Relevant and even prescient commentary on news, politics and the economy.

Students who Whine Like This are not Long for Class

The Battle of Late January has ended, as Amazon yields, gracelessly:

We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book. We don’t believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative. [emphases mine]

Whenever a company talks about how it is looking out for your interested, Jim Henley’s consumer-surplus version of reality notwithstanding, check for your wallet; it’s probably missing.

The first italic is obvious: any firm that calls complete stopping of sales “expressed our strong disagreement” is either really stupid or exercising monopoly power—and no one thinks Jeff Bezos is stupid.

The second is even sillier: Amazon accuses Macmillan of exercising “monopoly power” and declares that they “will have to capitulate.” Someone ask the people at Hachette about how Amazon has to yield in a clash between it and publishers.

We’ve all seen the claim that starts this article: “On Christmas Day, for the first time in its history, Amazon.com (AMZN) sold more digital books than the old fashioned kind.” Not for the Xmas season; just on the day. And even there, it’s an Amazon declaration—not verifiable from the publishers, since e-book sales are confidential information. But Tobias Bucknell lays out the details from his royalty statements:

Well, I have my eBook sales figures of Crystal Rain, a book that has sold in the five figures in print, meaning people who have purchased in print, print online and in bookstores. That’s a nice run, it’s my bestselling book of the 3 Xenowealth books (Crystal Rain, Ragamuffin, Sly Mongoose), but leaves me still a midlist writer….

In 2008, for a brief while, Crystal Rain was available for free via download. Number of Kindle users who downloaded it: low thousands. Number who’ve purchased it for sale after that: low hundreds.

So five figures in volume compared to three figures. That’s an order of magnitude difference.

This magnitude difference holds steady. I sell hundreds of copies of eBooks, and thousands of paper copies.

The difference between Hachette and Macmillan isn’t one of size. It’s that the Amazon monopoly—the proprietary e-reader format of the Kindle—now has another viable rival: the poorly-named iPad, which uses the ePub format that is the standard among non-Kindle readers.

Apple is confident: the iPad will do more things than read books, so it can sell books that can also be read on other devices. Amazon, for all that it offers other products, lacks that ability, and is trying to protect itself through proprietary formatting.

It appears—given the speed with which they ended their ostracizing of Macmillan—that they may need a new business strategy soon.

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Cui Bono? The Kindle

John Scalzi makes a clear case that Amazon’s determination to subsidize the Kindle is coming at the expense of Authors’s and their Publishers:

This asinine jockeying over electronic book prices has very little to do with what’s actually good or useful for anyone other than the manufacturer of a piece of hardware… who also happens to be a book retailer.

Since this model is the same one as is used by cell phone providers, we come back to Stan Collender’s question of two weeks ago:

That begs an interesting question about my existing phone and contract: Since my existing phone was paid for over the past 24 months, why doesn’t my current Verizon bill fall by the monthly amount that was priced in to my payment 2 years ago? Isn’t that a rip-off as well?

Yes. It’s called monopoly profits.

UPDATE: Charlie Stross correctly piles on:

Amazon.com can kiss my ass. Shorter version: they’re engaging in monopolistic practices that damn well ought to be illegal, in an attempt to use their near-monopoly position to fuck over authors and bring publishers to heel.

Which is more concise than what I said below. That’s why he gets, and earns, the Big Bucks (well, Quintessential Quid, in his case).

UPDATE 2: Via Felix’s Twitter feed, Marion Maneker at The Big Money corrects Henry Blodgett:

Books are, within reasonable limits, demand-inelastic. Just as movies are. Demand comes from the quality or popularity of the book, not the price. We know this because the great transformation of the book business over the last two decades has been to shift readers from mass-market paperbacks to hardcovers sold at discounted but still higher prices. Readers have been paying more for James Patterson and Dan Brown, not waiting for the cheaper mass market paperbacks.

Consumers trade money for time. And publishers should have the freedom to set their prices at what the market will bear, not what suits Amazon’s–or Apple’s–needs.

