Michael A M Davies’s Techdirt Profile

michaeldavies

About Michael A M Davies

Senior Lecturer, MIT
Chairman, Endeavour Partners
Guest Lecturer, London Business School

http://www.linkedin.com/in/michaelamdavies



Michael A M Davies’s Comments comment rss

  • Oct 26th, 2012 @ 12:00pm

    Re: Re: Re: Re: Re: Re: Re: Re: Why price discrimination for music and software makes sense

    Apple, in iTMS DRM days. Because of the stance of the content providers, Apple could not have obtained content without DRM. It made money from the content, and much more money from the sales of iPods.

    Quod erat demonstratum

  • Oct 26th, 2012 @ 11:58am

    Re: Re: Re: Re: Re: Re: Why price discrimination for music and software makes sense

    @John Fenderson

    I was responding to @Gregg's point, which suggested a causal mechanism that went higher prices for goods workers purchase, thence demands for higher wages, thence higher wages. That causal mechanism does not obtain; all things being equal, an employer won't necessarily pay higher real wages because of higher real prices for the goods that their workers buy.

    When making geographic comparisons, the driving factor by far for the enormous differences in wages are the enormous differences in economic productivity.

    Relatively short-term and localized factors such as unemployment may also have some impact, but are tiny effects relative to productivity differences between countries, which was the point at issue.

    And the second point about Moravec's paradox is about relative productivity as well

    Michael

  • Oct 26th, 2012 @ 10:34am

    Re: Only half of the equation

    @Ed C

    I agree that distributors often play a large role in this.

    My position on online versus physical (they're actually both digital) prices is that they need not mirror each other, but they can't be completely independent, yet.

    There is still some, albeit increasingly residual, cross-substitution of demand between online and physical, so pricing has to reflect the cross-elasticity of demand, broadly considered.

    Michael

  • Oct 26th, 2012 @ 10:31am

    Re: Re: Re: Re: Re: Re: Why price discrimination for music and software makes sense

    @Ed C

    Yes

  • Oct 26th, 2012 @ 10:31am

    Re: Re: Re: Re: Re: Re: Why price discrimination for music and software makes sense

    @John Fenderson

    Let's be pragmatic rather than perfectionist. While I concur, much, perhaps most DRM is utterly crappy, some, such as Steam, is clearly 'good enough'. The success of iTMS in its DRM era demonstrated that there was adequate demand despite DRM, if it was done at least reasonably well.

    While, I concur that restrictions on the way that content can be used may have some adverse impact on its legal use, the key question is whether or not this trade-off is worthwhile. Demonstrably it is, in many cases.

    Now that's an empirical observation; at least as far as I'm concerned the practical implementations of DRM in many cases are either or both user unfriendly or unduly restrictive. I do think content providers are missing out on a huge market opportunity because of artificial and outmoded restrictions that reflect antiquated analog business models. Nevertheless, there are lots of circumstances in which DRM makes sense.

  • Oct 26th, 2012 @ 10:25am

    Re: Re: Re: Re: Why price discrimination for music and software makes sense

    In aggregate, median wages are rising. Quick check suggests about 3.0% per year, with inflation at about 1.7%. Two other effects are, however, important:

    - the balance of supply and demand for labour - and with unemployment relatively high in the US this has suppressed wages somewhat - although this will ease as unemployment continues to fall

    - a distributional issue, related to the supply and demand of different kinds of labour - leading to Moravec's paradox

    http://en.wikipedia.org/wiki/Moravec's_paradox

    And a couple of my colleagues on the topic: http://www.nytimes.com/2011/10/24/technology/economists-see-more-jobs-for-machines-not-people.html

    Michael

  • Oct 26th, 2012 @ 9:46am

    Re: Re: Re: Re: Why price discrimination for music and software makes sense

    @Anonymous Coward

    We're NOT discriminating primarily on the basis of technical knowledge (although that certainly does happen) but on the basis of willingness and ability to pay, for which the mechanism is technical.

    And it's not just the availability of the tools, it's taking the time and trouble to make use of them. Go check out TorVPN's how to page; it includes a 2 minute long video. For many people, that's just not worth the effort.

    There are, as you note, some people who are being discriminated against on the basis of their technical knowledge: price-sensitive, unwilling or unable to pay the offered price in Australia and UNABLE to figure out how to use TorVPN or one of the other services. True, this group loses out.

    But overall, price discrimination makes economic sense for both producers and for consumers, provided that (1) different consumers have different ability or willingness to pay and (2) there is an effective market mechanism for price discrimination.

    Whether or not arbitrary discrimination makes sense depends on the meaning of arbitrary:

    - based on or determined by *individual preference* or convenience rather than by necessity or the intrinsic nature of something - YES

    - existing or coming about seemingly at random or by chance or as a capricious and unreasonable act of will - NO

    http://www.merriam-webster.com/dictionary/arbitrary

    And the issues with DRM are not so much DRM itself, but (1) poor implementation and (2) disproportionate penalties for breaking or evading it, out of all proportion to the real economic harm

  • Oct 26th, 2012 @ 8:35am

    Re: Re: Re: Re: Why price discrimination for music and software makes sense

    @The Anonymous Coward

    Separate point, with which I don't disagree.

    Collection agencies and much of the mess of the analog era makes much less sense nowadays, for many content producers.

    And the absolute costs are dramatically lower than they ever were. On the other hand, the marginal costs are arguably zero or negligible.

