Overzealousness at the FTC

It’s shaping up to be a tough week for booksellers. First, got slammed by a cover story in Barron’s that ran through every bad thing anyone has ever said about the company’s business model. (All that was missing was the “And if there’s a nuclear war, people won’t buy as many books” line.) Then Barnes & Noble found out, via the New York Times, that the staff of the Federal Trade Commission is recommending that the FTC block B&N’s proposed $600 million acquisition of Ingram Book Group, the country’s largest book wholesaler.

Needless to say, the latter news is more important to Barnes & Noble than the Barron’s article is to Amazon. (For that matter, the Ingram news is probably more important to Amazon than the Barron’s article.) B&N had counted on the Ingram acquisition to significantly reduce its transaction costs, improve its distribution capabilities, and as a result give it a leg up on Amazon. With Ingram, B&N essentially would have been able to offer its customers overnight delivery at no added cost in close to three-quarters of the country. I’m not sure how big a difference that would really make–Amazon tends to get books to me within a couple of days at no added cost–but when it comes to retail, no advantage can be overlooked.

As I argued when this deal was first announced, though, what the Ingram acquisition was not designed to do was allow B&N to squeeze its competitors by denying them business or slowing down order fulfillment. Ingram is the major supplier to many independent booksellers, and Amazon says Ingram fills 58 percent of its orders. But buying Ingram and then cutting off its major customers would be a very odd way to maximize the value of a $600 million investment. Especially since if it did vacate the field, one of Ingram’s competitors would immediately take its place.

Nonetheless, it was precisely this concern that motivated the ardent lobbying campaign that has led independent booksellers to swamp the FTC and state antitrust officials with letters and phone calls protesting the merger. Independent booksellers have seen their core business eroded first by the advent of superstores and now by the rise of online book buying, so it’s understandable that the Ingram deal would appear to be the final nail in their proverbial coffin. But it wouldn’t have been, and unfortunately the lobbying campaign seems to have led the FTC into some of the more questionable areas of antitrust law.

In recent years, the FTC and the Justice Department have done an excellent job of resurrecting antitrust law from the neglect it received during the Reagan and Bush administrations. In particular, they’ve done a good job of looking skeptically at horizontal mergers, which is when two large companies in the same industry propose to unite. Deals like the Staples-Office Depot merger and the Lockheed-Northrop acquisition have been blocked because of their anti-competitive ramifications, and sensibly so. In general (though not always), more competition means more innovation, greater efficiency, and lower prices, which are good things.

The B&N-Ingram deal, though, would be a vertical merger, a classic case of a company integrating backward in order to improve efficiency. It’s analogous to the way auto companies purchased their suppliers back in the 1920s. As such, it’s actually a very old-fashioned deal. Today, auto companies that still own their major suppliers are seen as dinosaurs, and companies like Chrysler are praised for outsourcing the production of most of their components. But B&N clearly believes that it can do better if it owns Ingram rather than having to negotiate with it.

What’s unclear is why this kind of merger should be blocked. Oil companies own oil fields, refineries, and gas stations. Car companies own suppliers, factories, and dealers, and in the days of Henry Ford they actually used to own coal fields and steel plants. Vertical integration may not make economic sense, but it’s hard to see why it doesn’t make legal sense. The deal won’t reduce competition in the wholesale book business, since demand for wholesale books will remain the same and the number of players in that business won’t be reduced. And it won’t reduce competition in the bookselling business, since the number of players in that business won’t be affected either. The deal may help Barnes & Noble be more competitive, but that’s hardly a reason to block it. Antitrust law is a blunt instrument, and in this case too blunt to justify its use.