An update on the evolving e-book market: Kindle edition (pun intended)

by on March 1, 2011 · 4 comments

[Cross-posted at Truth on the Market]

[UPDATE:  Josh links to a WSJ article telling us that EU antitrust enforcers raided several (unnamed) e-book publishers as part of an apparent antitrust investigation into the agency model and whether it is “improperly restrictive.”  Whatever that means.  Key grafs:

At issue for antitrust regulators is whether agency models are improperly restrictive. Europe, in particular, has strong anticollusion laws that limit the extent to which companies can agree on the prices consumers will eventually be charged.

Amazon, in particular, has vociferously opposed the agency practice, saying it would like to set prices as it sees fit. Publishers, by contrast, resist the notion of online retailers’ deep discounting.

It is unclear whether the animating question is whether the publishers might have agreed to a particular pricing model, or to particular prices within that model.  As a legal matter that distinction probably doesn’t matter at all; as an economic matter it would seem to be more complicated–to be explored further another day . . . .]

A year ago I wrote about the economics of the e-book publishing market in the context of the dispute between Amazon and some publishers (notably Macmillan) over pricing.  At the time I suggested a few things about how the future might pan out (never a good idea . . . ):

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

This “agency model,” if you recall, is one where, essentially, publishers, rather than Amazon, determine the price for electronic versions of their books sold via Amazon and pay Amazon a percentage.  The problem from Amazon’s point of view, as I mention in the quote above, is that without the ability to control the price of the books it sells, Amazon is limited essentially to fiddling with the price of the reader–the platform–itself in order to encourage more participation on the reader side of the market.  But I surmised (again in the quote above), that fiddling with the price of the platform would be far more blunt and potentially costly than controlling the price of the books themselves, mainly because the latter correlates almost perfectly with usage, and the former does not–and in the end Amazon may end up subsidizing lots of Kindle purchases from which it is then never able to recoup its losses because it accidentally subsidized lots of Kindle purchases by people who had no interest in actually using the devices very much (either because they’re sticking with paper or because Apple has leapfrogged the competition).

It appears, nevertheless, that Amazon has indeed been pursuing this pricing strategy.  According to this post from Kevin Kelly,

John Walkenbach noticed that the price of the Kindle was falling at a consistent rate, lowering almost on a schedule. By June 2010, the rate was so unwavering that he could easily forecast the date at which the Kindle would be free: November 2011.

Continue reading →

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More Confusion about Internet “Freedom”

by on March 1, 2011 · 8 comments

Nate Anderson of Ars Technica has posted an interview with Sen. Al Franken (D-MN) about Defining Internet “Freedom”. Neither Sen. Franken nor Mr. Anderson ever get around to defining that term in their exchange, but the clear implication from the piece is that “freedom” means freedom for the government to plan more and for policymakers to more closely monitor and control the Internet economy.  The clearest indication of this comes when Sen. Franken repeats the old saw that net neutrality regulation is “the First Amendment issue of our time.”

As a lover of liberty, I find this corruption of language and continued debasement of the term “freedom” to be extremely troubling. The thinking we see at work here reflects the ongoing effort by many cyber-progressives (or “cyber-collectivists,” as I prefer to call them) to redefine Internet freedom as liberation from the supposed tyranny of the marketplace and the corresponding empowerment of techno-cratic philosopher kings to guide us toward a more enlightened and noble state of affairs. We are asked to ignore our history lessons, which teach us that centralized planning and bureaucracy all too often lead to massively inefficient outcomes, myriad unforeseen unintended consequences, bureaucratic waste, and regulatory capture.  Instead, we are asked to believe that high-tech entrepreneurs are the true threat to human progress and liberty. They are cast as nefarious villains and their innovations, we are told, represent threats to our “freedom.” We even hear silly comparisons likening innovators like Apple to something out of George Orwell’s 1984.  Continue reading →

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Jim Harper on identification systems

by on March 1, 2011

On the podcast this week, Jim Harper, director of information policy studies at the Cato Institute, discusses identification systems. He talks about REAL ID, a national uniform ID law passed in 2005 that states have contested, and NSTIC, a more recent government proposal to create an online identification “ecosystem.” Harper discusses some of the hidden costs of establishing national identification systems and why doing so is not a proper role of government. He also comments on the reasoning behind national ID proposals and talks about practical, beneficial limits to transparency.