The pricing pressure in books comes not from customer demand but from retailers fighting over market share. That’s what Barnes & Noble (BKS) did to independent bookstores and Costco did to Barnes & Noble. Now Amazon’s doing it Costco with the Kindle.

Via Patrick, of course.

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What is competition?

rdan

A reader commented that market share statistics do not reflect whether competition occurs in a health insurance market. To stress a point he stated competition occurs when companies >1, and many states have competition of >2 major players, which makes for a more competitive market than a monopoly allows.

Competition to me means that at the least there is/are ‘forces’ in the market that somehow impact prices and quality of product or service, and in common usage implies lowering prices overall with some attention to quality. Many of us have cars in mind as a mental picture, and electronics.

Health Care for America Now has put together information compiled by the American Medical Association on market share enjoyed by insurers by state, and on the DOJ interest in the increasing concentration of ownership, again using AMA figures going from 33% highly concentrated in year 2000 to 51% in year 2007 as median % of market share nationally (Blue Cross/Blue Shield mainly). The trend for increasing consolidation within each state is clear.

The Department of Justice disagrees that anything less than a monopoly makes for effective competition in the health insurance market, as does economic theory in the form of an Herfindahl index. In fact, since 1982 anti trust law has used this measure along with a concentration ratio of an industry as an indicator of the relative size of firms in relation to the industry as a whole in evaluating ‘competition’.

DOJ states that in the state-based system of health insurance currently practiced:

If one company holds more than a 42 percent share of a market the U.S. Justice Department would consider that market “highly concentrated.” This means that an insurer, with impunity, could raise premiums and/or reduce the variety of plans or quality of services offered to customers.7

(7. US Department of Justice, “The Herfindahl-Hirschman Index.” Accessed here; American Hospital Association, “The Case for Reinvigorating Antitrust Enforcement for Health Plan Mergers and Anticompetitive Conduct to Protect Consumers and Providers and Support Meaningful Reform,” May 11, 2009. Accessed here.
This report makes use of data published by the American Medical Association (AMA), which is not a member of the Health Care for America Now coalition. The AMA did not collaborate with HCAN on this report.)

Without necessarily getting into health insurance competition only, since the competition meme is invoked often in many places, what are market rules that demonstrate whether competition is working or not?

Several thoughts occur, to fit the meme:

1. Competition is defined as the way to lower prices and better product by many. Does this occur naturally, freely, when two companies share 75% of a market? Or if one company has 50% market share, with more players (as in MA)?

2. When prices double for a product in 8 years, how is competition working to control costs? How is this claim for competition proved?

I have in mind a different post on market share for health insurance companies, and the nature of health care for another. This could be a post to come to terms with readers notions of competition.

Chart below the fold.

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Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

by divorced one like Bush

Well, well, well, seems our Robert will have some more thinking to do. Via C & L to Radamisto who want’s to know if we have ADD or what comes the Bloomberg story that the money from money machine is being restarted.

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Gee, Morgan Stanley, Goldman Sachs? Two totally separate companies, just happen to be mentioned together implimenting the same strategic plans.

8/18/08 Morgan Stanley, Goldman link lending to their own creditworthiness

The Financial Times is reporting that Morgan Stanley is implementing systems that tie the prices of credit insurance on their own debt to their commitment to provide financing to their hedge fund clients. The shift would allow the bank to pull out from its funding commitments should it run into a crisis of confidence like that which wiped out Bear Stearns in only a matter of days. Goldman uses a similar arrangement that ties its lending commitments to the firm’s own bond prices.

9/21/08
WASHINGTON (Associated Press)

The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks – Goldman Sachs and Morgan Stanley – to change their status to bank holding companies.
The decision means that the Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed’s emergency loan program.

3/9/09 UPDATE 2-Barclays cuts price targets on Goldman, Morgan Stanley

March 9 (Reuters) – Barclays Capital cut its price targets on Goldman Sachs (GS.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research) and said it expects the former investment-banking giants to post losses for December, mostly due to asset markdowns, investment losses and “very subdued” core earnings.

5/19/09
Goldman Sachs and Morgan Stanley have formally asked the Federal Reserve for permission to repay a combined $20 billion in federal bailout money.

