In debates about copyright and piracy, one hears a lot from copyright law advocates on one side (tough laws, digital rights management, enforcement with teeth), and cultural libertarians on the other (broad fair dealing provisions, open source, lenient enforcement). However, one hears little from economists. Sure, there are sweeping claims from the tough-on-piracy camp that illegal downloading costs the cultural sector billions in lost revenue. And there are equally sweeping claims from the free culture camp that piracy can be treated as a loss leader promotion ploy that, in fact, generates revenue. Viewed in isolation, both positions sound plausible. But viewed at some remove, I can’t help but sense that both camps exaggerate their claims about the economic consequences of an activity we have come to describe as piracy. Since I can’t trust either camp to represent itself honestly, I’m forced to figure things out all on my own.
I am not an economist (neither are the people embroiled in this debate). Nevertheless, I can recognize a bogus argument when I hear one, and I have a sufficient grasp of mathematical principles that I can understand basic economic concepts. At the very least, I can formulate pointed questions.
What interests me is the sudden shift from analog to digital media in the publishing industry. Newspaper, magazine and book publishers are in a tizzy. They are uncertain how to negotiate the tectonic changes before them and so look for guidance to the music business which has undergone analogous changes. While the comparison is natural, it is important to note differences between their respective media. Otherwise the comparison is unhelpful and may be downright misleading. This is where the discipline of economics can provide a useful tool. It reveals what I regard as an essential difference between digital music and digital publishing—demand elasticity.
(Note: while I resent the application of words like product and consumption to books, I’ll save my resentment for another time and resort to the terms in which a neoclassical economist might discuss this issue.)
Price elasticity of demand (PED) is the variability in the demand for a product as the price for that product changes. Yawn. I know, I know, but bear with me. There’s an interesting point coming. I promise. Typically, when the price for a product goes up, demand goes down. And vice versa. All other factors being equal, there is an inverse relationship between price and demand. But all things are never equal. If the price for a product goes up and demand doesn’t change at all, we say that demand is inelastic. If, on the other hand, price for a product goes up and sales drop to nothing, we say that the demand for the product is perfectly elastic.
In the context of the music industry, vendors have discovered that the market for digital music is relatively elastic. Record labels have had to set their price with one eye on their main competitor—the pirate/consumer. Contrary to popular belief, pirate/consumers do not download music tracks for free. They pay a price which is a function of such factors as:
• cost of internet connection and bandwidth
• cost of hardware
• risk of getting caught X consequences of getting caught
Consequences can include fines (depending on the jurisdiction in question) and academic discipline (where the pirate/consumers are students using school servers). Record labels and vendors like Apple have discovered that the $.99 price point for music tracks is low enough to compete with the notional price paid by pirate/consumers. At the same time, demand for digital music tracks is elastic enough that the reduction in price has resulted in an increase in demand.
Digital books haven’t been around long enough to provide us with useful data, but I suspect demand for digital books is inelastic. The reason for this rests on a single factor: time.
From a book consumer’s point of view, the most significant contributor to a book’s price is the time required to read it. Because most music consumers listen while doing something else, the temporal component we can assign to an audio track’s value is typically zero. Compare that to the price for a long novel like Infinite Jest or War and Peace. While we can buy Infinite Jest on Kobo for $9.99 and War and Peace for free, it is legitimate to measure their cost to individual consumers in thousands of dollars (expressed as an opportunity cost). And, except for those of us who live in science fiction universes, our temporal income is fixed and constant, so the amount of time we invest in one book reduces the amount at our disposal to invest in others. This means that the change in a store’s price tag has little effect on a book’s real price to a consumer.
It is arguable that people buy books they never read, and therefore I have exaggerated the real cost of books. After all, I myself have bought books for the simple pleasure of possessing them, and with no reasonable hope of ever reading them. But with the shift to the ebook market, this secondary motivation disappears. Who would buy an ebook for the smell of its paper or the signature on the title page or for the pleasure of looking at it on the shelf? One of the biggest shakedowns of epublishing will happen on the consumer end of the supply chain with a change in buying habits—readers will become more scrupulous, buying only those books they have the time to read.
Although it is possible to treat time as an unquantified component of a book’s purchase price, it is just as plausible to treat time as a factor affecting demand. It doesn’t really matter how we treat the issue, the consequences are the same. As a factor affecting demand, we can say that time imposes a practical ceiling on demand for ebooks. Suppose the average reader has time for no more than one book each week. No reduction in price—not even to zero—will change that practical limitation.
What are the consequences of (in)elasticity in demand for the epublishing market? I throw out several points for your consideration. Treat them more in the spirit of discussion points.
1. The proliferation of pirated ebooks has far less significance to the publishing industry than the proliferation of pirated mp3 files to the music industry. While testing the availability of pirated ebooks, I recently downloaded a folder containing 6,000 ebooks. If I read continuously for the rest of my life, I would be hard-pressed to “consume” 6,000 ebooks. Unlike mp3 files, whose cost is nominal, the opportunity costs of pirated ebooks, even for a pirate, are significant. Pirated ebooks have already saturated the market. The fact that there are new pirated titles tomorrow won’t make the market any more saturated; it only means that tomorrow there will be even more books available that I don’t have the time to read.
2. A greater threat to epublishing is the legitimate book priced at $.99. These books will not result in increased sales across the industry since, as I have already noted, demand has a practical limit. Instead, profitability in the book publishing industry will fall. It has to. It’s also worth noting that the reduced price cannot be justified as a ploy to combat piracy.
3. Searching for a sweet price point is only half the game. Book length is just as important. And Epublishers need to make an ebook’s length clearly visible so consumers know its true cost.
4. Vendors, like Apple, whose sales platform makes little differentiation between audio files and text files, cannot help but hurt epublishers because (among other things) its model assumes an elasticity of demand that doesn’t exist.