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Sen. Klobuchar’s Child Safety Hearing: Bring Your Own Salt!

by on February 28, 2011 · 0 comments

The Senate Judiciary Committee will hold a hearing on March 2 entitled “Helping Law Enforcement Find Missing Children.” While this is just about the most popular topic for a hearing one could imagine, and I’m as much in favor of finding missing children as anyone, I’m a little concerned to see Sen. Klobuchar presiding over a hearing that could lead to new proposals for Internet regulation. As a former prosecutor, it certainly makes sense for her to have taken over Judiciary’s Subcommittee on Administrative Oversight and the Courts. But she’s engaged in blatant fear-mongering about online child safety in the past, so I think it’s fair to say that anyone listening to this hearing should take it with at least a grain of salt—especially if the hearing calls for new mandates for internet intermediaries to address a supposed “crisis.”

Last summer, as I noted, the Senator sent an angry letter to Facebook demanding the site require “a prominent safety button or link on the profile pages of users under the age of 18″ that included the following:

Recent research has shown that one in four American teenagers have been victims of a cyber predator.

The letter didn’t actually cite anything, so it’s not clear what research she was relying on, as I noted:

The 25% statistic is particularly incendiary, suggesting a nationwide cyber-predation crisis—perhaps leading the public to believe 8 or 9 million teens have been lured into sexual encounters offline. Perhaps the Senator considers every cyber-bully a cyber predator—which might get to the 25% number. But there are two serious problem with that moral equivalence.

First, to equate child predation with peer bullying is to engage in a dangerous game of defining deviancy down. Predation and bullying are radically different things. The first (sexual abuse) is a clear and heinous crime that can lead to long-term psychological damage. The second might be a crime in certain circumstances, but generally not.  And it is even less likely to be a crime when it occurs among young peers, which research shows constitutes the vast majority of cases. As Adam Thierer and I noted in our Congressional testimony last year, there are legitimate concerns about cyberbullying, but it’s something best dealt with by parents and schools rather than prosecutors (like Klobuchar in her pre-Senate career).

I went on to cite summaries of the statistics on actual child predation rates—not even close to Sen. Klobuchar’s figure. If she had made these unsubstantiated claims in an academic paper, she would have been roundly criticized by her peers in the “reality-based community.” Yet in Congress, a willingness to sensationalize seems to have little consequence—other than a promotion to a larger bully pulpit from which to harangue. With her experience, she could be an an excellent Chairman and leader on these issues.  I only hope it starts with a commitment to accuracy, lest unsubstantiated concerns about child safety lead to bad policy-making while real and substantiated concerns are under-emphasized.

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Apple, Antitrust, and the FTC

by on February 28, 2011 · 0 comments

[Cross-posted at Truth on the Market]

Antitrust investigators continue to see smoke rising around Apple and the App Store.  From the WSJ:

For starters, subscriptions must be sold through Apple’s App Store. For instance, a magazine that wants to publish its content on an iPad cannot include a link in an iPad app that would direct readers to buy subscriptions through the magazine’s website. Apple earns a 30% share of any subscription sold through its App Store. …

A federal official confirmed to The Washington Post that the government is looking at Apple’s subscription service terms for potential antitrust issues but said there is no formal investigation. Speaking on the condition of anonymity because he was not authorized to comment publicly, the official said that the government routinely tracks new commercial initiatives influencing markets.

Investigators certainly suspect Apple of myriad antitrust violations; there is even some absurd talk about breaking up Apple.  There is definitely smoke — but is there fire?

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market. Continue reading →

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More Challenges to the Lessig-Zittrain-Wu Thesis

by on February 27, 2011 · 3 comments

Writing over at Forbes, Bret Swanson notes that the progression of information technology history isn’t going so well for those Net pessimists who, not so long ago, predicted that the sky was set to fall on consumers and that digital innovation was dying. Specifically, Swanson addresses the theories set forth by cyberlaw professors Lessig, Zittrain, and Wu (among others), whose theories about “perfect control,” the death of “generativity,” and the rise of the “master switch,” I have addressed here many time before.  [See this compendium of TLF essays discussing “Problems with the Lessig-Zittrain-Wu Thesis.”] Swanson summarizes what went wrong with their gloomy Chicken Little theories and their predictions of the coming cyber end-times:

As the cloud wars roar, the cyber lawyers simmer. This wasn’t how it was supposed to be. The technology law triad of Harvard’s Lawrence Lessig and Jonathan Zittrain and Columbia’s Tim Wu had a vision. They saw an arts and crafts commune of cyber-togetherness. Homemade Web pages with flashing sirens and tacky text were more authentic. “Generativity” was Zittrain’s watchword, a vague aesthetic whose only definition came from its opposition to the ominous “perfect control” imposed by corporations dictating “code” and throwing the “master switch.”

