Don’t Rock the Boat, Baby

A couple of years ago, a big publishing company called Hachette had a problem with a contract that Amazon wanted them to sign. Hachette publishes top-shelf writers like David Sedaris, J.K. Rowling, James Patterson, and Malcolm Gladwell. Hachette’s contract with Amazon had expired and the new contract’s main proposed condition was that Hachette set all of their e-books at the much-lower price of $9.99. Hachette and most of its authors felt that this was way too low. They weren’t yet willing to sign.

It’s a negotiation, right? These things happen in business. The two companies hash it out and eventually reach some sort of agreement.

Nope. Amazon apparently wasn’t interested in a convo. They immediately retaliated with a full-blown delivery throttle, imposing a 2-to-5 week delivery date on each and every book written by a Hachette-represented author. They removed pre-order buttons from all upcoming Hachette books, including J.K. Rowling’s highly anticipated follow-up to Harry Potter. Many of their books weren’t coming up in search results at all. All because Hachette had the audacity to try and counter-negotiate with their business partners.

During what ended up being Amazon’s six-month storm of wrath against the publisher, the many journalists covering the story were overwhelmingly—and rightfully—critical of Amazon’s behavior. But perhaps they shouldn’t have been. This is exactly how we should expect companies to act when they merge and grow and merge and grow until they have nobody left to compete with.

Many people who consider themselves free market capitalists will argue that the way big corporations operate is basically none of the government’s business. They don’t say this because they’re heartless monsters, but because they truly have faith that the free market will tell a company like Amazon where their limit is based on what a company like Hachette will and won’t accept. And in a truly free market, they would be correct. In a truly free market, your company would outsource its costs as long as it was profitable. But there comes a point—there used to—where the people you do business with aren’t willing to accept your cost-cutting measures. They’ll switch to your competition if you go through with it, and not working with them would be bad for your bottom line, so you don’t do that thing you wanted to do. The market takes care of limits by itself—no regulation necessary. If you like free markets, and in an ideal world, I would too—this is what you believe.

But what happens when the companies within a single market take over such a large portion of the market share that you, the consumer, or you, the producer, have no choice but to accept whatever the company demands? Is it capitalism anymore when with every passing year, if you want to fly on a plane, use Internet in your house, or sell a book, you have fewer and fewer options but to accept the terms of an 800-pound gorilla? Is it capitalism anymore when one of the two parties stops having options?

This is what’s happening to chicken farmers. Tyson and 3 other companies have come to control an alarmingly high portion of the consumer chicken market. Meaning that if you’re a chicken farmer and it’s 2017, you have fewer and fewer outlets to sell your product to except Tyson, Pilgrim’s Pride, Perdue, or Sanderson Farms. So when Tyson, and soon after, the other big three realized that it sure did cost a lot to own all that land to store and raise their product—chickens—they came up with a genius idea that would have never worked two decades earlier when they had more competitors: they approached the many independent farmers who were increasingly struggling to make a living in a Tyson-saturated market, and recruited them to work for them under a flock-to-flock contract. The farmers would raise chickens on their own land (thus enabling these companies to not have to pay for any of the land needed to raise their product). And hey, since it was the farmers’ land, the farmers would pay the roughly $900,000 it costs to erect the industrial chicken houses and other equipment consistent with company standards. “You get to be an independent contractor!” Tyson said, and still says. Except even better, because you don’t have to worry about the changing cost of feed like you would if you worked for yourself. Tyson sets them up with the baby chicks, the feed, and the precise instructions on how to grow the chicks effectively. Plus, they hook the farmers up with a bank that will issue them the massive loans they need to pay for their chicken houses out of pocket—loans that a bank would never give to someone of their means if they weren’t with Tyson.

The farmers are willing to take on such massive debt because they see what they’ll be making once the equipment is paid off in 8 years or so—assuming all goes well and Tyson keeps contracting with them flock after flock. It’s good money—better than they’d ever make alone in this climate. ‘I’m hardworking. I’m enterprising,’ they think to themselves. ‘I can follow their instructions. There’s no reason I won’t get out of the red.’

Except there’s one part of the story they forgot to account for, which is when Tyson approaches the farmer two years in, while he’s still very much in debt for the original chicken houses he bought to enter the relationship. “Hey Paul,” they say, “you’re doing great. So great, in fact, that we want you to upgrade to this new, more efficient ventilation technology we’ve developed. It’ll cost you $250,000. We’ve spoken to Brenda at the credit union and she’s willing to issue you the loan.”

