Publishers and ebooks: innovation, DRM, and resale price maintenance

Lynne Kiesling

I hope all of you economists out there are following the current brouhaha between Amazon and the publisher Macmillan, because the number of fascinating economics issues is stunning. In brief, Macmillan is one of the publishers working with Apple on the iPad and Apple’s ebook store. At the same time (I remain agnostic on any causal association), Macmillan proposed to Amazon a shift in pricing and ebook availability to a so-called “agency” model, which involves dynamic pricing over time as the book’s release date recedes (starting at a higher price on release); they also said that if Amazon did not agree to such agency pricing and wished to leave the retail ebook price at $9.99, then Macmillan would start “windowing” their ebook releases, and would allow Amazon to issue ebooks only 7 months after the hardcover release. As described by Engadget,

Macmillan claims that its new model is meant to keep retailers, publishers, and authors profitable in the emerging electronic frontier while encouraging competition amongst new devices and new stores. It gives retailers a 30% commission and sets the price for each book individually: digital editions of most adult trade books will be priced from $5.99 to $14.99 while first releases will “almost always” hit the electronic shelves day on date with the physical hardcover release and be priced between $12.99 and $14.99 — pricing that will be dynamic over time.

Then, on Friday Amazon removed all of Macmillan’s ebook and print book products from their site, leading to a host of reactions, including this selection:

Then on Sunday, after Macmillan’s CEO issued a statement about their proposed change in terms with Amazon, lots of authors complained to Amazon, and many blog and web site editors de-linked Amazon from their sites and thus reducing traffic to Amazon. As of Sunday evening, Macmillan’s products were again available at Amazon, and Amazon had published a carefully-worded apology.

Accusations of bullying and the exercise of market power are flying against both parties: Amazon has market power as a leading book retailer, and they are bullying Macmillan by removing their print products to keep retail ebook prices low and sell more Kindles! Macmillan has, as the Amazon “apology” puts it, a “monopoly over their own titles”, and thus we have to capitulate to their bullying! Macmillan is trying to tell Amazon the retail price at which to sell their products, abominable!

This last accusation hints at one of the two particularly interesting economics topics involved in this episode — consumer welfare and resale price maintenance. I do think that this situation will raise some interest in and attention to the competitive or anti-competitive RPM implications of Macmillan’s proposal and Amazon’s response. First, is it really the case that Macmillan is trying to set Amazon’s (or Apple’s, for that matter) retail prices for their products? Second, would Macmillan’s proposed agency model and dynamic pricing benefit consumers or not? As it happens, there has been something of a revival of interest in resale price maintenance in the antitrust literature since 2007, when a longstanding precedent in the area was revised to more of a “rule of reason” approach. Here are some recommended readings on RPM to get you thinking about this:

The second important economic issue is digital rights management and how both Amazon and Apple restrict the use rights of their ebook customers. That will have to wait for another post.

Adler on the Housemartins: Sunday Song Lyric

Lynne Kiesling

While I’m out reading around … Jonathan Adler asks “Who remembers the Housemartins?” I do, I do! I actually liked them better than their Beautiful South spinoff, although both have a dark humor and a tight, jangly, pop-y vibe that was one of my favorite themes in British music in the 1980s. Sadly, I haven’t listened to them in years, because it’s all on vinyl, in a box up in my home office/attic …

Speaking of tight, jangly British music, I had my own 80s music revival experience on Friday night, when the KP Spouse and our friend Sharon and I went to see Lloyd Cole and his new group, the Lloyd Cole Small Ensemble, at the Old Town School of Folk Music. Lloyd Cole has always impressed me as a clever and inventive songwriter, accompanied by his clear and distinctive voice and spare, clean guitar lines. With his original band the Commotions, he created two albums that were in regular rotation on my stereo. Even today I still have LC&TC songs and Lloyd Cole solo songs figuring prominently on playlists on my iPod; “Four Flights Up”, “Perfect Skin”, and “Are You Ready To Be Heartbroken?” are awesome, and his solo “A Long Way Down” has this most excellent lyric:

Didn’t I hear you say your heart’s made out of steel
And no one’s gonna get so close
No one’s gonna know how you feel

Now you’re a punch drunk sycophant
A little SOB
You say your mind is made up
Isn’t that the way that it’s supposed to be?

