Sunday, September 01, 2013

two wrongs don't make a right, but some wrongs are more dangerous than others

Cult of Mac has published a thoughtful piece about the e-book antitrust case against Apple and a collection of publishers with whom Apple was working to build its iBook Store business, in which they link to another thoughtful piece, published by FORTUNE.

The FORTUNE article asks one very poignant question, “Why the Justice Department chose to prosecute the new entrant in the e-book market, and not the monopolist.”

To me it looks like the DoJ chose the safer target. With all of the patent litigation in which it is embroiled, Apple's star is already tarnished. Also, the notion that there might be something illegal about raising prices (conspiring to do so, actually) is likely to play well with the public.

Everything else being equal, lower prices are generally in the public interest. I say 'generally' because there are exceptions. Too low a price on gasoline, for example, would forestall development of alternatives to the internal combustion engine until the last drop of petroleum had been pumped from the ground.

In the case of e-books, the logic is a little different. Let's start by examining the costs involved in publishing books on paper. First there's the compensation to the author, without which many books would never be written. It's not that authors are greedy, but that they need to be able to treat writing as a full-time job to get anything done. They need to be able to live off the proceeds of their writing. Some manage a comfortable living this way; more live on a shoestring.

Then there's the costs to the publisher, which include managerial overhead as well as editing, typography, graphics, and making sure all the legal ducks are lined up. Then come costs for printing, distribution, and publicity, frequently including author tours.

E-books replace the costs of printing and distribution with the negligible cost of a download, making it reasonable that they should be less expensive than the print versions of the same books, but how much less expensive? One could argue that since they seemingly reduce all incremental costs to that of the bandwidth used by downloads, there is no limit to how low the price can go, since the fixed costs can be spread over arbitrarily large sales figures. The flaw in that argument is that one incremental cost remains in the e-book scenario, market saturation, so price reductions will not necessarily result in a proportionally larger market.

The Amazon model is akin to a print distributor which has purchased the right to reproduce and sell some title, for a flat fee plus marginal royalties. The Apple model is like a distributor which charges a percentage of the retail price, paying for printing out of its cut. Neither of these is necessarily better or more appropriate than the other; they're just different.

The problem with Amazon's use of their model is that they have engaged in predatory pricing, sometimes selling e-books below their cost, with the result that they have very little competition.

The problem with Apple's model is that the publishers liked it so much that they wanted to force it on Amazon.

So DoJ hauls Apple into court, and orders it to change its model. Go figure.

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