The Book Industry is in Trouble. But Piracy is Just a Symptom.

Randall Stross has an article in the NYT this morning suggesting that the book industry may soon get “Napsterized” — suffer the disastrous fate of the music industry, all because of piracy. This article performs revisionist history on the explicit actions of the music industry underlying its decline. Piracy has been a convenient culprit for media industries as their distribution shifts to digital, but it is not the only cause of their problems. It is largely a symptom of traditional market issues.

In the physical goods world, media companies maintain a monopoly over the distribution of their content. They control who can sell it, they price it at whatever level they deem appropriate and they determine if and when a consumer can buy it (think release windows). As all media goes digital, this monopoly quickly melts away. The content owner cannot control distribution (it’s too easy to copy a digital good) and as such they cannot control availability. When this control erodes, pricing pressure follows as consumers have a choice between buying and stealing.

The music industry, after the emergence of MP3 encoding in 1996, did not internalize this fundamental change. They believed they could maintain their monopoly on distribution by suing consumers who engaged in piracy, controlling release windows and limiting licenses to only a few digital outlets at the same prices of the physical goods. Consumers inherently knew that the digital good should be less expensive than the physical one (there are no hard good costs, after all) and demanded widespread access to digital downloads. It took the music industry seven long years until they broadly licensed Apple in 2003 with their full catalogs. In that time, consumers found the alternative — Napster, Gnutella and Bit Torrent. By the time iTunes took off, it was too late.

The book industry, with all this learning behind it, is making similar (but not identical) mistakes. They have licensed some of their catalog to a few eBook retailers. But there are still millions of titles not available for legitimate download. In addition, they have tried to hold pricing for the eBook at the same level as the physical book. Jeff Bezos knows consumers expect to pay less. So he subsidizes the price of eBooks in order to get the price to about $10 a book. When free is a few clicks away, convenience rules. The publishers should flood the market with their entire catalogs and price them at dramatically low prices. There should be hundreds of places to buy them online. They should make it painfully easy to buy an eBook, even risking the cannibalization of their physical books. They need to make the legitimate good superior to the pirated one.

The digital future for all media companies is likely a smaller market with inferior economics than the monopoly physical one they enjoyed for decades. To survive in this new world will require lower cost structures. But the result of not embracing this future are clear: just ask the music industry.

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