Storming the iTunes Music Store

France has passed a law that requires suppliers of content (most notably Apple’s iTunes Music Store) to provide information that is essential for ‘interoperability.’ Currently, purchases from Apple will only play on iPods, PCs and, of course, Macs, but not on other MP3 players and systems. The intent of the law is to require Apple to provide a means of making their downloads playable on alternative systems.

I have noted before that, in an ideal world, this might not be a bad thing for Apple. It will only encourage more sales from its store and may not make such a difference for iPod sales (after all, most music on iPods does not come from Apple, it is from peoples’ own music collections).

Of course, the world is not ideal. It seems reasonable to suppose that Apple’s agreement with music publishers is contingent upon downloads being in their DRM format. Moreover, it is also likely that Apple would be contractually prevented from providing ‘work arounds’ as the French law would require. So what will happen?

There are several possibilities:

1. Apple exits France.

Notice that this won’t happen immediately. Someone has to make a claim against Apple. They have to then demonstrate the ‘interoperability’ is possible but it is unclear whether this can be modified for piracy concerns.

Moreover, even if that is done, Apple could argue that its downloads are already interoperable. Why? You can burn a CD from iTunes in the original CD format. Then you can load it back to the computer in MP3 format; something playable on most systems.

2. Apple partially exits France

Apple could modify its iTunes Music Store in France to supply content that does not require DRM (e.g., podcasts and independent music publishing). This would leave it with a presence as well as sending on on-going message that French customers are being disadvantaged by the French government.

This is not usually Apple’s style but then again, they did launch the Australian iTunes Store without Sony initially. Australians knew where the blame lay there.

3. Apple finds a way to provide interoperability.

If it is potentially in Apple’s interest to open up the system, it could provide interoperability. Imagine what would happen if it found a way to do this that was proprietary. Then its music store would have a considerable advantage over others and it would retain its dominance there. Thus, there are big incentives to innovate on that dimensions.

So, in summary, given this, the immediate exit notion seems very unlikely to me. It also seems that this will not have long-lasting effects on innovation. It just sends a signal to the music industry: worry about DRM but also worry about providing competition. We want to find out if we can have our brioche and eat it too.

Back inside the box: A significant anniversary

Next month is the 50th anniversary of a truely significant economic event. On the 26th April, 1956, a converted tanker was loaded with 58 modified, 35 foot truck containers and sailed from Newark (NJ) to Houston (TX). It was significant for two reasons. First, the containers had been filled and sealed inland, loaded on trucks and loaded onto the deck of the ship without being refilled. Second, the whole process involved a single contract.

Thus began the containerisation revolution. Malcolm McLean who bet his trucking fortune on this founded Sealand; the major cargo shipping company of the next 50 years.

I became interested in the container as an innovation about 15 years ago when sitting in class taught by Nathan Rosenberg (on the history of innovation). He commented on the widespread impact of containerisation but the fact that the innovation was simple; “just a box.” I was sceptical that simplicity could lead to such revolution and set out to investigate.

The results of my investigation were published in 1995 in Prometheus. Here is a link to the paper. And the answer: well it wasn’t so simple. There was alot to do to make containerisation profitable. Ships had to be redesigned (the first was introduced in Australia in 1964). Contracts had to be re-written. Ports need overhauling. Unions needed busting. Logistics and reinforced steel had to be invented. And finally, a tipping point had to be reached. So it wasn’t “just a box” at all.

When I wrote my paper, not much had been written about the container. It took me a little time to attribute the whole innovation to Malcolm McLean. Next month a new history by Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, will be published by Princeton University Press. I can’t wait.

Opening up iTunes

France are considering opening up iTunes to other devices. At present iTunes downloads are in Apple’s proprietary format. Originally this was important in securing appropriate digital rights management to effectively establish the legal downloads market. Nowadays that isn’t an issue as other formats provide the same thing.

The problem is that iPods only play Apple’s format or the open mp3 standard. They do not play standards that are supported, for instance, by Microsoft. Other players do this but cannot play using Apple’s standard.

The French law will make it legal to utilise software to convert songs from one format to another. This would allow users to purchase songs from iTunes and play them on devices other than iPods or with programs other than iTunes. Thus, the link between Apple’s dominant share of music purchases and players would be broken.

There are suggestions that Apple will shut down its iTunes store in France in response to this. It may have to if its agreements with copyright holders cannot be amended. But if it had a choice would this really harm Apple. After all, it would make the iTunes music store more attractive and there are plenty of substitutes for its iPod anyway.

Of course, the alternative to the French approach would be for Apple to open up iPod to alternative formats. This would allow consumers to purchase music from alternative sites. This would also likely make it easier for competition to trancend national boundaries — something it isn’t doing today (see this article for a discussion). From where I sit, that is where the big gains to competition lie.

Google saves Dilbert

Here is a great story of Google overcoming the costs associated with excessive specialisation in medical practice.

I have had similar experiences; mostly trying to work out how serious a child’s symptoms are. Not wanting to constantly run over to the GP everytime one of them has a fever, I usually google “fever” and “other random symptom.” It sometimes gives additional symptoms to look for. In one of these many years ago, the additional symptom was large changes in appetite. My daughter had combined her fever with a massive display of eating (half a rockmelon). However, I don’t think an upwards change was what they had in mind. Anyhow, I decided not to worry and things worked out without taxing the health care system.

I wonder if the ‘google effect’ will show up in the data one day?

