Why Is This Hill So Steep?

by Steve Jordan

  So the paper producers supported Big Pub, and the drive to keep books on paper. Unfortunately, they had to do so quietly, as their extremely dirty production practices had recently been presented to the public, and they were already afraid of local backlashes against their operations that might result in a significant loss to their profit margins, or possibly outright shutdown. Efforts to claim better environmental stewardship on their part were mostly hollow and ignored by environmentalists, who had gotten very efficient at ratting out specious “green” claims.

  There was also the transportation industry to be reckoned with. Paper had to be driven to printing plants; printed volumes had to be driven to warehouses; boxes of books had to be delivered to stores, or shipped directly to consumers. Truck transportation was a massive part of the printed book business, and they saw the potential losses that e-books could create. And, like the paper production industry, the trucking industry had environmental issues that they did not want discussed in public, namely, the amount of diesel soot pumped into the air by their trucks as they cris-crossed the country. So they also acted as silent supporters of Big Pub, allowing the publishers to maintain center-stage while they hung, like the paper production industry, in the shadows.

  And finally, there were the places where the books were stored. Warehouses and bookstores generally stored books in spaces designed to keep them in optimal condition for sale. That meant spaces that were generally temperature- and humidity-controlled. As books were considered valuable property, they were watched by security systems, and energy was burned to keep them in lighted areas. Even sitting in one place, printed books seemed to use energy and cost money. No one was that seriously concerned that storefronts and warehouses were burning through fossil fuels or polluting the environment, so they could be a much more vocal part of Big Pub’s resistance to e-books, its insistence that a brink-and-mortar presence of physical merchandise were essential to the longetivity of the traditional business.

  ~

  Throughout these Progressive vs Traditional debates, both sides have demonstrated little or no inclination to actually listen to the other parties. In some issues, there could have been effective and practical compromise; but an absolute refusal to sacrifice a dollar of profit, or an ounce of property rights (which will be covered in more detail in Chapters 14 and 15), meant one or both sides would refuse to give an inch, and effectively shot down any possibilities for a workable medium ground.

  12: The accountants—How much is an electron?

  Accounting related to digital files in general has been especially tricky, and e-books have been no exception. Accountants quickly discovered that electronic files presented their own unique problems when it came to establishing them on a ledger sheet.

  Primarily, electronic files are not physical products in the traditional sense of the word. Once one is created, it can be replicated at virtually zero cost. That means that once the cost of creating the first file is recovered through sales, money made off of subsequent files is pure profit.

  However, the problem with the ephemeral quality of electronic files is that they can be replicated so easily by anyone, meaning a customer can conceivably replicate his own purchased file and release those versions for free, thereby removing any future profit that might have been gained from selling those replications. Consumers are well aware of this, and some have made a habit out of exploiting that fact. The amount of loss from what is commonly called “pirated” electronic works is estimated to be significant… but because of the present nature of the web, the actual amount of loss cannot be accurately measured, leaving people on both sides to casually toss around high and low figures with no facts backing them up.

  This has been a problem ever since electronic documents were devised, and to date, no foolproof method of protecting a document from unauthorized replication and theft has been devised. But a number of solutions have been tried, and it is clearly the hope of all digital file sellers that they will one day find the method that will work for all electronic files, including e-books.

  ~

  In the meantime, accountants needed a model to apply to digital selling. The model had to do two things: It had to provide more of a return than was spent on creating the digital document; and it had to guarantee a maximum return from customers, based on the concept that lower prices meant more purchases, higher prices meant fewer purchases, and the highest possible return was somewhere at the top of a bell curve between those extremes.

  Consumers were well aware of the inherent differences between physical and digital goods. Unfortunately, they were not nearly as well-versed in the production costs inherent in creating a piece of literature (due, in no small part, to the closed-door business practices of the publishers). Consumers also showed little or no sympathy for those costs, owing primarily to accounts, anecdotal and documented alike, of printed works that had suffered from inferior production, editing, or proofing. Customers took these accounts to indicate that the work being done by editors and publishers was often not worth the money being spent, and they were all in favor of cutting those costs out altogether.

  This supposed zero-tolerance on the part of consumers made it very difficult to establish reasonable margins for e-book sales. Guided by knowledge about how physical products worked, their knowledge of production costs, and vague notions about the nature of digital sales on the web, the accountants began trying various scenarios to see if one would work.

