The Battle For a Digital Pricing Model That Works. Part One: Pub Wars!

By Rebekah Hunt
In March of 2011, Jon Bon Jovi famously accused Steve Jobs of being “personally responsible for killing the music business,” in an interview with the London based Sunday Times. “Kids today,” the aging rocker said (probably after chasing some off his lawn), “have missed the whole experience of… taking your allowance money and making a decision based on the jacket, not knowing what the record sounded like, and looking at a couple of still pictures and imagining it.”
In his defense, he did acknowledge that this made him sound like an old man, but the self-awareness stopped there. Mr. Jovi failed to grasp the crux of the issue, which is the other part of the experience kids these days are missing: the experience of getting price-gouged by a greedy record company for a record that included a bunch of filler, propped up by one or two listenable songs and a ruthlessly promoted single, only to feel let down and cheated after being forced to buy it “not knowing what the record sounded like” and then being stuck with it. And it is this experience, not Steve Jobs, that really killed the music industry.
What does this have to do with the publishing industry? Everything. One of my major motivating interests in the publishing industry, specifically at this point in history, is the monumental evolution the market is undergoing. In the wake of the Napster/iTunes revolution and its palpable effects on the music industry, current developments in software, hardware, and online accessibility; other industries are quickly moving to follow suit.
Despite criticism of its bite-sized, carte-blanche style of selling media to consumers, iTunes has set the bar for consumer expectations of the availability and ease of consumption of media. Sites like Netflix and Hulu are leading the way in on-demand digital sales of television and films, even partially contributing to the Writers’ Guild strike of 2007-08 over residual payments based upon digital media downloads and online streaming content. The one industry that appears to be foundering in the current market’s sea change is the publishing industry.
This brings me to the ultimate question for the publishing industry: how is the publishing industry going to evolve to stay relevant in the current economic and technological climate? The obvious answer for now seems to be the migration of the written word away from paper and toward digital media, but the struggle over pricing and distribution of books and other publications in digital formats has been confusing at best, chaotic at worst. In order to find a solution, we first need to isolate the problem by examining the traditional publishing model and trying to assess the major factors contributing to its decline.
Stay tuned for next week’s blog, the Fall of the Old Republic (the decline of the publishing industry); and the week after that, for the Dark Side of the Force (digital piracy) and A New Hope (the publishing market evolves); and the week after that for the Return of the Jedi (an ebook pricing strategy that works).

Digital Pirates II: The Curse of the Black URL

By Rebekah Hunt
In my last thrilling, swashbuckling article on digital piracy, I explored the differences between the piracy of films and that of books. However, the most pressing question surrounding the piracy of digital content is this: does piracy of digital content hurt sales? As it turns out, opinions on this very complex issue are extremely divided. The same article from contains two diametrically opposed viewpoints.
According to bestselling author Hugh Howey, “I love pirates. I get money from them all the time… They send me money thanking me because they loved my book. I sometimes go onto torrent sites and if I don’t see my book there I feel bad because it means I’m not in demand.”
Michael D. Smith, professor of information technology and marketing at Carnegie Mellon University, tells a different story. “Publishers can and do compete with pirated versions of their content available for free,” he says. “When ABC added its content to Hulu, incidences of piracy of ABC content decreased 37%.” That’s a compelling, if not exactly rigorously examined connection (chronology is assumed to represent causality with no other evidence shown) in the television industry, but what about books?
Smith makes reference to an “anonymous publisher that selectively windowed its ebook and print book titles to see if releasing the digital version after the print version would result in increased sales for the print version.” He concludes, “Sales of print copies increased by 0.4%—but ebook sales decreased by 52% and overall sales dropped by 22%, presumably because of piracy.”
This explanation raises more questions than it answers. For one, how did they determine that ebook sales decreased after the digital versions were released, if releasing the digital version was the experimental condition and was only measurable after it was introduced? Unless we’re in some sort of Looper situation, you can’t have a decline in digital sales if no digital sales existed before you introduced them in order to measure their effect, can you?
More important is that little word “presumably.” Once again, this argument is fraught with the failure to adequately distinguish between correlation and causation, as no evidence is given that establishes the causal link, only chronology. Smith goes on to suggest that “publishers should adopt two major strategies in combating piracy: Make their content available online and use anti-piracy laws.”
Chris Anderson, Editor-in-chief of Wired, and author of the amazing economics book Free, has a more reasoned perspective. He addresses the fear of piracy and unauthorized distribution of digital content, saying,  “All that counts as Very Scary Stuff to industry executives, and as a result they’re looking for ‘strong’ DRM before they consider letting their premier content circulate online.” He maintains that all the fear of piracy and the tactics adopted by companies to protect their precious treasures are a mistake. “If your content is uncrackable, it means you’ve probably locked the market down so tight that even honest consumers are being inconvenienced.” He advises content providers to “be careful what you ask for, because you just might get it. ‘Uncrackable’ DRM could make the P2P problem worse, by driving more users underground and depressing prices.
Anderson also claims that “zero-percent piracy is not only unattainable, it’s economically suboptimal.” He elaborates, saying, “piracy can actually let you raise your prices.” How could this be true, you ask? Because, “the pirate price is so low that it’s rarely possible to close that gap enough to make much of a difference… The usual price-setting method is to look at the entire potential market, from the many at the economic lower end to the few at the top, and set a price somewhere in between the top and bottom that will maximize total revenues. But if you cede the bottom to piracy, you can set a price between the top and the middle. The result: higher revenues per copy, and potentially higher revenues overall.”
This seems to fly in the face of traditional economic models, but as we have seen time and time again, everything about the digital content market consistently does that anyway. “The lesson,” Anderson says, is that “markets should exhibit just enough piracy to suggest that the industry has got the balance of control about right: not too loose and not too tight. That number is not zero percent (which requires protection methods so invasive they kill demand), and it’s not 100% (which kills the business). It’s somewhere in-between… Most consumers see the value in paying for something of guaranteed quality and legality, as long as you don’t treat them like potential criminals.”