Category: Economics

The Amazon Effect

More than a decade ago, a book editor managing her own imprint at one of the big publishing houses gave me some insight into her world that I’ll never forget.  “I have to publish about five diet books,” she told me, “in order to invest in one new novelist.”  It’s important to understand that this is not a comment on the publishing industry but rather a comment on the book-buying market.  Like it or not, the number of people who want to purchase serious literature and non-fiction is considerably smaller than the number of people who want to buy self-help books, diet books, and pulp fiction.  And there’s nothing inherently wrong with suppliers delivering the products people want, but when it comes to products like books (as it is with music and filmed works), the healthiest market overall is one that sustains the greatest diversity of material, which is not necessarily the same thing as the greatest number of works.  This is a distinction I suspect the algorithmically-minded folks at Amazon may not understand, or care to understand; and this leads to the question of what effect the distribution leviathan will continue to have on publishing and literature going forward as well as what the company represents to the overall economy.

This past February, George Packer published a detailed examination of Amazon in The New Yorker under the subtitle Amazon is good for customers.  But is it good for books?  Packer covers so much ground, some of it rather startling, that the article is hard to summarize, and I strongly suggest reading it if you haven’t.  Probably the most striking revelation in the piece is the manner in which Amazon pushed the concept of “co-op marketing” fees, money a publisher would spend at a brick an mortar store like Barnes & Noble for a prominent display of a new book, to something reminiscent of an old-fashioned shakedown with a digital spin.  According to accounts cited in Packer’s article, it was pay the fees to Amazon or watch the “Buy” buttons disappear from your products, meaning browsers literally could not purchase the books on the site.  You can almost imagine the heavy saying something like,  “Youze got a nice collection of novels here. I wouldn’t want to see anything happen to ‘em.”

To my mind, the techo-utopianism exemplified by Amazon — and uniquely by Amazon because of the way the business is both web-based and operates in physical space — is based on two illusions, one that is probably hazardous economically, and another that is probably hazardous culturally.  The economic implications are relatively easy to recognize in that we’re seeing the Wal-Martization of every line of business represented by the things Amazon delivers — and Amazon delivers everything.  The illusion for the consumer is that we get low prices and convenience; but the hidden, long-term cost may well be the jobs that enable us to buy stuff in the first place.  This vicious, downward cycle is very neatly summed up in this 2005 JibJab spoof. It depicts a man enjoying low prices at “BigBox Mart,” losing his job at a supplier due to pricing pressures by “BigBox Mart,” then having no recourse other than to work for “BigBox Mart” well below his qualifications and at some fraction of his previous earnings.

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An economy is an ecosystem, and just as the principle of biodiversity teaches us that a whole species cannot be eradicated without threatening other species, I suspect the same can be said for certain organisms within a free-market economy.  Sure, those who stand to gain will talk about creative destruction and technological progress, but when the products or labors being artificially devalued still have real value (i.e. market demand), that’s not creative destruction; it’s just destruction without creating anything new to replace what’s been lost. Like Wal-Mart, the Amazon model doesn’t create anything; it is merely a distribution system, a contemporary railroad that can dictate the prices charged in every diner along its route.  Except this railroad has thousands of lines spanning in all directions, doling out cheap candy to the passengers and simultaneously reducing the value of labor in so many little towns along the way until eventually nobody can ride the train.  From the Packer article:

According to a recent study of U.S. Census data by the Institute for Local Self-Reliance, in Washington, brick-and-mortar retailers employ forty-seven people for every ten million dollars in revenue earned; Amazon employs fourteen.

Like his Silicon Valley brethren, Amazon CEO Jeff Bezos speaks with the confidence and arrogance of determinism, as though these dominant, even monopolistic, technology companies are manifestations of the only history that could have unfolded in the digital age.  “Amazon is not happening to bookselling. The future is happening to bookselling,” Bezos is quoted as saying in the Packer article.  And while it may be true that the publishing industry does cling to some antiquated practices, it’s a subtle but important sleight of semantics happening there when a wealthy corporation owner tells us that the manner in which his business operates was inevitable, ordained as it were by the natural order of our times.  Does this apply to the entire enterprise?  Are the transitory, non-union “pickers” hired to work in Amazon fulfillment centers in questionable conditions and for low wages an inevitability in this “future?” Because on the subject of antiquated practices, the notion that warehouse workers have to be treated like machines so that I can get a dollar off a luxury item like a book or a CD takes us back at least a century.  Does the future belong to people who make conscious choices, or is it already encoded by seven wizards who dwell in the sacred valley?

