| Ricci Street
< Port 80 < Shoreline
|| search | sitemap | help gazette | theater | bistro |
| | |
 |
|
Power demands to be taken seriously. But the Internet is
rolling on the floor laughing, deep wracking intertextual guffaws.
-- Christopher Locke
Why do textbooks cost, on average, $ 66.08? Illustration of Where the New Textbook Dollar Goes.
If ever anything cried out for a web site, it is the typical textbook. Links, searchability, copy/paste, constant updating, feedback from users, lesson plans and other teaching materials.
This pressure from the Internet and the new economy is not lost on the publishing industry. Several years ago, they commissioned an expensive study of the products by NuvoMedia (the Rocket e-book), Peanut Press, and Softbooks. The first two have been bought out by larger companies and the third is no longer in business.
The study, E-Book Security Assessment, was written by Global Integrity Networks but is no longer available at their website because they were bought out. The Assessment study includes the explanation below of the economics of information goods. Where it says books, substitute anything else -- such as movies, newspapers, magazines, music, television, news, and live events in general -- that can be turned into a binary bit stream and distributed over the Internet.
It's a long report, so I've excerpted (fairly, I believe) the part that goes right to the heart of the matter.
The business of selling intellectual property has
interesting economics: high production costs and low reproduction costs. In
general, intellectual property is expensive to produce. It is very expensive to
produce the first copy of a work because of the time and effort that the
creators, the author and the publisher, put into researching, writing, refining,
and developing the work. Additional expenses are involved in marketing the work
to make it known to the appropriate audience. Pirates, in fact, depend on the
successful marketing efforts of the publisher to create a demand for the work.
It costs significantly less to produce subsequent copies. Unlike many other
fields, the costs incurred in producing the first instance of the product are
sunk costs, (e.g. there is no equipment left over that can be sold off to
recover costs). This means that publishers must be able to recover their costs
and make profit by selling subsequent copies of the work.
The environment in which the publishing industry arose was one in which the cost
of reproducing (or producing subsequent copies) was also relatively high.
Publishers have benefited from economies of scale that made it impractical for
individuals to publish their own works or for consumers to make their own
reproductions. By mass producing books, the publishing industry has been able to
drive the cost far enough below the price consumers are willing to pay that the
profits compensate all the parties in the supply chain (i.e., authors, agents,
publishers, distributors, and retailers).
To a degree, the cost of reproduction is kept high artificially through laws
that protect intellectual property. Some time ago, society as a whole recognized
that, in some cases, economics of producing intellectual property was a negative
incentive to authors from sharing their IP with others. As a result, they put in
place mechanisms such as copyrights and patents to encourage the flow of ideas.
By providing inventors and authors a degree of legal protection, society seeks
to ensure that they can reap greater rewards by making their intellectual
property publicly available rather than keeping it secret.
For written works, the real cost of reproduction is still relatively high
because they are sold as physical property. Books have a per-unit cost of
production. They are the preferred form because the physical artifact of the
book is so well-designed and convenient to use. For extended reading, there is
still no substitute for a professionally bound, paper and ink book.
In the future, this may change as a result of two trends: First, the Internet is
establishing an inexpensive digital communication network that is attracting
consumers because of the range of services available through it. Second, it may
soon be possible for electronic devices to match or surpass the quality of
display (e.g. by providing animation and interactivity), the ease of use (e.g.
by providing convenient indexing and search), and the compactness of form (e.g.
by making entire libraries easily portable) of traditional books.
When the Internet is truly ubiquitous and consumers will feel electronic books
are equal to or better than traditional books, the economics of the publishing
business will change fundamentally: At that point, the marginal cost of
reproducing books will effectively drop to zero. Once consumers own electronic
books and there are digital networks in place over which publishers and
consumers can communicate, distributing a book to a consumer electronically does
not incur any significant additional cost for either party.
There are two noteworthy impacts from this change. First, anyone can produce and
sell their own books, since there is no longer an economy of scale to overcome.
