Economics

One of my bosses got a Kindle 2 a few months ago, and was wondering how an avowed gadget lover such as myself did not have one already. I am perfectly comfortable reading books in electronic form on the small screens of PDAs or phones, but I have little interest in carrying yet another device with its bevy of chargers and accessories, so I just humored him. As far as I am concerned, the Apple iPad pretty much killed the e-reader market. E-ink technology has a place in digital signage, but a general-purpose computing device with Internet connectivity like the iPad wins over a unitasker any day.

My main objection to commercial e-books as they are mooted today is digital rights management. e-books cannot be resold or even given to family members. Even if DRM were acceptable, the value of a restricted e-books is a fraction of the value of a real book, but pricing today is much higher, despite massively lower costs of production, and short-sighted publishers want to take them even higher, to the same levels as hardbacks.

All tech companies fall somewhere on a spectrum of evil. Microsoft is on the bumbling side—their products are inferior and their marketing practices sharp, to say the least, but they are a fairly open company when it comes to developers using their platform, and Bill Gates is a modern day Robin Hood of sorts, taking from rich Westerners and giving to the poor in the Third World. Apple embodies the seductive dark side—superior products but a company that has no compuction in stabbing developers in the back, and with a demonstrated penchant for control freakery as shown with the iPhone App Store. Google is on the undecided side, ruthlessly violating privacy, but still capable of the odd principled gesture such as facing down Chinese censors.

Amazon as a company lies quite far on this spectrum. Good customer service does not excuse their behavior:

• Jeff Bezos is personally listed as an inventor on the obviously frivolous “one click” patent and has been using it to extort royalties and stymie competitors.
• At one point they removed all gay themed books from their search listings by classifying them. Faced with a firestorm of controversy, they unconvincingly claimed it was an operator error. Why do they have a bulk blacklisting facility in the first place?
• In an example of life imitating art, they pulled e-book copies of Orwell’s “Nineteen Eighty Four” from Kindle users who had paid for them. Apparently, they had never bothered to check if they had the rights to sell them. The simple fact Amazon has the power to pull books back from electronic bookshelves is unacceptable.
• They are trying to leverage their dominant position in online book sales to monopolize print-on-demand publishing by refusing to carry books not published by their own on-demand imprint, BookSurge, even though the latter is higher priced than competition and has serious quality issues.
• This is only the tip of the iceberg. Publishers speak in hushed tones about Amazon’s thuggish “negotiating” tactics, but never publicly out of fear of retaliation.

Since the launch of the Kindle, which is estimated to have 70% market share in e-readers, Amazon has been trying to leverage its market power in paper book sales to corner the market in e-books. One of the prongs in their strategy is to keep the legacy model where the publisher treats the e-book store like a dead-tree book reseller, rather than a model and revenue share more in line with the true costs of e-books (which are obviously much lower than for physical books, as the bandwidth required is piddling).

Apple’s iPad and its associated iBooks store has changed the way the debate is framed, and offers publishers an attractive agency model to counter Amazon’s diktat. It is not surprising that five of the big six publishers (all but Random House) signed up for the iBooks store.

Last Friday, in an escalation of mind-boggling arrogance, Amazon decided to punish Macmillan, the smallest and weakest of the big six (at least in the US) by withdrawing every Macmillan book from sale, including paper books, not just e-books. Among others books by Macmillan affiliate Tor, the leading label in Science Fiction and Fantasy, are not available for sale by Amazon (although they are still available from third-party sellers via Amazon’s site). Essentially Amazon is trying to use its dominance in printed book sales to twist Macmillan’s arm. As far as I am concerned, this is racketeering.

Disclaimer: my wife used to work for Macmillan in the UK. Not that it matters, Amazon’s behavior would be just as reprehensible with any other publisher.

I do not approve of the publishing industry’s doomed attempts to impose premium pricing on e-books, or their attempts to impose unacceptable DRM, but customers are perfectly capable of voting with their feet, as I do, and a middleman like Amazon behaving this way is intolerable. Booksellers censoring books or limiting supply is not an innocuous act. Norman Spinrad is in self-imposed exile in Paris because B. Dalton and Waldenbooks, the dominant booksellers in the 80s, would not sell his more controversial books (like Journals of the Plague Years) out of fear of offending conservative audiences in the Bible Belt.

