Jeffrey Tucker

Today’s papers are filled with the news that the government is taking on the e-book market. That can’t be good news. Given the long history of anti-trust, they will make a big mess of what is a wonderful emerging market with a new technology.

And get this: The federal bureaucrat who last month started the litigation against Apple and book publishers for e-book pricing is the same person who, back in the stone age, represented Netscape in its lawsuit against Microsoft.

Recall that Microsoft was trying to give away its Internet Explorer to computer users for free. Netscape went nuts and got the government to clobber Microsoft for being so nice to consumers. It put the company through litigation hell and even demanded that Microsoft change its operating system code to untie it from IE.

The person’s name is Sharis Pozen, and she is acting head of the Justice Department’s antitrust division and a political appointee of the Obama administration. She claims that she is threatening violence against Apple and publishers for pricing collusion — and that it’s her job to protect consumers.

Interesting. She began her career trying to protect the rights of an old-line company to rip off consumers. To her, a price of zero was unfair competition. She was sure that a browser should be a paid product. The progress of history flattens that argument. Today, dozens of companies beg you to download their browser for free. Browser use is all over the place, sort of like a free market. There is no Microsoft monopoly, contrary to the overheated predictions.

Given that history, one might suppose she would retire from public life and maybe go into flower arranging or something. Instead, she is still at it. Last year, she denied a proposed merger between T-Mobile and AT&T that would have improved your cell service. This year, she says that a deal between publishers and Apple is harming consumers, so she has to act. .

Government had absolutely nothing to do with inventing the e-book. It didn’t invent the e-reader, either. The Nook, Kindle, iPad and all the others were purely the products of private enterprise. So too the distribution system that makes millions of titles instantly downloadable with a quick click, storing your downloads in the cloud. The whole apparatus has given new life to the book itself, and represents a bigger shift in publishing than even the printing press.

But we are supposed to believe that Sharis Pozen knows exactly what the prices of e-books should be. She knows how the contractual relations between publishers and distributors are supposed to work. She knows when there’s competition and collusion. She knows how to protect the consumer against high prices because, of course, we stupid consumers are all sitting here completely clueless about whether $9 or $14 is too much to pay. We’d just mindlessly let go of our money, scammed by private enterprise, were it not for Sharis Pozen looking after our interests.

There is no arrogance in this world to compare with the government bureaucrats’. If the government had prevailed in the Microsoft case, we would all still be using a browser from 1995 and you probably wouldn’t be reading this article right now. Only private markets have given life to the world of digital literature as it exists today.

There is no way that any mortal can know in advance how e-book pricing should work. For years, people tried to create a profitable market in selling PDF downloads. Some firms succeeded, but only in a limited way by selling to large institutions, and even then, the product add-ons had to be pretty impressive: fancy searches, large collections, citation help and more. This model never penetrated the retail sector.

Why? It’s hard to say for sure, but in hindsight, one might speculate that the PDF format just isn’t very consumer-friendly. It is fine for many purposes, and miraculous by any historical standard. But in the end, it was not commodifiable on a mass scale.

Then came the e-book. It had an HTML structure that allowed fonts to be increased and decreased. It allowed instant search. Navigation was a snap. It mimicked the page turn of a physical book. It was lightweight. For all these reasons, and probably some reasons that I haven’t thought of, the e-book became commodifiable. I never would have believed it, but there it is.

I know that I’m hooked myself.

But how does pricing work? A conventional government model would examine costs and presume that prices are marked up along a preset path. This model has a superficial, if fallacious, plausibility with physical goods, but it is wholly irrelevant to digital goods. With digital goods, in which the marginal unit cost of each additional item is effectively zero, the price is, very obviously, nothing but a point of agreement between buyer and seller, having nothing to do with costs of production.

So it’s anyone’s guess what the final price of an e-book ought to be. The market dictates this. At first, publishers were selling on a wholesale model and letting the distributors determine the prices. As the distributors do with physical books, they were pushing prices lower and lower, and the publishers started to complain.

That’s when Apple shifted to an agency model of pricing. The publisher sets any price and the distributor takes 30%. That way everyone can make a profit. This also allowed smaller publishers to get involved. Even a sole proprietor can get involved and push out e-books to the world.

So what’s the problem? Apple and Amazon have made it part of their contractual relationships with those using their services that they do not want to be undersold by another company. And why? Of course they want the business, but more tellingly, they are trying to incentivize producers to bring down prices in the interest of making deals.

This is standard procedure in Web pricing. If you are using a service, the service wants to be able to offer the best deal available. Actually, Amazon and others have been doing this for many years. The service user can accept or reject the deal.

Here’s the thing. If this is not the right model, it will hurt the service it delivers. Others can compete. Authors and publishers can establish their own systems. Markets work these things out for themselves. In this case, it appears that Amazon is the only complaining party: it does not want Apple to gain a foothold.

The e-book market is brand-new, for goodness sake. It is going to go through many changes before it is settled — and actually, here’s to hoping it never settles! Ceaseless change in economics and life is a good thing.

But bureaucrats don’t see it that way. They want to freeze everything in place and make all things conform to their model. And if Sharis Pozen had her way, we would all be paying Netscape for the opportunity to surf the Web. So much for caring about the consumer.

Sincerely,

Jeffrey Tucker

Jeffrey Tucker

Recent Articles

5 Min. Forecast
How to Profit On the Back of an “Activist Investor”

Dave Gonigam

Since the invention of the "shareholder rights plan" (i.e. the "poison pill"), most companies are relatively immune to hostile takeovers. But according to Dave Gonigam that could all change thanks to one activist investor. And if you're savvy enough, you may just be able to follow his lead for big gains. Read on...


Extra!
Why Americans Shouldn’t Worry About Income Inequality

Jim Mosquera

As the markets have continued to rally over the last several years, more and more people have touted the problem of "income inequality" in the US. But as Jim Mosquera explains, this perceived problem will likely sort itself out with the arrival of one specific market event. Read on...


One ETF to Play Asymmetric Warfare

Addison Wiggin

Almost one year ago, substation telephone cables were maliciously cut in San Jose, CA. In 20 minutes, 17 transformers were knocked out. A year on, similar threats have cropped up. Today, Addison Wiggin explains why these threats are so serious for the safety of the global economy... and shows you one way to play it...


What Small-Caps are Saying About the Current “Bubble”

Greg Guenthner

The big problem with declaring bubbles is that it really does you no good. Unless you're attempting to measure and time market moves, you're also blowing hot air. But if you keep watch for negative divergences, you have a much better shot at figuring out big market moves than the latest bubble-busters. Greg Guenthner explains...


A Simple Strategy for Investing in the US Energy Boom

Byron King

Too often investments are made in a vacuum. But as Byron King demonstrates, the global economic crash... easy money... and technological advancements are all interdependent. In particular, that connection has changed the investment calculus in the resource market. Read on to learn how...


How Gold Will Respond to Declining Discovery

Henry Bonner

Oil isn't the only resource to experience "peaks." Due to a major contraction in gold exploration over the past few years, the mining sector is no longer mining gold at its replacement rate. In other words, the amount of gold above ground is running out. And according to Henry Bonner, it will get worse before it gets better...