More on email externalities

Take a look at this analysis of the emailing issue I raised earlier this week.

FYI (and since you may want my input on this) on the binder versus notebook issue I will take a stand: I think binders are more useful than notebooks (you can put additional stuff in them). So there is no need for any more emails on that one.

Product differentiation by ignorance

Telstra’s Bigpond ISP launched its movie and TV download service yesterday. This is an interesting move given Telstra’s stake in Foxtel as it appears to provide a competing service.

According to today’s Australian Financial Review, the download service will be distinct from the cable TV service. Why? Well read this:

Families that insist on using their TVs to watch TV shows and movies would be able to do so -but only “if they can work out the black wire and the yellow wire and the red wire” to connect it to their PC, Telstra BigPond group managing director Justin Milne said.

Yes, go ahead and read that again, it did say what you thought it said. Only consumers with ‘wire colour knowledge’ will be able to freely substitute between content sources and watch that content on their TVs. Others who download will be confined to their PC. So no worries, no competition. After all, how many people have ‘wire content knowledge’?

Obviously, the more relevant question is how many people who have ‘work out Bigpond’s download service’ do not have ‘wire colour knowledge’? Remember ‘wire colour knowledge’ is roughly equivalent to ‘connect VCR to TV knowledge’ and my guess is those with the ‘CD tray is not a cup holder’ knowledge are ‘wire equipped.’ So basically most downloaders will have a nice free choice. Talk about “delusions of differentiation”!

Actually, I have a Mac Mini hooked up to our TV. I haven’t checked it out yet but there is a pretty good chance that the Bigpond digital rights management won’t work there. In that case, Telstra will have managed to exclude ‘sensible enough to use a Mac’ households from their service. But is that differentiation or indifference?

Effective emailing

Dan Drezner identifies a New York Times story on emailing professors. I definitely couldn’t let that pass without highlighting it here.

Email is definitely the best way to approach me outside of class. It also makes a quick reply possible.

But I do get students emailing me apologising for missing class; including with excuses. That is all very nice but when I have 70 plus students, I am unlikely to notice and in any case I figure class attendence is a student’s responsibility; so turn up if you want to! Of course, if you are unwell I hope you return to health too and if you have a job interview, good luck. But traffic (!), enough with the excuses already.

An iTunes Index for Exchange Rates

A few weeks ago, The Economist published its annual Big Mac Index. This has been a long-standing exercise by that newspaper to examine how close current exchange rates were to purchasing power parity (or PPP). The idea is to take a standardised commodity that is otherwise locally produced and compare prices across countries. According to PPP, exchange rates should adjust so that in the long-run, the purchasing power of a consumer across countries is the same. Big Mac prices (and perhaps Starbuck’s Tall Latte prices) can, therefore, give an indication as to where PPP exchange rates should be. 

One feature of Big Mac prices is that they, of course, build in variation in local costs. Put simply, the price of beef is lower in Australia than Japan and always will be. What one really needs is a standardised commodity that is free of variations in local costs.

It occured to me that iTunes individual song downloads were such a commodity. Like Big Macs their pricing is set by a single firm. But unlike Big Macs we can expect that there are no local variations in costs as for a given song it is the same music company that negotiations with Apple. Hence, all price variation is likely to be demand related.

There are many iTunes stores but only six distinct local currency prices (USA, Europe, UK, Japan, Canada and Australia). The following table is my calculation of the iTunes Index and based on today’s exchange rates what the suggested over or undervaluation of each currency (relative to the US dollar) is:

There are two things interesting to note here. First, apart from Canada, iTunes songs are priced at a premium in other music stores. This echoes my observations about the Australian iTunes music store in The Age (4th November, 2005) where I noted the substantially higher prices for all iTunes products (if they were available) in Australia as compared with the US. Second, there is no relationship between the PPP implied exchange rates under the iTunes and Big Mac indeces. Indeed, there isn’t even a qualitative consistency. 

What is interesting about all of this is that I suspect it is the iTunes pricing — something that was fixed but also was set as iTunes rolled out — that is a poor predictor of PPP rather than Big Mac pricing that is flexible and also has a longer-term history. This suggests that iTunes may face some painful pricing reallignment in the future. Certainly, I do not expect exchange rates to adjust to resolve the distortion.

Of course, this might also suggest that it is just the US price that was set poorly. For instance, according to the Big Mac prices, the Australian dollar is overvalued with respect to the Yen but for iTunes, there is no overvaluation or undervaluation.

Nonetheless, if I am wrong and Apple based its iTunes pricing optimally on long-term forecasts of exchange rates, then the iTunes Index should outpredict the Big Mac Index for exchange rate movements as it is free of local variation. I guess time will tell on that one.

Solving the email game

This morning’s news reported intentions by AOL and Yahoo! to provide certain delivery of email for the price of stamp.

We all know the current situation that email sent may not be delivered or may be delivered into a spam filter. As Ariel Rubinstein identified almost two decades ago, this presents real problems for reliable coordination. (His paper is conveniently available on-line).

The problem is simple: if you and I need to coordinate our activities and a lack of coordination is really costly, then if communication between us is even slightly unreliable, we may shy away from such activities altogether. Moreover, doing simple things such as acknowledging the receipt of email can’t help (and indeed may make things worse!) if the acknowledgment cannot be reliably sent.

What this means is that AOL and Yahoo!’s solution is going to have to be perfect if it is going to provide real value.

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