While the consumer is distracted by cheap commerce, the producers (authors) gaze at a different illusion — one that preaches self-reliance, a chance to connect directly with customers, and bypass the traditional, elitist “gatekeepers.”  This is music to the aspiring writer’s ears, particularly if he’s been turned down for publication by one of those gatekeepers in the publishing world; but more total manuscripts uploaded by more writers does not mean that more great works must inevitably be discovered or that more writers will make a living through digital sales.  “The digital market is awash with millions of barely edited titles, most of it dreck, while readers are being conditioned to think that books are worth as little as a sandwich,” writes Packer.

There’s a reason my editor friend referred to “investing” in an author, and it’s because the best stuff almost always comes from the healthy center of an industry, where experienced professionals have the resources to cultivate something the market doesn’t know it wants yet. The best stuff comes from high-risk bets.  It’s not too hard to sell a slightly scandalous S&M trilogy or mass-market paperbacks or diet books. But stewardship of the next Toni Morrison is hard and takes experience and real risk because that kind of literature just isn’t going to be as popular as 50 Shades of Grey.  And unfortunately, what is threatened by the devaluation of all works by a model like Amazon are the resources available to make those riskier investments.  Some people may call the curators of those bets elitist, but which is the preferable tastemaker — the agent or editor steeped in literature his whole life, or Amazon’s pay-to-play model for promoting a book?  Or worse, how about a bot swarm telling us how great or awful some new ebook is?  I say, bring on the elitists.

The promise says “your work will retail for less, but you have the potential to sell more and pocket a larger percentage of the sales than you would with a traditional publisher.”  This illusion is how the internet industry convinces people that these models are examples of creative destruction — that these new opportunities for authors are what’s being created to replace those jobs in publishing and book retail that are being wiped out. Interestingly enough, though, Packer’s article mentions that even Bezos’s own wife, an author, published her last novel with Knopf and not through Amazon Publishing.  Since it’s a safe bet MacKenzie Bezos knows where her next meal is coming from, why not give Amazon Publishing or even direct sales on its platform a go?  Maybe because book publishing is more complicated than the Amazon model says it is.  From the Packer article:

“Writing is being outsourced, because the only people who can afford to write books make money elsewhere—academics, rich people, celebrities,” Colin Robinson, a veteran publisher, said. “The real talent, the people who are writers because they happen to be really good at writing—they aren’t going to be able to afford to do it.”

It was inevitable that these companies, once they controlled the lines of distribution, would get into the business of production; and while it’s reasonable to expect that Amazon as publisher might partner with some great authors and strike good deals with them, what would Amazon be at that point other than another so-called gatekeeper?  More importantly, everything about the company’s business practices suggests they expect to be the only gatekeeper, which is why all this democratization talk is bullshit; it’s a hypnotic used to blind people to the fact that these companies are designed to devour whole industries and emerge as the only game in town.  That doesn’t sound like the promise of the information age to me.

What does sound like the promise of the information age to me is something akin to my long-time friend and colleague’s venture Bittersweet Editions. Marco North spent over two years developing an artist-centric, all-digital publishing entity. Modeled after a classic small press, Bittersweet and ventures like it are seeking a balance, looking to provide authors a choice between big, corporate publishing and getting lost in a sea of “content” on the Web.  The roles of editing, marketing, and connecting with the right audience are still relevant, still take labor and expertise, and still have value.  Just like any editor/publisher, the small press or small label or small film distributor makes an investment in works and cannot help but impose his own tastes in making selections.  Call this “gatekeeping” if you will, but it seems to me that the better vision for the future is one that fosters more independent gatekeepers rather than one big company with a master key.

app shoot

Photo by Photo-Dave
Photo by Photo-Dave

So, if your teenager turns out to be a tech savant who builds an app that ranks in the top ten on iTunes, are you going to let him drop out of school to become an entrepreneur?