“No thanks,” Paul says, “I don’t want to take on any more debt right now.”

“No really,” Tyson says. “Do it.”

“No,” Paul says, “I can’t right now.”

So Tyson starts giving Paul shittier, sicker chicks to raise. Since the farmers are paid on a per-pound basis, this directly impacts how much money Paul earns. He starts to not be able to make his monthly bank payments to pay off the original chicken houses. All because he didn’t want to buy upgraded equipment out-of-pocket at the precise time that Tyson demanded he did.

So much for being an ‘independent contractor’.

You may be thinking—well, there are three other big options you named that the farmers can work for instead: Pilgrim’s Pride, Perdue, and Sanderson Farms. That’s a borderline-acceptable amount of competition. But here’s the kicker, which chicken farmers have known for years and Christopher Leonard details in his extremely entertaining book on this topic: these top four companies have what is effectively an unspoken “gentleman’s agreement” with each other: they won’t recruit farmers on each other’s turf. So there are ‘Tyson communities’ and there are ‘Pilgrim’s Pride communities’, but never both. If Tyson terminates your contract, good luck getting a job with anyone else. And you’re still wildly in debt from those industrial chicken houses, which you owe bank payments on regardless of what happens with your employer.

“Over the past 15 years, I have sold millions of dollars’ worth of books on Amazon, which means I have made millions of dollars for Amazon. I would have thought I was one of their best assets. I thought we were partners in a business that has done well. This seems an odd way to treat someone who has made you millions of dollars.”

That’s what many-time bestselling author Malcolm Gladwell, who was represented by Hachette, had to say to the New York Times when Amazon was retaliating against them for not agreeing to sell their e-books at $9.99. The journalist he spoke to rightly noted that he sounded more like someone who was hurt by a friend than angry at a billion-dollar business.Why would that be? Why would the world’s most famous social scientist be so…emotional over something that was so strictly business? Well he, and I would argue, most of us, are still assuming that the basic laws of business from the days of our parents and grandparents apply to us: that if we create something that makes boatloads of money for the company that sells it, that makes us an asset that the company doesn’t want to lose. In other words, the bigger you get, the more respect you get; the more your business partners will stretch—within reason—to keep you happy and keep you working with them. But in the age of monopoly, we’re late to the party in realizing that the old rules of business do not apply. As fewer and fewer corporations control more and more of the market share across almost every industry, no person, no supplier matters enough to listen to or accommodate—not even the superstar moneymakers.

Enter Malcolm Gladwell’s sense of dismay, dismay over the respect—seemingly more than the price—he felt he was owed. Gladwell is one of the most in-demand writers in the world, and thereby, on Amazon; we get the weird benefit of witnessing the moment he realized that his demand was unhinged not only from his supply and from his prices, but from the basic dignity that producing something popular used to get you. Corporate consolidation not only warps the logistical rules of capitalism but the emotional matrix of anyone who participates.

Speaking of which, up until the day that Tyson would come to town, farmers in any given community would share advice, tricks, and tips with each other. You could do well and your neighbor could do well at the same time. No longer. The farmers in each community are put in a “tournament” system with each other to determine their salaries per flock… the same concept as being graded on a curve. So the size of their checks every six weeks aren’t determined by how big they grow their chickens but how big they grow their chickens in comparison to their neighbors. Your success depends on your neighbor’s relative failure. And your neighbor’s success is, by design, bad news for you. And since you’re all deeply in debt for the chicken houses Tyson had you buy, the stakes couldn’t be higher. It’s actually in the farmers’ contracts that they’re not allowed to communicate with each other about their methods. They’re only allowed to communicate with their assigned technician representative. The design literally rips communities apart socially as much as it does economically, transforming amicable neighbors into nervous competitors, isolated not only from their craft but from each other. Without antitrust, we literally create an anti-trust. And, much like the real game of monopoly, if your competitors can’t pay back the bank for the property they bought and have to declare bankruptcy, you’re not supposed to care. Because it means you win.

While the tournament system sounds shocking and cruel when you get what’s really happening, think about how a high-up at Tyson would describe it: “It promotes competition! It encourages farmers to do their best work! It rewards the hardest working chicken farmers with bonuses! That bonus is available to any of the farmers who are willing to work hard enough.”

I have to admit: if I heard a corporate representative saying something like this about another industry I didn’t know as much about, I doubt I would think it sounded that bad. I might even nod my head along a little. Yeah, that sounds innovative! That sounds like how capitalism probably ought to work. I think I’m down.