In their straw world of “open” heros and “closed” monsters, AOL’s “walled garden” of the 1990s was the first sign of trouble. Microsoft was an obvious villain. The broadband service providers were of course dangerous gatekeepers, the iPhone was too sleek and integrated, and now even Facebook threatens their ideal of uncurated chaos. These were just a few of the many companies that were supposed to kill the Internet. The triad’s perfect world would be mostly broke organic farmers and struggling artists. Instead, we got Apple’s beautifully beveled apps and Google’s intergalactic ubiquity. Worst of all, the Web started making money.

Swanson goes on to argue that, despite all the hang-wringing we’re heard from this triumvirate and their many, many disciples in the academic and regulatory activist world, things just keep getting more innovative, more generative, and yes, even more “open.”  Continue reading →

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Today’s Titans, Tomorrow’s Bygones

by on February 26, 2011 · 1 comment

Newsweek has a great single-page spread on Who’s Eating Your Lunch? about the topsy-turvy tech sector, illustrating beautifully our argument that the relentless force of disruptive innovation is the best remedy for incumbent power:

AOL has been forced to become a content company and team up with Huffington Post now that we all get our Internet from the cable guy. Meanwhile, MySpace is sporting a FOR SALE sign and Borders is facing Chapter 11, while their competitors—Facebook and Amazon—brag of record growth and profits. Now as ever, success in business belongs to those ready to eat the lunch of a complacent rival—and the cycle of life completes itself as potential competitors of the future hit the scene. Here’s a guide to some of the business world’s biggest recent reversals of fortune.

Check it out here.

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Noonan on How the Internet Improves Political Rhetoric & Knowledge

by on February 26, 2011 · 0 comments

Loyal readers know of my generally bullish, optimistic outlook regarding the Internet’s impact on society, economy, and even politics. On that last front, columnist Peggy Noonan has a nice piece in today’s Wall Street Journal entitled, “The Internet Helps Us Get Serious.” Serious about politics and political rhetoric, she means. Speaking about how politicians are addressing the current fiscal crisis in the U.S., Noonan argues:

One way to change minds about the current crisis is through information. We all know this, and we all know about the marvelous changes in technology that allow for the spreading of messages that are not necessarily popular with gatekeepers and establishments. But there’s something new happening in the realm of political communication that must be noted. Speeches are back. They have been rescued and restored as a political force by the Internet.

She then makes the point that I always stress when debating Net pessimists: You have to measure progress against the yardstick of the past and ask yourself if we really better off in a world of information scarcity. Noonan does that beautifully when she notes: Continue reading →

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Three Models for Creating Local Online Hubs

by on February 25, 2011 · 0 comments

Last year I was asked by the Aspen Institute Communications and Society Program and the John S. and James L. Knight Foundation to author a study on models for local online hubs or community web portals. This paper was one of several commissioned by the Knight Foundation to implement the 15 recommendations found in the Knight Commission report on the Information Needs of Communities in a Democracy.  The specific Knight Commission recommendation I focused on in my white paper read as follows: “Ensure that every local community has at least one high-quality online hub.” More specifically, it said: “Communities should have at least one well-publicized portal that points to the full array of local information resources. These include government data feeds, local forums, community e-mail listservs, local blogs, local media, events calendars, and civic information. [The entire three paragraph recommendation can be read here.]

My resulting white paper is entitled, Creating Local Online Hubs: Three Models for Action, and it was released by the Aspen Inst. & Knight Foundation at an event this morning.  (Another Aspen/Knight white paper was simultaneously released on Government Transparency: Six Strategies for More Open and Participatory Government. It was written by Jon Gant and Nicol Turner-Lee.) A short summary of my report follows down below, and you can find the entire report online here.  I’ve also embedded the video of this morning’s launch event for both reports.

Continue reading →

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Does the Internet Cause Freedom?

by on February 25, 2011 · 2 comments

That will be the subject of a Cato on Campus session this afternoon entitled: “The Internet and Social Media: Tools of Freedom or Tools of Oppression?” Watch live online at the link starting at 3:30 p.m., or attend in person. A reception follows.

The delight that so many felt to see protesters in Iran using social media has given way to delight about the use of Facebook to organize for freedom in Egypt. But this serial enthusiasm omits that the “Twitter revolution” in Iran did not succeed. The fiercest skeptics even suggest that the Tweeting during Iran’s suppressed uprising was mostly Iranian ex-pats goosing excitable westerners and not any organizing force within Iran itself. Coming to terms with the Internet, dictatorships are learning to use it for surveillance and control, possibly with help from American tech companies.

So is the cause of freedom better off with the Internet? Or is social media a shiny bauble that distracts from the long, heavy slog of liberating the people of the world?

Joining the discussion will be Chris Preble, Director of Foreign Policy Studies at Cato; Alex Howard, Government 2.0 Correspondent for O’Reilly Media; and Tim Karr, Campaign Director at Free Press. More info here.

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