  The first scenario tried was simply to use the printed book model for e-books. Customers rejected this instantly and angrily, as they reasoned the costs of printing, shipping and storing the printed books were not present in e-books. Customers considered that paying those prices meant they were in essence paying for something they were not getting… or put another way, that publishers were cutting a major part of their production costs away, and greedily not sharing those cost savings with their customers. Since customers did not believe an e-book was equal in value to a physical product, they would not accept the printed book cost as value of the literature itself. In fact, many of them still insisted the e-book should be worth nothing, and many of them refused even to accept the notion that publishers deserved any profit from their labors at all.

  On the other hand, businesses largely accepted the print prices for e-books. But it was easy for them to do so, because they could label the purchase as a tax write-off, making their actual payout zero (or, put another way, forcing consumers to pay for their e-books through our taxes… nifty, huh?). Even with business’ tacit acceptance of high e-book prices, however, the consumers were too large a market to ignore.

  The web had experimented early on with advertising-based revenue to subsidize web content, and e-book publishers looked at that. Conceivably, if an advertiser subsidized the content, an e-book could essentially be given away to customers for a very low price, or even free. Television, radio and magazines were all examples of cases where ad revenue managed to replace part or all of the customer’s cost without undue angst on the part of the customers (for, while few people say they actually enjoy commercials, even fewer refuse to watch television because of them).

  Again, customers unilaterally rejected the notion of ads in their e-books. Ironically, the majority of customers had not actually had experience with e-book ads, as few e-book sellers had ever actually included them in their books previously. But customers drew from memories of the worst of ad-based websites, and television stations that seemingly play five minutes of commercials for every ten minutes of content, and they assumed that any ads put into e-books would by default be the most distracting and annoying of content, repeated every few pages, probably animated, and impossible to ignore. (Although this would seem on its face to be an exaggeration on my part, in order to make a point, it is not: This reflects actual statements and fears of consumers, as they themselves have stated them in numerous forums and settings.) At some point, the possibilities of ads in e-books may be more thoroughly tested, but at the moment, al
armingly adverse customer reaction has kept this potentially good idea at bay.

  Subscription models were proposed next. A few web sites, like Baen Books and Zinio, have demonstrated some success at subscription-based e-book groups. Subscriptions essentially replace high-profit-per-product revenues, which can vary widely with sales over time, with lower but steadier profits on periodic releases. This model could work with a publisher large enough to ensure a regular output of content for its subscribers, but smaller outfits could not necessarily guarantee that regular an output. And even the larger publishers did not like the idea of the lowered revenue per unit that would bring in, nor the accounting obstacle courses they’d need to run to provide varied compensation to various artists based on steady-stream incomes.

  ~

  At a loss to develop a satisfactory sales model, some e-book proponents began looking at the question from a more philosophical point of view, considering e-books not from the standpoint of product, but from the idea of content. It was reasoned that printed books were simply bound volumes of paper and ink… the content was the words, the ideas presented therein. Similarly, it did not matter what electronic container the e-book came inside… it was the words, the ideas, that made up the meat of the product.

  That meant a completely new model was required, one that was not based on how many pages a story would fill, but the amount of work that went into creating the story, editing it, proofing it, and preparing it for sale. But there were no precedents for a new system, and no support from within the industry to develop one. Despite calls from outside the industry to develop just such a system, it was believed by those in the publishing industry that it would ultimately be less profitable for all parties concerned; so all concerned parties passed on it.

  Independently of them, however, many self-publishing e-book authors were developing their own scale of an e-book’s worth, and instead of waiting for the indecisive publishing industry to dictate to them, they started selling their e-books at the amounts they felt they were worth. These e-books went for anywhere from one to five dollars on average, a reasonable amount to the independent authors (since they were receiving all of the proceeds from each sale).

  This upset the Big Pub machine, for they were positive they could not sell their e-books of established and famous authors at that price. Prices like that were too far at the low end of the bell curve they were used to working with… the printed books bell curve. Payments, royalties, etc, were already balanced for the high point of the curve—they would have to be severely rewritten to accommodate selling at any other point, which every instinct told them would not work anyway.

  So when the first major publishers started selling their e-books, they priced them along the lines of printed book prices—along the bell curves they understood—while publicly suggesting that their level of quality control and vetting made their higher prices worthwhile. Consumers generally disagreed: They thought publishers were crazy to sell e-books at printed book prices, and sales were dismal at first. Big Pub merely held their results up as proof that e-books were ultimately unprofitable anyway, and stayed the course. And the accountants, largely being ignored by Big Pub, eventually shrugged their shoulders, accepted their situation, and sat back to wait for the train wreck.