Small independent bookstores are failing everywhere, and even the large Barnes & Noble and Borders chains are in dire straits. A company like Amazon with a demonstrated history of abusing its market power cannot be permitted to continue. I always buy my SFF books from the lovely Borderlands Books in any case, and my classical CDs from Arkiv Music, but I will henceforth abstain from buying books from Amazon altogether.

As for the Kindle, it can go to hell. I would not take one if they gave it to me for free.

Update (2010-02-04):

Like the SFWA, I replaced all the Amazon links on this site to Indiebound, a website that helps support independent booksellers.

Update (2014-05-28):

They are employing their racketeering tactics again, this time against Hachette.

A 33% hike in Muni fares was announced today. This will hit the poorest people in the city first, and to add insult to injury, this is accompanied with cuts in service.

San Francisco has a budget of over $6B, about the same size as much larger cities as Chicago or Paris, and exceeding the budget of 20 of the US states. It also exceeds the entire GNP of countries like Mongolia or Georgia (in the Caucasus). San Franciscans get little to show for it in services.

One reason why: SF has over 8,000 city employees making over $100,000 a year (the head of Muni is one of them, making $325,000, or more than US Cabinet ministers who make $191,000). The share of the city budget spent on those high flyers is over $1B…

The economic crisis headlines are rife with CEOs and other executives behaving in ways contrary to the interests of shareholders. Business schools teach agency theory, an economic discipline that aims to solve the problem where an agent of principals (e.g. shareholders) needs to be given wide power to perform his job, but could abuse these powers in ways inimical to the principal’s interests, specially when accountability is difficult because the agent controls the information fed back to the principals. The standard recommendation of agency theory is to align the agent’s incentives with those of the principal by setting performance-based compensation such as stock option schemes.

In the real world, of course, the reaction of an agent given a set of incentives is not to act in the way they were designed (too much work) but rather to game the system. In the case of stock options, take large amounts of risk that mostly pays off, but in unlikely cases fails catastrophically, the opposite of insurance, in fact. In the most likely case, they deliver apparently excellent results, and pocket handsome bonuses. When the bets turn spectacularly bad, the shareholders foot the bill. The failure of agency theory is just another example of how intellectually bankrupt and disconnected from reality most B-School curricula are.

This is not a new problem. Historical rulers from Cyrus the Great to Alexander to Peter the Great to Stalin had to control power-hungry and untrustworthy satraps or barons. The way they solved the problem was invariably to set up a network of spies and run two parallel and competing chains of command constantly at each other’s throats, to keep each other honest. To a certain extent, the more arbitrary and capricious the ruler’s favor seems to be, the more effective it is at keeping the underlings in line.

Investors would be well advised to study the tried and proven methods of the great tyrants. The way to control untrustworthy agents is fear and setting up parallel information-gathering networks unbeholden to the agent, not by lavishing rewards that only motivate even worse behavior. Instead of relying on corporate governance consultancies like ISS, they should hire private eyes like Pinkerton to infiltrate their companies.

One of the great things about living in the United States is the ubiquity and affordability of high-quality orange juice. A few weeks ago, while going through the aisles at Target to buy a carton of Tropicana, I couldn’t find any. It looked like Target had replaced them with cheap generic knock-offs. On closer inspection, it turned out Pepsi redesigned the packaging. To say the new design is ugly is an understatement. Many comments on the redesign compare it to generics in its amateurism.

Pepsi’s marketers are not legends in the field like those of Procter & Gamble, but still, I find it hard to believe no one there perceived how bad the new cartons look, and how off-putting they are. This led me to think if this wasn’t intentional.

In this economy, sales of Spam are exploding even though the ersatz canned meat is actually more expensive than more nutritive fresh meat and a much worse value. One explanation is that spam is what economists call an inferior good, a good for which demand increases as incomes decrease because people can’t afford the better stuff. One extreme type of an inferior good is a Giffen good, a product for which demand increases even as its price increases. Economists still debate whether Giffen goods even exist. One often-quoted (and just as often disputed) example are potatoes during the Great Irish famine of 1847. As the price of potatoes rose, the poor were locked in a vicious circle of not being to afford anything else and being more dependent on potatoes, which only accelerated the price explosion.

Perhaps the Tropicana marketers have figured that in a severely down economy, people are settling for inferior goods, and making Tropicana look downmarket may increase its sales…

Update (2009-02-23):

So much for my theory. Although you could make the case this is more like the New Coke fiasco (that many conspiracy theorists still think was deliberate).

An interesting factoid. The Herald Tribune has a discussion of the geopolitics and economics involved.