution. In that same post, I argued that the traditional paper publishers should be more circumspect in their views about the Kindle 2 for the reason that reason that it will disrupt their business and pricing models.

It is therefore fair to consider what the success of a proprietary model like the Kindle 2 would have on the competition landscape. To start with, this piece by Farhad Manjoo on Slate has addressed the immediate concerns regarding the possibility that the success of Amazon's e-book reader may lead to substantial market power.

The first point is that Amazon has established an exclusive standard and locked in Kindle 2 buyers into purchasing exclusively from Amazon. This means that buyers of the Kindle 2 are bound to be locked into purchasing products from the Amazon stores, a situation that closely mirrors the lock down which Apple maintained with the original sale of tracks from its iTunes stores. In fairness, this is a legitimate concern in the sense that the Kindle 2 is not only an expensive gadget but one that limits the choices of the sources of the material that could be used with it. If this business model is maintained, then it is possible that the success of the Kindle 2 would allow Amazon to wield substantial market power with both the producers of content on the one side and its customers on the other.

Secondly, Farhad Manjoo claims that buyers of books have grown accustomed to sharing their books with others and that this will be impossible with the Kindle 2. I am unsure that this is true because the sharing is still possible only to the extent that one would have to lend out one's kindle together with the entire library for the duration of the lending. What I see as a distinct possibility is that while it may not be possible to transfer the e-books, many people who are avid readers will lend out their machines in exchange for others. I am not that sympathetic to this view because two Kindle 2 owners may soon buy different titles and merely exchange the gadgets to allow each to read the other book. Indeed, if the Kindle 2 was to be so successful that it reached a critical mass, then this would control the extent to which Amazon would use it power to raise prices. Sharing will still happen in the same way that people shared the physical CDs.

The third point follows from the fixed nature of the E-book and the restrictions to copying that come with its purchase. here too, I think that Amazon would be completely naive to think that there would be a perfect electronic format that would preclude copying. It is just not possible that if the Amazon became as successful as I expect it will be, that there would be no software programmer out there who would not breach the DRM system. In a short while, it will be possible to copy the e-book without much problem even if that were illegal. I see no reason why DRM would be useful here when it was not with music. Following Steve Jobs eloquent argument on which this post was based, I am less inclined to believe that no software programmers out there would not be equal o the task. Indeed, the problem would be whether there's a mechanism t transfer it from one machine to the other. But that it would eventually be copied is something that i would wager a reasonable bet on.

To my mind, the real issue that concerns competition policy here is to actively watch the markets for Kindle 2 and ensure that Amazon does not retain exclusive arrangements to sell all e-books that are compatible with the Kindle to itself. To democratize that part by allowing Kindle 2 buyers to buy the books from other competing stores would be sufficiently welfare enhancing. The competition at that level would ensure that the publishers reexamine the folly of charging similar prices for the electronic books as they do for paper versions. The Kindle 2 should bust that part. Then the e-books market should be open to competition.