About fifteen years ago, when my eldest was just starting Kindergarten, I sat with my friend the political operative and made some predictions about education in the U.S.  We figured by the time my son was college age, we’d be in a crisis — namely that college would be so expensive that even the well-to-do would be hard pressed to pay for it, that the market would not support student loan repayments, and that young people would begin to recognize how many of the most successful and interesting people in America were college dropouts.  Most of this has come to pass, and is personified rather neatly in the kid who at least thinks he’s on the road to success with  the next great app.

This NY Times article by Matt Richtel profiles kids between the ages of about 12 and 17 who have already worked in one way or another in the technology industry, usually in the area of app development.  Despite the fact that the field is crowded — there are over one million apps in the iTunes store — app-building is enticing to the young, tech-savvy entrepreneur.  The programming has been made easier thanks to a variety of open-source and pre-fab assets; the app space is cool and fun; and a truly successful app really can make a ton of money.  If a kid has the skills and a decent idea, ordinary school can no more compete for his attention than it can for a kid who’s a sports prodigy or a child TV star.  Add to this the fact that primary education is in a state of disorder and higher education can no longer promise the employability it once did, and of course teenagers are heading to SXSW Interactive to schmooze with their kindred spirits and just maybe meet the VC who will make their dreams come true.

The second Times article, written by computer scientist Yiren Lu offers a view both wide and deep of a social, cultural, and even practical role of age in Silicon Valley.  One point I found particularly interesting is a general divide whereby older engineers tend to be the ones working in more established companies on some very important technologies you’ve never heard of (i.e. faster, better servers) while younger engineers are found in start-ups working on the latest app.  That may seem obvious; we would expect the younger crowd to be less risk-averse and to gravitate toward the “rockstar” part of the business, but Lu points out that the app bubble isn’t necessarily producing great and meaningful technology.  “Why do these smart, quantitatively trained engineers, who could help cure cancer or fix healthcare.gov, want to work for a sexting app?” Lu asks.

Reading these articles together, it’s not hard to think immediately of analogous stories of young athletes, lured away from an education toward fame and wealth only to have that immediate success undermined by some monkey wrench in the works.  This narrative usually involves a cathartic moment when the protagonist says, “There I was at 24 without an education and certainly not enough money to live on the rest of my life.”  And it’s hard to know whether or not the app bubble will spill out similar stories when it bursts. I think it is fair to say, though, that floating in that bubble has some of the same potential drawbacks as other tempting careers that produce a tiny number of stars and  a large number of hopefuls and dropouts.  When focus becomes narrow, all-consuming, and all about money, one can easily imagine a young person with mad coding skills and little life experience developing something utterly hip and utterly useless at the same time.  It’s interesting that in Lu’s article, he mentions the draw to work on a sexting app by way of example and further down in the piece he makes this observation:  “In a place with one of the best gender-ratios in the country for single women, female friends I talk to complain that most of the men are, in fact, not available; they are all busy working on their start-ups, or data-crunching themselves. They have prioritized self-improvement and careers over relationships.”

Lu doesn’t explicitly paint this contradictory image of a loner building a relationship or hook-up app, but he seems generally to believe there is some relevance to what that image implies.  In fact, it reminds me of the last scene in The Social Network in which Mark Zuckerberg, left alone, sends a friend request to his ex-girlfriend and then refreshes the screen several times seeking her acceptance.  Accurate or not, it’s a good piece of dramatic writing by Aaron Sorkin in that he shows us a man who cannot connect with anyone but who has built something revolutionary that connects everyone.  Odds are, of course, many of these kids jumping into the app shoot will discover — as even Zuckerberg I believe is still discovering — that one needs to learn and experience many things in life in order to build technologies that actually serve people.

Pandora’s Westergren Offers Odd Valuation of Music

Last week, Pandora CEO Tim Westergren, appearing on a forum called PandoMonthly, said a strange thing while defending against criticisms streaming services received in 2013 from name-brand artists.  He said the following:  “The industry has for a long time been propped up by a product where you’re paying $20 for something you really wanted to pay $1 for.  Maybe you could argue that the bad guy was the one who made it possible?  That’s a little bit of an unfair label I think.”

