17 December 2011

This Is To Be Expected

When Amazon.com Inc. introduced its first Kindle e-reader back in November 2007, the $9.99 digital best seller was a key selling point. Today, the price of a Kindle has plummeted to under $100—from $399 back then. But e-book prices for some popular titles have soared.
Take Ken Follett's massive novel "Fall of Giants," for example, which costs $18.99 as an e-book. On Wednesday it was selling for $16.50 as a paperback on Amazon.
The digital price increases are the result of a decision by the six biggest publishers to set their own consumer e-book prices, a move that effectively bars retailers from discounting their e-books without permission. No such agreement exists for printed books—where retailers are free to set their own prices. So while a best-selling e-book price is often less than half of the hardcover price, heavy discounting of the print version closes the gap.

This is, of course, an easily predicted event.  You’ll recall that publishers mostly ignored the eBook business when they first hit the shelves, way back in the day.  Why pay attention to such a niche market?  At the time, this decision probably made sense, but now it doesn’t and because publishers refused to stay ahead of the curve, they eventually took it in the shorts when eBook sales began to cannibalize physical book sales.

This came about because the publishers were not in a good position to sell eBooks once they became popular.  Outside of Amazon, there aren’t any major retailers that sell them, and with such a wide selection to boot.*  As a result, Amazon has significant market power, which will eventually kill the publishing industry as we know it.  This shouldn’t be a bad thing, in and of itself, but the publishers are quite naturally opposed to it.

In order to fight back, then, the publishers have elected to raise the price of their eBooks while still allowing Amazon to lower the price of their physical books.  This strategy helps the publishers because it encourages people to go back to physical books, and thus diminishes Amazon’s market power.  Amazon survives on very thin margins, and so it is imperative that it sells as much as possible.  It’s competitive advantage is lower prices, so if Amazon were to raise the price of their physical books, they would simply lose sales, and those lost sales would not be recovered in eBook sales.

And so, the publishers and Amazon are at a bit of a stalemate.  The publishers’ decision to raise eBook prices will harm their own profitability, though it will harm Amazon’s more.  Amazon’s decision to not raise the price of physical books will only exacerbate the problem with declining eBook sales.  This whole system is a mess, and this stalemate will not end well.

What, then, is the cause of this mess?  Unsurprisingly, the answer is Intellectual Property.

Copyright law creates an artificial restriction on the supply and distribution of eBooks.  As is well known, copyright law grants monopoly privileges to publishers and writers, and makes it illegal for people to simply make a copy of a given work.  This makes it considerably easier for publishers to charge high prices for their books since it is simply illegal to buy them from some other supplier.

Patent law also plays a role by restricting the use of eBook readers, per the terms set forth by patent owners thereof.  This is to say that it is illegal for someone to copy certain aspects of an eBook reader for the purpose of establishing a competing good that is compatible with given devices.  If people could read Kindle books without having to bow to the software’s patent restriction, it would be easier for people to circumvent the general restrictions on eBooks.

Basically, the current mess in the book market is due to government interference.  The government has granted monopoly power to specific businesses, and they are unsurprisingly trying to abuse said power.  The result is a currently stagnant market and dissatisfied consumers; basically, the twin hallmarks of government interference.

* Barnes & Noble’s Nook is the exception to this statement, but even then B&N’s market share pales in comparison to Amazon’s.

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