Second, anyone can take a book they possess, reproduce it perfectly, and
distribute it as widely as they like. In other words, while the cost of
developing literary works remains, the economic factors currently affecting the
production and distribution may soon change significantly.
Look at that next-to-last paragraph again. The use of "books" there is a little imprecise. When the Internet is truly ubiquitous, I won't need a book, I'll need a reading device because everything will be instantly available. Where the bits are served from won't matter. Nor will I have to "keep" a copy. Why should I when it's always available instantly from wherever it is? Then it's not anywhere, it's everywhere.
There won't be a rights question because there won't be a copy question.
The Effect
of File Sharing on Record Sales: An Empirical Analysis
by Felix Oberholzer and Koleman Strumpf
March 2004
A longstanding economic question is the
appropriate level of protection for intellectual property. The Internet has
drastically lowered the cost of copying information goods and provides a natural crucible to assess the implications of reduced protection. We
consider
the specific case of file sharing and its effect on the legal sales of music.
...
Downloads have an effect on sales which is statistically indistinguishable
from zero, despite rather precise estimates. Moreover, these estimates are of
moderate economic significance and are inconsistent with claims that file
sharing is the primary reason for the recent decline in music sales.
The
New Economics of Music:
File-Sharing and Double Moral Hazard
by Umair Haque
Bubble Generation, 2004
Part 1: Why the Music Industry is (Really)
Broken
The Net offers listeners insurance against the music industry itself.
File-sharing isn't simply theft. Rather, file-sharing is risk-sharing -- against
an industry with the freedom to undertake hidden action in the extreme, and not
live up to the contract it has written. Remember, the contract said that labels
would assume the risk in exchange for dollars from listeners - so when moral
hazard lets labels try and push risk to listeners, is it any surprise that
listeners try and minimize it by parceling it out? In fact, we could go even
further - saying that file-sharing is a way for principals to punish agents
operating under extreme moral hazard, with the hope of bringing the agents
incentives into line.
Will MP3 downloads
Annihilate the Record Industry? (127K .pdf)
The Evidence so Far
Stan Liebowitz
University of Texas at Dallas, June, 2003
Records are just a particular category of
consumer goods, and not a terribly large one in terms of revenues. Even so,
listening to music is one of the major daily activities for many Americans.
Estimates indicate that the average American spends 45 minutes a day listening
to recorded music and almost three hours listening to the radio—where music is
the major programming ingredient. Thus even if its share of GDP is small, its
share of the collective consciousness and behavior of consumers is very large.
It is also possible that its value to consumers might be much larger than that
indicated by market revenues, just as air or water provide enormous values but
very little, if any, market revenues.
As is the case with most economic goods, we expect the demand in the market to
be impacted by economic factors such as changes in taste, income, prices of
substitutes and complements, demographics, and changes in the nature of the
product. Many of these factors are discussed in Section II.A. The factor that is
of particular relevance in this market is the impact of copying.
The analysis will consist, therefore, of simply examining the sales of albums
and trying to determine the factors responsible for changes in sales. We can
then focus on sales in the last few years, since that is the period in which MP3
downloading began, and see whether sales decline in an otherwise unexplained
manner, or whether they fail to increase as we might have expected them to.
Again: what's so difficult about abundance?
by Jerry Michalski
Sociate, July 25, 2004
While moderating an afternoon panel at
BlogOn last Friday,
Technorati's Dave Sifry made a passing
comment that got me a little stirred up. I can't quote him verbatim, but he
stated roughly that in business, there's no value without scarcity. I
couldn't help myself and shouted a "no!" as I gave him a thumbs-down. ...
It drives me nuts that scarcity is seen as such a fundamental requirement for
creating a business. Sure, there are plenty of businesses built around scarce
resources, and sure, Dave's time and my time are scarce, but that's no proof
that businesses can't cruise along profitably creating voluntary loyalty by
knowing their customers better, never betraying them, always being available and
fixing problems, responding more quickly than others.... you get the picture.
But go to business school and what they teach you is how to create artificial
scarcity. That's the kind of thinking that got us into the present mess.