It’s one of those statements that, on the surface, sounds reasonable but not so much after a moment’s thought. What I hear him saying is that at some point in the pre-internet past, let’s pick circa 1988, we consumers felt ripped off by music prices and we can now thank technologists like him for driving the market to reflect prices more demonstrative of honest value. It should be stated that it is very difficult to assess consumer appreciation for products whose value is unavoidably skewed by the gravitational pull of a black market (a.k.a. piracy), but let’s assume Westergren is comparing apples to apples (i.e. paying customers to other paying customers) and not referring to those who value music at zero dollars.

I will also assume that the 20:1 ratio to which Westergren refers is not a mathematical error — we rarely paid $20 for a whole album and never paid that much for a single track — but that he’s echoing a 1990s-era complaint that fans felt “forced” to buy a whole album of songs they didn’t like in order to get one or two tracks they wanted.  To the extent that this complaint is valid, it is one about the music itself and not the consumer’s instinctual sense of the correct price point for a song. Although iTunes has more or less established the face-value for a track at between $1 and $1.29, how much has the consumer’s perceived value of the music he buys really changed since pre-internet days?

In real-dollar terms, factoring only for inflation, a single that would have cost $1.50 in 1988 should cost about $3 today.  While we can certainly give some credit to the low cost of digital distribution for pricing the average single at 1/3 of what inflation says it should be, there are other factors in the market that affect what people are willing to pay for discretionary items.  Globalization, for better or worse, is why we pay less for a toaster at WalMart than we probably should; and raw marketing is why we pay more for a latte at Starbucks than we probably should. But what makes a latte that lasts fifteen minutes worth more than twice the price of a song the consumer gets to theoretically keep forever?  If anyone knows the answer to that, there’s an economics prize in his/her future, but suffice to say that the consumer’s sense of value can be tough to assess, with or without certain technology’s influence.

I believe it’s also relevant to look at wages and the perceived value of income in a pre and post internet market.  If ten bucks was easier to come by in 1988 than it is today, which is the case for many 20-somethings, and the cost of living is higher, then the price for a discretionary purchase like music is logically a more significant psychological barrier than it was 20 years ago. And again, technology has almost nothing to do with it.  Digital downloads and streaming music services afford us the opportunity to preview new work before buying it, an opportunity to buy on a whim, or the option of buying one song in lieu of a whole album; but this legal, digital distribution alone cannot claim to have dramatically affected the value we paying customers place on the music we want.  Moreover, if in fact, money is more dear to certain consumers, one could argue that the social value of music for the paying customer is greater than it was in more flush times; and the fact that the paying customer opts not pirate when he could get away with it also suggests that his purchase reflects a very strong personal value being placed on the music.

Whatever role legal, digital distribution has played in the prices we now pay for music, it’s a strange, time-traveling leap for Westergren to insist that that today’s prices are the prices we all had in mind 20 years ago.  The face value we’re paying today is actually about the same as it was in 1988, so prices are only lower if we factor for inflation; and I’m reasonably confident Westergren wasn’t doing this math in his head when he made his somewhat cryptic statement.

We are taught that when technology makes processes more efficient or products more widely available that prices must go down.  And while this is true to an extent, the principle is not easily applied to products like entertainment media, particularly because their production requires skilled labor that cannot be replaced or replicated by technology.  Also, we see a market in which production costs have almost nothing to do with purchase price.  A ticket for a $100 million-dollar movie is the same price as a ticket for a $1 million-dollar movie; and this phenomenon is generally true for music, where the consumer can expect to pay between a buck and a buck fifty for a popular song no matter what it cost the artist to produce it.  Despite this relative uniformity in pricing, dramatic differences in sales from one creator to another make it clear that music is not a generic commodity with uniform value.  Regardless, technologists tend to homogenize all media with the term content and then propose the economic principle that more volume must lower prices as though music were like mineral deposits or crude oil.

In essence, I would argue that, among paying consumers, the value we place on music today is not that different, and may even be greater, than it was more than twenty years ago.  Additionally, it is ironic that as Tim Westergren attempts to claim credit for the price points, he overvalues Pandora’s role in the market.  His streaming service is pretty cool, and Spotify is a little cooler in my opinion, but both can be replaced in the blink of an eye by a competitor, and consumers won’t really care.  Seriously, if we lost sleep every time a tech company went down . . .  So, before making such unconsidered statements about the value of music, Westergren should remember that it’s the musicians who have the fans, not Pandora.