The Real Reason Behind Steve Jobs' Price-Fixing Efforts

By Soroush Pour - May 23, 2012 | Tickers: AMZN, AAPL, BKS | 0 Comments

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By John Kocsis

“Hold back your books from Amazon” and “throw in with Apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99.” Apparently, Steve Jobs had these tidbits of advice to the five traditional publishing firms that, along with Apple, are currently being sued for price-fixing.  The federal and state governments take the suggestion to be indicative of a trust-like conspiracy that unduly hurts consumers of electronic books.  While the veracity and gravity of the feds’ complaint will be decided in court, the Jobs quote has large implications on the future of the e-book, regardless of the decision in the Southern District of New York.

At first glance, the statement seems simply to be part of the formation of a possible cartel to combat Amazon (NASDAQ: AMZN), the market leader in electronic books.  Of course, this is true, at least in part.  The hidden message, however, is much more dangerous to the powerhouse publishers.  Jobs’s message is a forewarning to the big firms of their impending obsolescence after the digital revolution.  Such a downfall will be the fault of the changing tides in economics, as publishers no longer have any real control over the cost of their books.  Their best hope is to coordinate some oligopolistic price, although as has already been evident in the music industry, such an effort will likely be fruitless.

The companies involved in the lawsuit, HarperCollins, Macmillan Publishers, Penguin Books, Simon and Schuster, and Hachette Book Group all have their roots in the 19^thand early 20^th centuries, at the height of the book-producing industry.  Earlier readings were primarily disseminated locally in pamphlet form, but the Industrial Revolution led to technology that could be used to print and coordinate distribution of the intellectual property.  Publishing firms created a final, more consumable product that reflected an author’s initial work.  This process was obviously somewhat costly, despite the benefits of economies of scale, and book prices have always been set accordingly.

Like many consumer goods, this model worked in accordance with the economics of scarcity.  Only a certain number of books existed in the world, and those that did only existed because of the costs borne by the producers responsible for getting the titles on the shelves at the local bookstores.  The 21^st century model differs considerably.  Although it costs a publisher a given amount to produce each copy of a physical book, it costs exactly zero to produce a second, tenth, or ten thousandth copy of an electronic book.  Any infinitesimal expenditure in this process is footed by the “e-tailer,” such as Apple (NASDAQ: AAPL), Amazon, or Barnes and Noble (NYSE: BKS), who are responsible for the negligible amount it takes to store and send a version of the tome to the reader.

Beneficiaries of the industrial revolution, traditional publishers will be victims of its digital successor.  While publishers may eventually learn to redefine themselves in more of an editing role, their participation in the distribution of books is increasingly that of the gratuitous middleman.  Outfits like Amazon’s Kindle Direct Publishing already facilitate the instant availability of user-generated content.  Just as YouTube has helped normal people share their creations without the pomp and circumstance that comes with a production company, e-book self-publishing will lead to opportunities for aspiring authors to contribute to canon without the dreaded courting of publishers.  Additionally, while Hollywood studios can certainly add production value to a multimedia work, it is hard to make the case for publishers drastically augmenting the quality of authors’ written work.

Although literati types have argued that this augurs the downfall of high written culture, it represents an astounding possibility for more consumer choice.  For example, a large brick-and-mortar bookstore the size of Barnes and Noble carries around 130,000 books.  However, half of the e-books Amazon sells are selections outside of the 130,000 most popular.  Obviously, a store can only hold so many books, both due to limitations of space and procurement costs.  The number 130,000 represents equilibrium in the model of supply and demand when the suppliers are wholesale retailers of print books.  Yet, when the supply is online, it is perfectly inelastic.  The quantity of books supplied does not rely upon the asking price, as the removal of sizable raw material and other costs make widespread dissemination almost free.

For the most part, electronic books cost around $9.99, the standard price set by Amazon.  This model is similar to the goals of Apple, who set the tone for 99-cent songs by cornering the music market.  However, as Apple’s aggression in securing publisher interests demonstrates, there is sure to be competition ahead.  Since cost factors are not holding anybody back, there is no telling how low book prices could get.  Amazon recently unveiled the addition of the Harry Potter collection to its Kindle library, conveying both the ease of distribution and its desire to Apple-style customer loyalty.

The economics of this market have yet to be affected by pirating types who have looted other aspects of the entertainment industry.  Hacking buccaneers could form even more of a problem to the book market, since their efforts are unlikely to be hamstrung by quality problems.  (While watching a pirated version of The Avengers will not be as enjoyable as watching the blu-ray, reading a Amazon e-book on your iPad will not produce significantly more utility than one downloaded from the internet).  In other words, a confluence of factors suggests a bright future for champions of reading, especially considering the amount of recommendations and reviews that come with browsing for books online.  Publishers, however, will have to adopt radically new agendas and business models to survive.  If they do not, legal fees will be the least of their worries for decades to come.  For more information on this topic and others, visit WealthLift to connect with a vibrant community of investors and finance enthusiasts.

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