Friday, June 16, 2006

Freakonomics has trouble with the economics of plenty

Stephen J. Dubner from Freakonomics is having trouble with the economics of plenty:

Some interesting e-mails turn up in the Freakonomics in-box. Here's a recent one:

I downloaded your book FREAKONOMICS on Limewire. Can I pay you something for this great book? Call it guilt or trying to use file sharing in an honest way, but I'd like to pay you something.
[...]
If you can reveal what you get per book from the publisher I want to better that amount.

A file-sharer wants to pay for the book he downloaded. Dubner isn't especially hostile to the concept, but neither does he quite get it:

Thanks for asking. The combined share that Levitt and I receive from a hard copy of the book is a bit under $4; I think it's less, however, for the electronic version. But if you were to pay us, why shouldn't you pay the publisher? After all, their costs are just as legitimate as ours, right? That would bring the price to roughly $14. And then what about contributing to the distributor who got excluded--that's got to be another $2 or $3. In other words, why should we be the only ones to get the offer of your generosity--are we simply more appealing b/c we're the creator of the work?

Well, yes, that was the point -- the authors are more appealing because they're the creators.

But Dubner gets the economics wrong, not just the human psychology. The electronic version of this book was downloaded -- I assume illegally, but that's not the point -- from the Internet. The publisher and distributor didn't have any costs. Zero. Whatever insignificent costs there were, were paid by people other than the publisher and distributor. Why should the publisher get paid $10 for duplicating a file when somebody else duplicated it?

In other words, Dubner's thinking is still stuck in the mid-twentieth century, not even the late twentieth century (let alone the twenty-first). He sees a product, in this case an electronic file. Therefore, the publisher must have had costs to produce it, right? Not at all: it was actually produced, at zero cost, by some third party. And it was delivered to a reader, so therefore the distributor must have experienced costs too. Not so: in reality the file was delivered electronically, at the (minimal) cost of the downloader.

Some people might argue that I've forgotten something. Somebody must have converted "Freakonomics" into electronic format first, right? That must have cost the publisher, and they deserve compensation for that, surely?

Not necessarily. Chances are Dubner and Levitt provided the book to the publisher in electronic format, and therefore conversion was essentially zero cost: it could take as little as a mouse click and three seconds worth of computer time. But even if there was some cost, it is beyond all credibility that it was anywhere near the $10 per electronic file estimated by Dubner.

That $10 cost for a book includes the cost of material (paper, binding) and printing; it includes an allowance for damaged and lost books that have to be replaced. If Dubner and Levitt are allowing their publisher to charge them for loss and damage to electronic files, they are being seriously cheated.

But let's take the worst case scenario: assume the publisher has to be paid to transcribe the book, by hand, from a paper copy to the download format. What's that going to cost? Hard to say, but I can make an estimate: how does $1,000 sound? At $10 an hour, that allows for 100 hours of typing and proof-reading. At $100 an hour, 10 hours. Surely a realistic cost can be found somewhere between those two extremes of 10-100 hours and $10-$100 rate.

So we can take $1,000 cost as a generous estimate of the cost of producing that first electronic copy of the book. But every copy following that costs essentially nothing. If the publisher conservatively assumes he'll sell 1,000 legal electronic downloads, he can amortize the cost as $1 each.

And distribution -- sure, running a website like Amazon doesn't come for free, but the downloader didn't get the copy from Amazon. Why should he pay Amazon for services not rendered? (Amazon, by the way, is selling Freakonomics for $12.95, significantly less than Dubner's estimate of $17 just for the cost of the download.)

Now, had Dubner argued that he had a moral imperative to see that his publisher and distributor got paid, that would be a different kettle of fish. "I made a deal to these people, and I want to stick to it!" -- that's the sort of argument I could respect. He could have said he is contractually obligated to give his publisher and distributor a slice of the action, no matter who actually experienced the costs of providing the file. He might even have taken a legalistic approach, and abused the file-sharer for breaking his and Lewitt's government-granted monopoly on copying that file (their copyright) without permission, regardless of monetary compensation offered.

But arguing, as he does, that the cost of duplicating a bunch of electronic bits in a computer is at least as expensive as making an actual hard copy from real dead tree, is just foolish, and demonstrates that he, at least, is one economist who has not come to grips with the economics of essentially zero-cost replication.

2 comments:

Eric Worrall said...

Attracting attention in a world with untold millions of competing messages is an art, and often an expensive art. Sometimes you will get a phenomenom such as Blair Witch, but more often success comes from the skilled efforts of publishers promoting works they agree to publish. Your assignment of near zero worth to these efforts betrays *your* shaky grasp of economic reality.

Vlad the Impala said...

"Success comes from the skilled efforts of publishers promoting works..."

Try reading this comment straight from the horse's mouth:

[quote]
Does marketing really make that much of a difference in sales?

it depends on the book. Some books get a lot of marketing and publicity and still don't move. Some books don't get much at all, and still move. Some books, it works out even.
[end quote]

In other words, it is all a big crapshoot. Publishers don't have a magic formula for making a book a hit: if they knew how to market a book so it sold, then they would only print books which sold.

If they work hard, and don't make too many mistakes, and they've done their sums right, they'll make profit averaged over their entire catalog -- but a profit from any one specific title is a gamble.

Does this mean marketing is irrelevent? No, of course not -- but somebody who downloads Freakonomics from Limewire hasn't done so because of the publisher's marketing. They've heard about it from word of mouth, or done a Google search, or they're just obsessively downloading everything they can, or because they have a dead-tree copy and now want an e-book. Remember, Freakonomics was published years ago -- the publisher isn't marketing it any more. This isn't like the latest hot Dan Brown novel which is still in the Top 10 lists. In the fast moving field of publishing, this is ancient history.

Think of it this way: de facto responsibility for marketing the book has been shifted from the legal publisher to the informal (okay, illegal) publisher on Limewire. Why should the old publisher be paid once the book is handed over to a new publisher?