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Posts Tagged ‘Internet’

A few months ago, I noted that Amazon and book publishers were tussling over the pricing of electronic books. Amazon had originally acquired e-books using a wholesale pricing model. It paid publishers a fixed price for each e-book it sold, and then decided what retail price to charge customers. Retailers usually sell products at a mark-up above the wholesale price–that’s how they cover their other costs and, if possible, make a profit. Amazon, however, often offered books at promotional prices below its costs. For example, it priced many new e-books at $9.99 even if it had to pay publishers $13.00 or more for them (often about half of the list price of a new hardback).

Several large publishers hated Amazon’s pricing strategy, fearing that it would ultimately reduce the perceived value of their product. They thus pressured Amazon to accept an agency pricing model for e-books. Under this approach, the publishers would retain ownership of the e-books and, most importantly, would set their retail prices. Amazon would then be compensated as an agent for providing the opportunity for the publishers to sell at retail. Under this approach, Amazon would receive 30% of each sale, and publishers would receive 70%.

The strange thing about these negotiations is that their initial effect appears to be lower publisher profits. As I noted in my earlier post:

Under the original system, Amazon paid the publishers $13.00 for each e-book. Under the new system, publishers would receive 70% of the retail price of an e-book. To net $13.00 per book, the publishers would thus have to set a price of about $18.50 per e-book, well above the norm for electronic books. Indeed, so far above the norm that it generally doesn’t happen. … [In addition]  publishers will sell fewer e-books because of the increase in retail prices. Through keen negotiating, the publishers have thus forced Amazon to (a) pay them less per book and (b) sell fewer of their books. Not something you see everyday.

Publishers presumably believe that the longer-term benefits of this strategy will more than offset lost profits in the near-term. What they may not have counted on, however, is the attention they are now getting from state antitrust officials such as Connecticut Attorney General Richard Blumenthal. As reported by the Wall Street Journal this morning, Blumenthal worries that the agency pricing model (which is also used by Apple) is limiting competition and thus harming consumers. And the WSJ says he’s got some compelling evidence on his side:

The agency model has generally resulted in higher prices for e-books, with many new titles priced at $12.99 and $14.99. Further, because the publishers set their own prices, those prices are identical at all websites where the titles are sold. Although Amazon continues to sell many e-books at $9.99 or less, it has opposed the agency model because it argues that lower prices, as exemplified by its promotion of $9.99 best sellers, has been a key factor in the surging e-book market.

It’s also interesting to note that Random House decided to stick with the wholesale model, and many of its titles are priced at $9.99 at Amazon.

Of course, higher prices on select books are not enough to demonstrate an antitrust problem. Publishers will likely argue that there is nothing intrinsically anticompetitive about agency pricing, which is used in many other industries. Moreover, there is nothing to suggest that they are colluding on e-book pricing. Also, they may claim that their pricing strategy will allow more online retailers to enter the marketplace, thus providing more competition and more choice for consumers (albeit along non-price dimensions).

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At the recent Milken Conference, I attended a panel moderated by Mike “Zappy” Zapolin. His claim to fame? He struck internet gold by developing generic web domains like beer.com, music.com, and the all-too-timely debt.com.

It’s much harder to follow in Zappy’s footsteps today since the obvious names are all gone. Except when new developments create new opportunities.

So it was last Thursday when I had an epiphany: Given the turmoil in Europe, Greece may eventually drop out of the euro. And instead of resuscitating the drachma, maybe Greece will opt for a currency called the “new drachma”.

I had this little insight about 2:35pm on Thursday afternoon. And then I got distracted by the hoopla over Wall Street’s “flash crash.”

I finally found my way over to whois.net today to see if “newdrachma.com” was still available. And here’s what I found:

Domain Name: NEWDRACHMA.COM
Registrar: FABULOUS.COM PTY LTD.
Whois Server: whois.fabulous.com
Referral URL: http://www.fabulous.com
Name Server: NS1.SEDOPARKING.COM
Name Server: NS2.SEDOPARKING.COM
Status: clientDeleteProhibited
Status: clientTransferProhibited
Updated Date: 06-may-2010
Creation Date: 06-may-2010
Expiration Date: 06-may-2011

So close. Great minds think alike, he who hesitates is lost, and all that. I’m sure Zappy wouldn’t have let this opportunity slip by.

Of course, Greece isn’t the only country in trouble. So here’s a question: Would anyone like to register newpeseta.com?

As of 5:40pm DC time, it’s still available.

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Over at the New Yorker, Ken Auletta has a fascinating piece about the future of publishing as the book world goes digital. Highly recommended if you a Kindle lover, an iPad enthusiast, or a Google watcher (or, like me, all three).

The article also describes an unusual battle between book publishers and Amazon about the pricing of electronic books:

Amazon had been buying many e-books from publishers for about thirteen dollars and selling them for $9.99, taking a loss on each book in order to gain market share and encourage sales of its electronic reading device, the Kindle. By the end of last year, Amazon accounted for an estimated eighty per cent of all electronic-book sales, and $9.99 seemed to be established as the price of an e-book. Publishers were panicked. David Young, the chairman and C.E.O. of Hachette Book Group USA, said, “The big concern—and it’s a massive concern—is the $9.99 pricing point. If it’s allowed to take hold in the consumer’s mind that a book is worth ten bucks, to my mind it’s game over for this business.”

As an alternative, several publishers decided to push for

an “agency model” for e-books. Under such a model, the publisher would be considered the seller, and an online vender like Amazon would act as an “agent,” in exchange for a thirty-per-cent fee.

