"When two hunters go after the same prey, they usually end up shooting each other in the back. And we don't want to shoot each other in the back."
Colonel Douglas Mortimer, For a Few Dollars More
Information Wants to Be Free Information also wants to be free because it has become so cheap to distribute, copy, and recombine – too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient. That tension will not go away.
Stewart Brand, The Media Lab: Inventing the Future at MIT (Viking Penguin, 1987), p. 202
In previous articles we talked about the economic characteristics that drive market power in the creative industries. In this series of articles we will talk about the economic characteristics of creative content itself, how these strategies might change in the presence of digital markets. We will begin by returning to 2009, when the head of market research at a major publishing house came to our research group with a simple but important business question: "What's an e-book?"
For years the publisher had followed the publishing industry's established strategy for selling its products. It would first release a book in a high-quality hardcover format at a high price, and then, nine to twelve months later, would release the same book in a lower-quality paperback format at a lower price. In the face of this established strategy, the publisher was saying: "I know where to release hardcovers, and I know where to release paperbacks. But what's an e-book, and where should I position it within my release strategy?"
Before coming to us, this publisher had released electronic versions of its books on the same date as the hardcover versions. However, it was questioning this decision, having seen several other publishers announce that they were delaying their e-book releases until well after the hardcover's release date in an effort to protect hardcover sales. For example, in September of 2009, Brian Murray, the CEO of HarperCollins, announced that his company would delay the e-book version of Sarah Palin's memoir Going Rogue by five months after the hardcover release as a way of "maximizing velocity of the hardcover before Christmas."
Similarly, in November 2009, Viacom/Scribner announced that it was delaying the release of Stephen King's new novel, Under the Dome, by six weeks after the hardcover release, because, as the company put it, "this publishing sequence gives us the opportunity to maximize hardcover sales." Hachette Book Group and Simon & Schuster went even further, announcing in early 2010 that they would delay the e-book version of nearly all of their newly released "frontlist" titles by three or four months after the hardcover release.
The implicit assumption each of these publishers made is that e-books are a close substitute for hardcover books, and that if an e-book is released alongside a hardcover edition many customers who previously would have purchased the high-priced hardcover will instead "trade down" to the lower priced e-book. This assumption seems reasonable on the surface; however, testing it is tricky, because we can only observe what actually happens in the market – we can't observe what would have happened if a book had been sold using a different strategy.
Viacom, for example, could easily measure what hardcover and e-book sales actually were when they delayed the e-book release of Under the Dome, but it couldn't measure what those sales would have been if the e-book's release hadn't delayed (what economists refer to as the counter-factual). Much of the art of econometrics is in finding creative ways to estimate the counterfactual from the available data.
In the context of delayed e-book releases, one might try to estimate counterfactual sales by comparing the sales of books that publishers decided to release simultaneously in hardcover and e-book format against sales of books in instances in which the publisher released the e-book several weeks after the hardcover title.
If e-book releases were delayed by different times for different books (for example, one week for some books, two weeks for some, and so on), a researcher could even run a simple regression, using the number of weeks an e-book was delayed (the independent variable) to predict the resulting sales of the hardcover edition (the dependent variable). That approach probably would work well as long as the undelayed books were essentially the same as the delayed books.
The problem is that delayed and undelayed books aren't the same. Publishers are more likely to delay e-book release dates for books they believe will sell in hardcover format, which means the books that publishers release simultaneously in hardcover and e-book formats are fundamentally different in kind from books that they release in sequence. Thus, even if we observe a relationship between increased e-book delays and changes in hardcover sales, we don't know whether the changes in hardcover sales were caused by the delay of the e-book release or were merely correlated with differences in what types of books were delayed in the first place.
Economists refer to this as "endogeneity" – a statistical problem that occurs whenever an unobserved factor (for example, the expected popularity of a book) affects both the independent variable (whether and how long books are delayed in e-book format) and the dependent variable (the resulting sales). Establishing a causal relationship in the presence of endogeneity requires finding a variable or an event that changes the independent variable without being influenced by the dependent variable.
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