“Punch drunk sycophant” has since become one of my favorite phrases. And finally, to reinforce his status as a music icon, in 2006 Camera Obscura (a fine, lovely Scottish band!) released their song “Lloyd, I’m Ready To Be Heartbroken.” (link will play the song on lala.com, give it a listen!). If you are an 80s Lloyd Cole & the Commotions fan who’s not listened in a while, or if you have never heard of him before, give him and his new band a listen; it’ll be worth your attention.

Oh, and today’s his birthday. Happy birthday Lloyd!

Boudreaux on populism and corporatist capitalism

Lynne Kiesling

Just a quick note to bring your attention to, and endorse, the point Don Boudreaux made in a recent letter to the editor of the Washington Post:

To the extent that trade – both national and international – is restricted, incumbent capitalists are shielded from what Joseph Schumpeter called the “gale of creative destruction.”  Subsidies and tariffs always protect established capitalists from having to compete with new rivals, new products, and new ways of doing business.  Such “anti-capitalist” protection harms not only upstart entrepreneurs; most importantly, it hurts the countless unseen and unrepresented consumers who are denied the gains they would have enjoyed from the innovation and competition that are squelched by the “anti-capitalist” restrictive policies that seem so in vogue today at Davos.

How valuable will a monopoly be to Lubbock Power & Light?

Michael Giberson

After over 90 years of operating in competition with a rival electric utility in town, late last year Lubbock Power & Light and Xcel announced a deal in which municipal electric utility LP&L would buy out Xcel’s distribution assets and customer accounts in the city for $87 million, leaving LP&L as a monopoly electric utility in the city.

Regulatory filings with the state reveal much more of the details of the deal.  A newspaper story in the Lubbock Avalanche-Journal notes, for example, that the $87 million will buy assets that Xcel values at $64.2 million.  Lubbock’s electric power consumers may wonder what the city is getting for that extra $22.8 million payment.

It is a complex deal that, in addition to paying Xcel to get out of town, accommodates changes in numerous existing contracts between the two companies.  For example, a few years ago when LP&L was on the brink of bankruptcy, LP&L and Xcel entered into a deal under which Xcel controls operations at LP&L’s generating plants and LP&L began buying all of its power supply needs from Xcel.  That deal expires in 2019, but under the acquisition plan Xcel would continue to make available some wholesale power to LP&L.  Xcel purchases waste water from the city for cooling a power plant, and that agreement would be revised as well.  All the complexities make it hard to evaluate what, exactly, the deal is worth to citizens of Lubbock – putative owners of the municipal utility – and the value to be created by the deal (if any).

One question to be asked, as a starter, is why LP&L needs to pay anything above scrap value for the Xcel distribution system in the city.  After all, the city claims its existing system is sufficient to serve the entire city and that maintaining two utility systems is town is wasteful.  So LP&L doesn’t need Xcel’s distribution assets to take on current Xcel’s customers, and adding the distribution assets will simply result in a costly, wasteful, and over-built local distribution system.

Scrap value would be too low, since some of the Xcel distribution system may be incorporated into LP&L’s system (in cases in which the Xcel system is superior to the LP&L segment that it duplicates), but book value on the assets seems a reasonable upper limit.  In any case it is hard to believe LP&L should pay a premium over book value for Xcel’s assets.

Is having a monopoly going to be so valuable to LP&L that they are willing to pay Xcel a $20+ million bonus to get out of town? What does that imply for future electricity rates in the city?

BACKGROUND – Earlier posts on electric utility competition in Lubbock:

Note that, technically speaking, one or two small neighborhoods will still have a choice between LP&L and South Plains Electric Coop, but otherwise LP&L becomes the monopoly provider in the city of Lubbock.

ADDED: The related regulatory filings at the PUC of Texas can be found via the PUCT’s Interchange document system.  Start on this page, enter 37901 as the “Control Number,” and press the “Search Now” button.