Perhaps more importantly, if you don't think from the point of view of
abundance, you're going to miss a ton of interesting new business ideas that are
emerging now. These businesses may not be IPO-track businesses (sorry, VCs), but
they can be vital, profitable enterprises.
The economics of information goods, known in legal circles as intellectual property.
Information Economics: A Primer
from The Digital Dilemma
Intellectual Property in the Information Age
National Academy Press, 2000
The creation of the original information content is what economists call a pure public good: The cost of generating new information is independent of how many people eventually gain access to it.
Intellectual property's value comes from both the physical medium (ink, paper, vinyl, aluminum, etc) and the work needed to produce the content.
Producers have a limited supply of items (atoms) to sell.
Each item has a marginal cost, that is, the cost to produce the nth item, plus
associated salaries, R&D, advertising, etc..
Consumers have a demand for items.
Prices regulate supply and demand. If demand is too high, prices will rise,
lowering demand. If demand is too low, prices will fall, increasing demand. If
prices are fixed or capped (say by marginal cost), then supply will change. If
price is greater than marginal cost, then firms have an incentive to enter the
market.
We Are the Web
by Kevin Kelly
Wired 13.08, August 2005
The Web continues to evolve from a world ruled by mass media
and mass audiences to one ruled by messy media and messy participation. How far
can this frenzy of creativity go? Encouraged by Web-enabled sales, 175,000 books
were published and more than 30,000 music albums were released in the US last
year. At the same time, 14 million blogs launched worldwide. All these numbers
are escalating. A simple extrapolation suggests that in the near future,
everyone alive will (on average) write a song, author a book, make a video,
craft a weblog, and code a program. This idea is less outrageous than the notion
150 years ago that someday everyone would write a letter or take a photograph.
What happens when the data flow is asymmetrical - but in favor of creators? What
happens when everyone is uploading far more than they download? If everyone is
busy making, altering, mixing, and mashing, who will have time to sit back and
veg out? Who will be a consumer?
No one. And that's just fine. A world where production outpaces consumption
should not be sustainable; that's a lesson from Economics 101. But online, where
many ideas that don't work in theory succeed in practice, the audience
increasingly doesn't matter. What matters is the network of social creation, the
community of collaborative interaction that futurist Alvin Toffler called
prosumption. As with blogging and BitTorrent, prosumers produce and consume at
once. The producers are the audience, the act of making is the act of watching,
and every link is both a point of departure and a destination.
The "invisible hand" of laizzez-faire capitalism
When supply and demand equalize, then profits and social welfare are maximized. When markets are left alone and allowed to work, supply and demand balance on their own. The role of the government is to correct market failures.
Low barriers to entry
Low switching costs
Low availability -- scarcity
Low transferability -- excludability
Low transparency -- uninformed consumers
Note the difference between these assumptions and what Porter's Five Forces model would consider a stable, profitable industry. That industry will raise barriers and switching costs.
Information goods typically have a high fixed cost (first-copy
cost) and little or no marginal cost (nth cost)
High fixed costs make entry into production difficult but into distribution
easy. Low-cost, powerful software has lowered production costs dramatically.
economies of scale | access to distribution channels | capital requirements |
We can switch with a few clicks.
Instead of scarce atoms, we want bits, which are abundant and
nonrivalrous. Your copy doesn't diminish mine; we can both have it. We cooperate
and share instead of compete and steal.
Classical economic theory predicts: in a competitive market, items will be
sold at marginal cost.
What if marginal cost is trivial? If we have unlimited numbers of items
available, everyone wants to pay the lowest price. Nothing.
Government has "corrected" this "market failure" with copyright laws creating
artificial scarcities and multinational cartel structures (e.g. music industry).
Both keep prices artificially high in spite of the fact that the music industry
also benefits from low marginal costs.
Classical microeconomic theory says that if goods aren’t scarce, no one will pay
for them. And that if no one will pay for them, no one will manufacture them.
Fallacy: That does not mean that people will stop making music. It means
that the Big Five won't make $20 CDs.