That way, the publishers would be able to set the retail price themselves, presumably at a higher level that the $9.99 favored by Amazon.

Ponder that for a moment. Under the original system, Amazon paid the publishers $13.00 for each e-book. Under the new system, publishers would receive 70% of the retail price of an e-book. To net $13.00 per book, the publishers would thus have to set a price of about $18.50 per e-book, well above the norm for electronic books. Indeed, so far above the norm that it generally doesn’t happen:

“I’m not sure the ‘agency model’ is best,” the head of one major publishing house told me. Publishers would collect less money this way, about nine dollars a book, rather than thirteen; the unattractive tradeoff was to cede some profit in order to set a minimum price.

The publisher could also have noted a second problem with this strategy: publishers will sell fewer e-books because of the increase in retail prices.

Through keen negotiating, the publishers have thus forced Amazon to (a) pay them less per book and (b) sell fewer of their books. Not something you see everyday.

All of which yields a great topic for a microeconomics or business strategy class: Can the long-term benefit (to publishers) of higher minimum prices justify the near-term costs of lower sales and lower margins?

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Suppose you’ve got a successful business, selling your product to a diverse set of customers. Life is good. But you’d like to increase profits even more. What should you do?

One option from the MBA playbook (among many) is to think creatively about your pricing. Maybe there’s a way to distinguish your customers from each other and charge them different prices. Perhaps you can charge higher prices to some of your existing customers without driving them away or charge lower prices to folks who aren’t yet buying from you, or a combination of the two.

Businesses have myriad ways of doing this but, not surprisingly, the web has opened up new vistas. Saturday’s New York Times has an interesting article about the extent to which web coupons can be used to distinguish customers, track their behavior, and optimize marketing and pricing strategies (ht Diana):

The coupon efforts are nascent, but coupon companies say that when they get more data about how people are responding, they can make different offers to different consumers.

“Over time,” Mr. Treiber said, “we’ll be able to do much better profiling around certain I.P. addresses, to say, hey, this I.P. address is showing a proclivity for printing clothing apparel coupons and is really only responding to coupons greater than 20 percent off.”

That alarms some privacy advocates.

Companies can “offer you, perhaps, less desirable products than they offer me, or offer you the same product as they offer me but at a higher price,” said Ed Mierzwinski, consumer program director for the United States Public Interest Research Group, which has asked the Federal Trade Commission for tighter rules on online advertising. “There really have been no rules set up for this ecosystem.”

The web thus offers new ways for companies to pursue the holy grail (from their point of view) of pricing: the ability to personalize prices for each potential customer.

Needless to say, this is sometimes bad news for consumers. After all, increased information can allow firms to jack up prices to consumers that the firms believe are unlikely to stop buying.

Less appreciated, however, is the fact that this can benefit consumers as well. For example, increased information can sometimes help firms offer lower prices to select customers who wouldn’t otherwise choose to purchase.

Without further information, it’s hard to know how such creative pricing will affect consumers in the aggregate. Except that the variety of prices will increase, making more of the marketplace look like the airline industry, in which it sometimes seems as though every seat was sold for a different price.

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Google and Me, Part II

My existential crisis is over. As of last Thursday, Google is again including this blog in its search results. So, welcome to all the new readers who’ve come here after Googling information on the Eggo shortage and the debate about whether kids should get one H1N1 shot or two.

This is probably of interest only to other bloggers, but for the record: When I first started this blog, it took about six weeks for it to appear regularly in Google search results. After several months, the blog inexplicably (to me, at least) disappeared from Google’s results. As in *really* disappeared; as one friend pointed out, you couldn’t even find it if you searched for “Donald Marron blog”.  About eight weeks elapsed before it reappeared regularly in the first few pages of Google’s results.

My eight-week exile provided a nice natural experiment for evaluating Google’s importance. Not surprisingly, Google drives a good amount of traffic; readership is larger when Google knows about the blog. The more interesting impact, though, is a version of the Long Tail: with Google’s help, more posts find readers on any given day.

 

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A strange this happened last week: Google misplaced my blog.

I’ve run all the usual diagnostics, and I can confirm that Google still knows that my blog exists. But it no longer appears in any of the searches – e.g., “natural gas price”, “unemployment”, “budget deficit”, or “brooke boemio” – that used to help new readers find posts on my site.

Things are so bad, in fact, that my blog doesn’t even come up when you search for “donald marron”. I feel an existential crisis coming on.

I presume this is just the result of some obscure algorithm tweak and that, over time, my posts will reappear in the ranks of the Google-worthy. But it’s fun to imagine that Google is mad at me for my posts criticizing the way it reports unemployment data.

I just checked and, no surprise, Google is still reporting the wrong data. If you search for “unemployment rate”, Google will tell you that the U.S. unemployment rate was 9.6% in August, when in fact it was 9.7%. Why the difference? Because Google is reporting an obscure measure of unemployment, not the one used by 99% of the world.

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Voyaging Through U.S. Jobs

In honor of Labor Day, you may want to check out Job Voyager by Flare. It provides a graphical history of the rise and fall of different types of jobs in the United States from 1850 to 2000.

Here’s what you get for “Farmer”:

Farmer Jobs

Back in 1850, farmers accounted for more than 40% of reported jobs. Today, less than 1%.

If you click around, you will find that the decline in farmers has been offset by growth in a host of jobs, including clerical, retail, and nurses.

And economists? Well, we grew rapidly until 1990, and then tailed off. Perhaps the would-be economists ran off to Wall Street instead?

Economist Jobs

P.S. The Job Voyager charts were inspired by the famous Name Voyager charts that let you track the popularity of first names.

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