    Michael

  • Oct 26th, 2012 @ 8:32am

    Re: Re: Why price discrimination for music and software makes sense

    @Dark Helmet

    I don't think I missed your argument.

    I agree that the Internt is *mostly* global, noting major exceptions for countries with censorship and restrictive regimes such as China.

    That does NOT mean that the *market* for DIGITAL goods is intrinsically global. The reality, which we may regard as unfortunate, is that to at least some extent the market is NOT global. For almost everyone, the channel may be regional, and the payment mechanism is almost always localized, and it takes some effort to overcome this.

    The reality is that many consumers will either not know how or not care enough about the price to incur the transaction costs involved to invest in either or both IP spoofing or getting a credit card in other domain.

    Let's applaud the Australian consumer group for advocating this and informing people, thereby reducing the barrier. Australian consumers who are sufficiently price-sensitive and technically savvy will, I'm sure, embrace this. More may do so because this makes them aware.

    BUT, for many, that's going to be too much trouble. These are real barriers.

    And FWIW, tying the price of goods to an individual's income level makes perfect sense. It's not bullshit; it's economics. And in many circumstances it makes perfect sense, maximizing both individual welfare and, more importantly, total welfare. A good can be made more widely available, and priced lower for many consumers if there are other consumers who are prepared to pay a higher price.

    You characterize this as 'the most minor of technical know-how'... If that is indeed the case, then the barriers WILL come tumbling down.

    Go look at the 'online guide'; all it does is tell consumers that it can be done. A whole lot more work is required, perhaps including things like configuring DNS settings...

    For most consumers this is NOT 'the most minor of technical know-how' - it takes time and effort and technical know-how

  • Oct 26th, 2012 @ 8:11am

    Re: Re: Why price discrimination for music and software makes sense

    The fixed cost of making the music is high relative to the marginal cost of distributing it in electronic form as a download. All things being relative

  • Oct 26th, 2012 @ 8:09am

    Re: Re: Why price discrimination for music and software makes sense

    @Gregg,

    Wages rise not because workers demand them, but because of increased productivity; that's the key to Africa's empowerment and the mission of organizations such as Technoserve. The causal relationship is NOT lower prices for traded goods from foreign markets = lower wages; it's the other way round. Higher prices for the goods that Africans make, reflecting higher productivity = higher wages.

    @The eejit

    I think our argument reinforces my point - a temporary price drop is a particular form of price discrimination. And the question of reducing the cost - the own-price elasticity of demand - is the exact approach used to set optimal prices. The optimal price, which varies by market or by market segment may in some cases be quite low.

    If there is another good involved, such as a live performance or a paid/in-app upgrade, the optimal price may be zero, given the cross-elasticity of demand. So it may make sense to price recorded music at zero, give it away, to drive demand for much more rewarding live performances. You may even make it available, as some artists already have, on a pay-what-you-want basis. We call this shareware when it comes to software. And this is also the reason behind the freemium model for many mobile apps and cloud services.

    @New Mexico Mark

    You're absolutely right. If the markets are not, in fact, segmented effectively then you cannot pursue price discrimination effectively. The practical question is can you establish a practical segmentation? If consumers have to resort to technical measures such as IP spoofing to overcome these barriers, then clearly providers can to at least some extent. I think you're going a little far to characterize it as bordering on insanity. And these things can and do co-exist until arbitrage across the price differences becomes easy enough

  • Oct 26th, 2012 @ 7:58am

    Re: Re: Why price discrimination for music and software makes sense

    Gregg, wages rise not because workers demand them, but because of increased productivity; that's the key to Africa's empowerment and the mission of organizations such as Technoserve. The causal relationship is NOT lower prices for traded goods from foreign markets = lower wages; it's the other way round. Higher prices for the goods that Africans make, reflecting higher productivity = higher wages.

  • Oct 26th, 2012 @ 7:24am

    Why price discrimination for music and software makes sense

    At the risk of being spammed here, going to have to disagree.

    Price discrimination does make sense, if there is a different willingness or ability to pay.

    For a good, such as music or software, which involves a high fixed cost and a low or negligible marginal cost, the way to maximize revenues is to use 2nd degree or 3rd degree price discrimination on the basis of willingness to pay. Consumers in developed markets, more able and willing to pay, are offered a higher price, while consumers in other markets or market segments, less able or willing to pay, are offered a lower price.

    If you only price the good at the price that the consumers who are prepared to pay the highest price, then lots of consumers who would have bought it, won't buy it.

    More importantly, if you only price the good at the lowest price that any consumers are prepared to pay, which may be zero you don't maximize revenues AND you may not cover your fixed costs, so you may no longer be able to offer the good at all.

    This, for example, is why prices for music in Africa are dramatically lower than in America or Australia. In general, richer markets pay more, and smaller markets pay more (to cover the fixed costs typical of serving that smaller market.

    The provider of the good should actually be relaxed about people using IP spoofing; in doing so they are demonstrating an unwillingness to pay the slightly higher price otherwise offered, and self-selecting as being willing to trade off some of their own time for a lower price on this good, and likely other goods.

    Increasingly, the price that you see online will reflect a sophisticated understanding of how much you individually are prepared to pay, particularly when it comes to a bundle of goods. Hence, loss leaders and couponing.

    Just thing about this: would it make any sense for all music and software to be priced at a level that Africa can afford? And if we did this, how much would get made?