We end up with something that sounds like a free market and looks like a free market to anyone on the outside. But most of those on the inside are—once they get in deep enough—ensnared. And, to win, which in industries like these is coming to mean ‘to not get dropped or go bankrupt’, it ends up costing them next to all of their autonomy and dignity. Wasn’t a sense of autonomy the whole reason we were more or less down with this capitalism thing? The feeling that our fate was ultimately in our own hands? That if we could create a killer product or service…we could win?

In 2012, Obama and his Secretary of Agriculture held hearings across the heartland for contract poultry farmers intending to develop new antitrust regulations aimed at their giant employers like Tyson. In spite of receiving tens of thousands of anonymous online comments prior to the hearings, almost no chicken farmers showed. Why? They said they were scared that their employers would retaliate against them. They had seen what had happened to their various ‘Paul’s’, let alone to the few brave souls who publicly spoke out against Tyson while they were working for them. Their stories often ended in bankruptcy and foreclosure… due simply to “poor performance”, according to their employers, based on low-weight chickens, which awkwardly coincided with the time they started to cause a ruckus.

Corporate consolidation isn’t just maintained by the technical reality that producers have fewer and fewer options; it’s maintained by the cold-sweat fear this dynamic instills in anyone who has a problem with it. With each merger and acquisition, the risk of speaking up increases. It becomes a risk to whisper. Even when the President himself is inviting you to.

Hachette and Amazon ended up reaching an agreement that the Hachette CEO said was “great news for writers.” But in the process, they learned an intractable lesson about their business partners: any time they wished to push back against Amazon, it was going to be high key. It was going to keep their writers from writing and cost them millions’ of dollars in sales, however noble the cause, however reasonable the request, and however overwhelmingly supported they were by the press and public opinion—as they were from the start. As far as their bottom line was concerned, Amazon appeared to be insulated from six months of sharp public criticism as well as not-shipping a number of the world’s most popular writers —people just bought one of the other two million titles they had on tap. Amazon could evidently withstand the hit. Could Hachette? If this happened even one more time, it’s easy to imagine how talented publishers might migrate to a firm that was in better graces with those that controlled almost 70% of their market. It’s easy to imagine how hot new writers might avoid working with Hachette out of fear that another dispute would arise. After all, they all got into this business to put great ideas out into the world, not to be activists. Under a virtual monopoly, any wrong movement threatens to bar you from the passions and skills you spent a lifetime investing in. Why rock the boat when the stakes couldn’t be higher?

This is where politicians come in handy, like when conservative president Teddy Roosevelt passed the Sherman Act when Standard Oil started to behave like today’s chicken companies. Unfortunately for the 21st century, The National Chicken Council lobbied the shit out of Obama’s poultry industry reforms, shelling out every last fiber of their anti-monopoly provisions and nearly everything else that would have made a difference. And weirdly, around the time that everything was going down with Hachette and politicians were starting to take notice of Amazon’s bullying tactics and asking questions like, ‘Hey, do you think Amazon’s a little too big?’, weirdly, and incidentally, Jeff Bezos purchased The Washington Post for $250 million.

So just imagine, as Zephyr Teachout said in her TED talk, any senator wanting to pass antitrust legislation and seeking re-election with The Washington Post hanging over their heads. No, billionaire business tycoon Jeff Bezos isn’t hunched over his editors’ shoulders demanding they write articles defending Amazon and slashing any senators who stand against them. That would be too transparent and too blatantly anti-free speech. Much more likely that he achieves the same effect through a concoction of op-eds, unspoken fear amongst mainstream sitting senators, and the access to powerful people one gets when one owns a newspaper. Looks like democracy. Sounds like democracy. But the key players are utterly ensnared.

Not only are all of these corporations’ actions perfectly legal—most people claiming to be free market capitalists will tell you that it’s perfectly natural, too. As markets mature, it’s only natural that the most successful corporations will get larger as they buy out their competitors. This is not something to be punished but celebrated, they’ll say—it’s a sign of success. But that’s not what their homeboy Adam Smith argued in The Wealth of Nations. His real argument for free markets was this: Markets, when under conditions of perfect liberty, will lead to perfect equality. In other words, free markets are good because they’ll lead to perfect equality. Free markets are the answer, he concludes, precisely because the people working under them won’t be forced to agree to outside orders that they don’t want to agree to—they’ll just switch over to another competitor.

When we encounter industries where this option is disappearing or already has, we ought to consider forcing corporations to stay small enough to have competitors. Especially those of us who are true free market capitalists—and hey, in a perfect world, conservative.