6/17/09 JPMorgan Chase, Morgan Stanley cut ties with government

In separate statements, Morgan Stanley and JPMorgan Chase said they will not issue bonds backed by the Federal Deposit Insurance Corp. The banks are striving to show they can raise funds without help from the government. Goldman Sachs and other financial institutions might follow suit.

Continuing the July 8, 2009 Bloomberg article:

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

Jennifer Sala, a spokeswoman for Morgan Stanley, and Gregory Mount, a Greywolf partner, declined to comment.

Banks are using re-REMICs to protect against losses on residential-mortgage securities during the worst housing slump since the Great Depression…Re-REMIC stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds.

Nice to know We the People have their backs huh?

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I Wish I TA’ed Monopolistic Competition instead of Economic Development

Everyone should read Joe Wilcox’s update, based on the release of more court docs, on the ongoing saga of Why Vista Sucked on Release. (Short version: because Intel asked.)

Teaser quote, which would look fine in Mankiw or Krugman’s next Macro text:

Based on the available information, I come to an easy conclusion: One monopoly colluded with another for economic gain—and in this instance causing harm to Microsoft, its partners and customers. Matters were even worse than intended, because Microsoft delayed Vista:

  1. Vista-inferior chip sets stayed in market longer than they otherwise should have.
  2. More consumers bought PCs incapable of fully running Aero Glass.
  3. Notebooks were disproportionately affected, because the state of the art was even lower than for desktops.

So if the guys at Compaq wonder why I will never buy one of their products again, they may have a legitimate argument that it wasn’t all their fault. But it doesn’t change the reality—or, if you prefer, the Externality.

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The Efficiency of the Private Sector

by cactus

The Efficiency of the Private Sector

Recently, the wife and I moved to a new state. When you do that, you need to get a new driver’s license, plus re-register your vehicles. The whole process, including taking the written (well, computerized) exam, from the moment we walked in until the moment we walked out, newly minted driver’s licenses in hand, took 50 minutes. My only real complaint – the picture on my license is awful.

The same week we went down the Verizon store. Essentially, we wanted to see if there was a plan that made more sense for us than the Verizon plan we were already on given that we aren’t getting a land line. We were told when we walked in by the young lady taking names that someone would be with us in ten minutes, fifteen at a max. We finally walked out the door plenty pissed an hour and twenty minutes later. We didn’t look at any new phones, we didn’t ask for brain surgery, heck – we didn’t even ask to re-register our vehicles or get a driver’s license. We just wanted to inquire about the cost of plans.

And yet, I keep hearing about the efficiency of the private sector.

(Rdan here…the all or nothing guys can’t handle this nuanced approach)

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Two Hours Later, All is Well

As noted last week, we are in Montreal, and Videotron was scheduled today to install telephone, television, and internet services.

They came through with flying colors.

Around 12:50, I called them, wondering when they were coming by. The representative noted that they were scheduled to arrive “sometime during the day,” not specifically in the morning as I had thought.* He also noted that they did not have my (current) cell phone number, so they had no way to contact me. And the apartment apparently doesn’t have buzzer service until and unless it has telephone service. So we established that there was no way for the tech to get to my apartment.

While we were talking, the tech (somehow) appeared at the door.

By 3:00p.m., everything was in and working, including installing new cables and working with some jerry-rigged electrical plugs from our side.**

The only problem was a “last mile” issue about the door buzzer itself. It took us an extra five or ten minutes because the (Bell Canada based) buzzer system uses a different entry code than the normal.

So I can safely say that the Canadian installation experience worked. But it appears I missed a plethora of really solid posts about fuels.

*Which turned out to be a good thing, since we went to Costco in the morning to buy a television and telephones.

**It is not a good idea to plug a power strip into another power strip, but it does work in the short term.

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Pluralising Anecdotes

In the grand tradition of cactus, I have arranged with Videotron for telephone, television, and internet service at our apartment in Montreal starting on Tuesday morning.

If all goes well, I hope to blog about it on Tuesday. If all does not go well, I’ll be blogging it sometime after the opening ceremonies of the Tiananmen Olympics.

Consider this an open thread.

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