  As long as Big Pub had no interest in experimentation to establish some concrete sales figures, and therefore had no e-book related figures to make a decision from, they made no decisions. The longer they made no decisions, the longer they held onto print-based business models and held up their failures as justification for taking no further action… presumably, to avoid making things worse. It was a vicious circle of willing ignorance, and it would eventually take the actions of one of the newest giants of the publishing world to break the circle created by the oldest players.

  13: Security—The DRM bogeyman

  It is an accepted axiom in business that any object or product that can be bought can also be stolen. Stolen goods are one of the risks of most businesses, and considered as an operational loss. In order to be a successful business, your income must be more than your loss to make a profit. Therefore, the better a business can maximize income and minimize loss, the more profit it will make, and the more successful it will be.

  This is the basic concept behind product security: Minimize loss through theft. There are very few businesses in the world that do not make some effort to minimize loss through theft, and very few businesses that take no effort to minimize loss through theft and manage to stay in business for long.

  Security can be as elaborate as a set of cameras, recorders and motion detectors; or as simple as a watchful eye, a glass case, or a lock and key. Security does not even have to be perfect to be effective: It only has to keep losses down to an amount that doesn’t offset income. Every business decides for itself how much loss is considered acceptable, and how much money to spend on security before it results in diminishing returns, in other words, when security costs more than the income coming in.

  This concept of product security is well understood worldwide, and was considered applicable to every business… until the software industry came along, and changed the very concept of products.

  ~

  Physical products and software products had in common that they required an expenditure of money for initial production. But software products, unlike physical products, could be replicated after initial production with very little expenditure of cost or effort. Effectively, software products could be created for virtually nothing. Physical products’ cost were partially defined by the costs of producing and replicating them, and adjusted by supply and demand, and desired profit. With the software replication cost reduced to effectively zero, only the aspects of initial production, supply, demand and profit were left.

  Unfortunately, consumers cared little for the demands of business, and they considered supply, demand and profit costs to be fully artificial—which they were—and they knew nothing of the costs of initial production, in terms of people or resources. Consumers also assumed a piece of software could be sold to enough people to earn back its production costs in no time… again, they gave little thought to a business’ intended profitability. This put businesses and consumers at odds related to software costs, and began the consumer concept that software should cost next to nothing to obtain.

  Although most commercial software invariably had a cost involved with it, most customers thought it was completely acceptable to make copies of that software and give it away to friends, neighbors and complete strangers, for free. After all, it had cost nothing to replicate the programs for all those people. Moreover, most consumers thought nothing of accepting and using those software applications without paying for them, often reasoning to themselves that the software companies were charging too much for the software, so they were justified in taking a free copy if they could get it. During the 1990s, it was more common for computer users to obtain bootleg copies of their computer’s operating systems and most widely-used applications than it was for them to pay for them.

  As time went by, and customers got used to the pursuit and use of free software, the idea that all software should be free (by virtue of its zero-cost to replicate) became a commonly-accepted guideline. The advent of the web, and a virtually-free worldwide network with which to disseminate all that software, served to reinforce this belief with users. Entire movements grew around the Utopian ideal of free content for all, with many predicting it was the inevitable future for Mankind to get all content for free, software being only the first of what would eventually be all products, software or physical, worldwide.

  The companies and programmers who created the software, quite naturally, felt they were within their right to be paid for their work, the same as these worldwide users had the right to demand a wage for their daily jobs. But the companies were at a disadvantage, as their products were among the first in human history to be so easily replicated. They knew they would need to have a way to secure their products,
in order to make their desired profits.

  This reality led some companies to take action to secure their software, to prevent as much bootlegging as possible, and minimize loss. The first Digital Rights Management, or DRM, systems were born to secure their products. Many of these systems were as simple as encrypting a password into the software when purchased, so users would have to enter that password at least once, and sometimes every time they opened the software, in order to use it. Some systems tied software to a hardware “dongle,” usually a device that had to be plugged into the computer as the software was being used, thereby limiting the software to be used on only one computer at a time.

  Many of these security systems were actually pretty effective, for a time. But the hardware dongle proved to be unworkable on some newer computers, rendering expensive software useless if the user upgraded their computer to a system that was incompatible with the dongle. And passwords could be passed on to others. Most importantly, the consumers who had come to accept the Utopian “free software” concept resented these security systems, and believed that DRM’s very existence implied they were being thought of as criminals by the software companies. They responded by purposely giving away passwords and copying applications, ironically proving themselves to be just as criminal as they believed they were perceived.