A Darkside to the iPad

There is an unfortunate trend emerging in the digital age that I have not seen anyone really address: the traditional role of the retailer as a middle agent with some sway over pricing of products appears to be eroding when it comes to digital media. In both the case of MP3s with Apple and ebooks with Amazon, the early successful entrants were able to dictate terms to the content industry. In both cases, 99-cent downloads and 9.99 ebooks allowed the two retailers to build a market. Of course, they also took advantage of the fact that in selling media content at such prices they were also able to sell hardware which increased their ability to capture consumers to their platform. (Sigh. Everybody wants to be a platform these days. Ten years ago, it was portals. Now it’s platforms.)

The content industries largely went along because no one else was really focusing on the big picture of building an economically-viable market and the much larger threat was that with no viable marketplace, everything would go through the black market.

An interesting part of the history here is that Apple was historically a hardware company that had taken on retail as a way to sell hardware. What began as a simple MP3 store has now expanded into a business that has only one peer: Amazon.com. Amazon started as a retail company that, despairing of anyone offering decent hardware for the ebook revolution that was inevitable (everyone had been talking about it for a decade), found itself needing to build hardware. I don’t think Amazon really cares that much about the hardware in terms of its overall revenues or profit but what it does care about is the lock-in the hardware achieves, enabling Amazon to offer DRMed EPUB files.

This play, of course, came right out of Apple’s playbook.

As the game, as it were, unfolded, Apple and Amazon thwarted each other. Amazon’s entry into the music download business gave the entertainment industry the chance it wanted to re-negotiate terms with Apple and the same events ensued, albeit with the tables turned, in the weeks leading up to and following the introduction of the iPad.

In both cases, what happened was not a return to the long established vendor-retailer convention whereby a vendor sells a product for a given price to the retailer and the retailer is free to set their own price, determining their own profits based on how much they markup an item and how many units they hope to sell. E.g., a book publisher determines that the price of a given book to any and all book stores will be $6 and then Bookstore A is free to sell the book at $8 in hopes of selling a lot and Bookstore B can choose to sell the book for $12 in hopes of attracting a smaller, but more discerning and committed clientele. Margin and volume.

The new era seems to be all about the so-called **agency model** wherein retailers are simply agents for content producers who determine the ultimate price of the product to the consumer. All the retailer does is negotiate the percentage of that price they get to put into their pocket.

This is an absurd position to put yourself in if your are a retailer, and I can only imagine that if you are Apple, you don’t care because you are mostly focused on selling hardware. If you’re Amazon, you care, but you are forced into this new situation because of Apple. If you are Amazon, and if you are a consumer, then you can only hope that things will eventually return to normal. (If you are Amazon, then you have to realize that you are being served a dish of crow for being such a jerk in the first place.)

If authors, and other content producers, think this new model is going to guarantee them a larger share of the profits, because there is going to be more profit, then I can only say that we can hope but history reveals that this is rarely the case.

Mostly I worry that this will lead to a stagnation in the market place at precisely the moment that we could use more experimentation. The idea that content producers engage the marketplace directly is a folly that they contrive out of greed but publishers and film and music producers have revealed that they really aren’t the place where innovation happens. If this new infrastructure put artists directly in contact with audiences, I might find it more interesting, but middle men remain, and there is no other set of middle men now to keep them in check.

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