Information goods are nonexcludable. You can't keep people from sharing them. If it's available for free, why would I pay for it? (What about bottled water? What are you really buying?)
Information goods are experience goods.
I don’t know how much I’ll like your new music until I hear it, so I have a hard time
determining how much I'm willing to pay. Will I pay for recommendations,
try-before-purchase, reputation?
Strategies for earning revenue from information
The
Long Tail (article)
by Chris Anderson
Wired, October 2004
Forget squeezing millions from a few megahits at the top of the charts. The future of entertainment is in the millions of niche markets at the shallow end of the bitstream.
The Long Tail (Chris Anderson's blog)
A public diary on the way to a book
Long Tail Marketing (Joshua Wood's blog)
Long Tail Marketing is a technique to increase sales while decreasing the cost per sale by developing and selling to thousands of niche markets. It has implications within search engine marketing, online selling and advertising purchases.
Lord
of the Things
by Owen Thomas
Business 2.0, March 1, 2002
Number of ...
daily customers at Wal-Mart stores worldwide: 15.7 million
unique daily visitors at Walmart.com: 450,000
SKUs stocked by a typical Wal-Mart Supercenter: 100,000
SKUs stocked by Walmart.com: 600,000
Consumer Surplus in the Digital Economy: Estimating the Value of Increased
Product Variety at Online Booksellers (.pdf)
by Erik Brynjolfsson, Yu (Jeffrey) Hu, Michael D. Smith
Management Science, November 2003
Yes, there's lots more variety at Amazon. But here's the kicker -- it's also their revenue.
47.9% of Amazon’s unit sales fall in titles with ranks above 40,000 and 39.2% of sales fall in titles with ranks above 100,000.
In other words, the titles with high sales ranking -- the best sellers available in the Barnes & Noble on Niagara Falls Blvd -- are on the left closer to the y axis. The books not available in the Barnes & Noble provide almost half of Amazon's sales. The authors conclude:
While lower prices due to increased market efficiency in
Internet book markets provide significant benefits to consumers, we find that
the increased online availability of previously hard-to-find products represents
a positive impact on consumer welfare that is seven to ten times larger. Limited
shelf space in conventional retail outlets constrains the types of products that
can be discovered, evaluated, and easily purchased by consumers. Limits on the
number of titles Internet retailers can present and sell to consumers are
substantially lower. As a result, Internet customers have easy access to
millions of products that they could not easily locate or purchase through
brick-and-mortar retailers.
To date, the economic effect of increased product variety on the Internet has
been ignored, effectively setting to zero the value consumers place on increased
selection at Internet retailers. Recent econometric advances have allowed for
the measurement of the economic impact of such new products. Our research
applies and extends these methodologies to quantify an important welfare impact
of online markets. Preliminary calculations for one product category sold in
U.S. markets show that the welfare gains are between $731 million and $1.03
billion for the year 2000 alone. These welfare gains dwarf the consumer welfare
gain from increased competition and lower prices uncovered in previous research.
On the graph above, the line drops rapidly and then goes on and on and on and on. That long tail has a name: the long tail.
The
Long Tail (article)
by Chris Anderson
Wired, October 2004
Forget squeezing millions from a few megahits at the top of the charts. The future of entertainment is in the millions of niche markets at the shallow end of the bitstream.
The Long Tail (Chris Anderson's blog)
A public diary on the way to a book
Long Tail Marketing (Joshua Wood's blog)
Long Tail Marketing is a technique to increase sales while decreasing the cost per sale by developing and selling to thousands of niche markets. It has implications within search engine marketing, online selling and advertising purchases.
Cooking Pot
Markets: An Economic Model for the Trade in Free Goods and Services on the
Internet
by Rishab Aiyer Ghosh
March 1998
There is a very tangible market dynamics to the free economy of the Internet, and rational economic decisions are at work. This is the "cooking-pot" market: an implicit barter economy with asymmetric transactions.
|
||||||||||||||||||||||||||||||||||||
